Possible first deal looking for some input - Philadelphia area

16 Replies

Hello everyone!

I am looking at what could be my first deal ever in my real estate in career. I am looking at a buy and hold opportunity for getting some nice passive income. It is a triplex in a lower quality area outside of Philadelphia, known as Norristown. I have some friends that are investing there and I am working with a realtor they recommended. The realtor has a client that has some properties that are offlist that he is looking to sell as he is an older gentlemen and looking to get out of the business and move to Florida. A close friend of mine already bought one of his properties. The triplex is currently fully rented for a total of $2125 per month. The seller is asking for $130k for the property and is also offer to do seller financing at between 4.5-5% (this is what the realtor told me, we still have to work out all the particulars) if I chose to go this route. I still have to work out key points like that, and I am having a contractor friend of mine do a walk through with me later in the week to let me know his thoughts on the property and what work it may need and anything he may think could be an issue with the property. The taxes on the property are $2377 per year. It seems like it could be a very good cash flow opportunity.

To bullet point the specs of the property to make it easier to follow

-$130k asking price

-Seller financing offered

-2008 square ft

-3 1 bed/1bath units

-Taxes $2377 per year (includes trash pick up)

- Currently rents for total o$f 2125 - Tenant pays all utilities except water/sewer

-oil heat

-I need to find out what type of lease he has in place with current tenants and find out a bit about them and how long they have been there.

I need to research the seller financing aspects to find out if there are closing costs involved (I am not sure exactly how that works), actual interest rate straight from the sellers mouth, not just the realtor. I also need to figure out what he is looking for down money, but If 20% I can easily cover that so I am not that overly concerned with that aspect.

I would greatly appreciate any input from members and what other pieces of the equation I may be missing and need to look for or ask. I am not well versed on seller financing and if there are downsides to that as opposed to getting a conventional or business loan. If anyone can elaborate on that I would be very thankful as well. I look forward to reading your input!

Thank you kindly,

Chris

I'm so excited for you!

A good tip I got recently on these forums: ask for the rent roll for the last year to see how much rent was actually collected (if tenants are actually paying) and to see vacancy rate. I suspect with 3 - 1/1's turnover may be high?

Drive the neighborhood in middle of the day to see if this "lower quality" area is a "working class neighborhood" (people caring for their homes) or just bad neighborhood (people hanging outside during work hours), it will make a difference come 'pay rent' time. Listen to Podcast 54 with Lisa Phillips, gives a good explanation of the differences.

Personally, I would be nosy and try to find out why the owner is moving to Florida, what he plans to do for cash here, and why he is selling. If this one property is cash flowing 2125/m, y not hire a property management co and keep his cash flow? Either way, you may pick up on any inconsistencies just by asking more questions.

Good luck!

@Vana G. Thank you so much for your reply and all your insight on things I had not thought of.

I know the area a bit, and its working class, but its not the greatest area and people do not always take care of their properties. The drilling down on why he is moving and asking for rent roll are excellent ideas thank you!

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I'll evaluate using the 50% rule on this one. 60% will go to expenses since you're going to be paying water/trash.

20% down on $130k = $104k loan. Not sure what kind of loan term/amortization the seller had in mind, that will greatly affect this calculation. I'll use a 30 year fixed rate fully amortizing loan for calculations sake.

$2125 * 40% = $850 - $558 (debt service) = $292

That's roughly $100/door, not bad! Now the big question is what terms other than the interest rate is he willing to do? Maybe you can negotiate 10% down, receive a little less cash flow in exchange for a much higher ROI and cash required.

I would also check:

  • If 1/1's are desirable in that area (Craigs List, Property Manger)
  • What the market rents are for them (Craig's List, Rentometer, property Manager)
  • Actual rent roll's like @Vana G. mentioned.
  • Maintenance Records for the past 2 years (etc)
  • List of Any known deferred maintenance (match this with what you're contractor friend comes up with)
  • You can even verify utility bills via utility companies

Hope that helps!

Wanted to update this post. I was supposed to see the property Friday but do to some issues with the owner of the properties availability as well as the tenants wanting to be there when we came through, we had to reschedule. We are tentatively rescheduled for Tuesday, but the inclement weather on the rise could possibly push that back as well. I told the Realtor I would need to see the rent role, maintenance records and lease info from the owner when we met.

@Mehran K. Thank you very much for taking the time to give me your input and to show me the numbers,! That type of info from a seasoned vet is invaluable for a newcomer like myself! I have made a list of questions from my reading and your posts as well as @Vana G. post to ask the owner and realtor and really uncover any pieces that I may be missing from the equation!

@Li Wa, yes Norristown can be a bit rough in places, it is not section 8 , but I am going to look at a shell there that I would Section 8 out most likely. A close friend of mine has 12 properties he Section 8's there and he makes really good cash flow with very little issue from tenants. I have to have my contractor check out the shell with me to see how structurally sound the property is and the roof etc. This property could probably be scooped up for 11k but I need to have it checked out first to see if its worth it. I am trying to stick to the same formula my friend is using where he gets into these places and up to code for no more than 35-37k. So we will see where it takes me when I get to view the property.

@Greg Wake Thank you! I have to say this community is great, amazingly helpful and really gives back, I hope I can start giving back like you all have very soon!

Norristown has some war zone and some decent blocks - you really have to go block by block. If it is near Chain and Lafayette - beware. Even the east side of town used to be OK, but is now block by block.

Then there is the matter of oil heat. In a multi-unit, there will usually just be one oil tank - so that implies owner pays for heat, and maybe even hot water too. Now, hot water might be tenant's responsibility if there are hot water heaters per unit and they are electric. and some units could have electric baseboard heat so that heat isn't for the landlord to pay. But this is an important expense to identify who will be responsible for paying.

Where did the tax bill number come from? Norristown school district is not really a good school district, and the school taxes are rather high; the number you posted seems like it could be low (or the property really has a low assessed value).

Thank you for your input @Steve Babiak . I know Norristown can be a rough area, I am not overly concerned about that with this property, but I absolutely need to assess that when looking at the project. I had been wondering about the heating issue as well. The info sheet on the property said it was oil heat, but said tenants paid for everything except water/sewer. I was told by another investor friend to NEVER get involved with a property if you have to pay the heat for the tenant, as this expense can be huge, especially when they do not have to be responsible for paying it.

The tax number is based of an assessed value of 60k, which makes me wonder if the sale would open up a can of worms and cause for a reassessment which would could make those taxes double. I am not quite sure if that is how it works and have it on my list of things to ask about, so thank you for bringing that up for me!

@Kenneth Shelley the seller is George

I saw the properties took my contractor along (who is a very close friend of mine) andhe said the structure was pretty solid. Def a lower end property, no frills. The current tenants seem nice, the one on the top floor have some mental challenges and the owner said he gets paid from someone who handles their funds they get from the state. It had baseboard heat in all the units and the roof was recently sealed and newer hot water heaters, paint. The basement needed to be cleaned and some minor work as well as place dehumidifier in there my contractor said. He felt all in all it he felt the major repair type of items were not something I would have to worry too much about. The one thing that concerns me is the current owner does not have good records, no rent roll to show bc a lot of it never hits his book I imagine and some in cash, as well as little maintenance records for last 2 years and claims very little has been needed to been done. He does have the leases for current tenants to prove what they are paying for now. He is moving to Florida and I asked him flat out why not hire a property management company and he said his wife has been in Florida full time and wants him there full time and with having properties that far away he would need to be up there time to time to manage and repair. I know he is selling his whole portfolio of rentals and has been for the past couple years.

Here is some more info I found out

-He apparently is NOT doing seller financing, just seller assist if necessary

-Total yearly income (Its fully rented now with new leases)- 25,500

-His expenses for last year

Sewer-1140.36

Water - 580

Insurance- 1041.90

Taxes - 2377

Total expenses -5139.32

Talk to my banker if I got a 20 year commerical loan at 5.45% with 25% Down (30k) my month payment would be 617 per month

SO total expense from what I listed above would be - 12543.32

Which would leave me with 12956.68 for maintenance and revenue before taxes








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Ok, call me if you want to discuss more about my involvement in this and if I can help I am here. George was over pricing them so all the investors I spoke to didn't want his portfolio . I have some extensive knowledge about these properties and if you are interested in talking I'll send you my office number.

@Chris Kreider

Generally speaking, at 60% expenses you're looking at roughly ~$230 cash flow per month.

What is the fixed rate period for the commercial loan? Many times they are amortized over 20 years but only are fixed for 3,5,7, or 10 etc. with a balloon at the end of the fixed term. Is there a prepayment penalty? What is your strategy for when the balloon comes up, if there is one?

The main things I'm always trying to pay particular attention to are:

  • Roof - Age/Condition/Life left? Figure they are good about 20 years
  • Furnace(s) - This case, oil boiler. Age/Condition/Life left? Figure they are good about 20 years
  • Electrical Panels/Boxes - Fuses or Breakers? Amps?
  • Water Heater(s) - Age/Condition/Life left? Figure they are good about 10 years
  • Foundation - I don't do any properties with foundation problems just yet.
  • Mold - Is there any? What Caused it if there is? Cost to remediate?

Any one of those that are near the end of life, I try to factor in to my costs of purchasing, or you can use that as a bargaining tool to have the price lowered.

Originally posted by @Chris Kreider :

...

The tax number is based of an assessed value of 60k, which makes me wonder if the sale would open up a can of worms and cause for a reassessment which would could make those taxes double. I am not quite sure if that is how it works and have it on my list of things to ask about, so thank you for bringing that up for me!

If the tax assessor has a $60K value, market value might be $90K to $100K, give or take a bit. Montgomery County does not raise assessments when a sale occurs that I have seen. They can raise assessments when an improvement is made to a property. And they can raise assessment if the assessed value is challenged in a tax appeal and they determine it should be valued higher. At some point they might have to reassess the entire county just like Phila recently did, but that would affect everybody not just a specific house.