Talk me into or out of this deal

[Brenda Reems]

I am looking at a triplex listed for $230,000. I offered $215,000 and it was accepted. In my underwriting, I calculated $15,000-20,000 for improvements. It is looking like it is going to be closer to $40,000-50,000+. It is located in a C neighborhood. I am not working with a realtor so it is tough to know what the ARV will be. However, I definitely don't think this would be a $265,000 home ARV. This is not a neighborhood that will appreciate much. The best rates I am finding at my local banks are 25% down, 6.49% interest with 30 year fixed. (We could do less if we wanted a 5 yr arm). I think the units will still cash flow anywhere from $500-900/month (Very conservative to best case scenario). However, we will have to put over $100,000 into the property.

We have the capital but should we really be putting this much money into a property with very little appreciation potential? Even with my utmost conservative numbers, I am getting an IRR of 7%. If things go well, I think it would be an IRR of 18% possibly higher.

This would be my second rental property. It was just put back on the market a couple of weeks ago but they have tried to sell it a few times before. So, I'm second guessing myself. I feel like this is a good rate of return but why aren't other investors jumping on it? We have the official inspection on Monday but I have already had some companies come in to look at the sewer and HVAC. 

The "upgrades" they did were done very poorly and some things need to be completely redone. The windows are terrible and at least 8 need to be replaced along with adding an egress window to make the 1 bd an official 1 bd. I knew it didn't have AC so that was part of my original budget. Since it is forced air, we got a quote for $7,000 to add central air. Windows themselves are going to be at least $20,000 and more if we do them all. Then all the cosmetic upgrades to at least get it rented. I definitely want a value add but not sure this is a true value add. 

[Alioune Camara]

Quote from @Brenda Reems:

I am looking at a triplex listed for $230,000. I offered $215,000 and it was accepted. In my underwriting, I calculated $15,000-20,000 for improvements. It is looking like it is going to be closer to $40,000-50,000+. It is located in a C neighborhood. I am not working with a realtor so it is tough to know what the ARV will be. However, I definitely don't think this would be a $265,000 home ARV. This is not a neighborhood that will appreciate much. The best rates I am finding at my local banks are 25% down, 6.49% interest with 30 year fixed. (We could do less if we wanted a 5 yr arm). I think the units will still cash flow anywhere from $500-900/month (Very conservative to best case scenario). However, we will have to put over $100,000 into the property.

We have the capital but should we really be putting this much money into a property with very little appreciation potential? Even with my utmost conservative numbers, I am getting an IRR of 7%. If things go well, I think it would be an IRR of 18% possibly higher.

This would be my second rental property. It was just put back on the market a couple of weeks ago but they have tried to sell it a few times before. So, I'm second guessing myself. I feel like this is a good rate of return but why aren't other investors jumping on it? We have the official inspection on Monday but I have already had some companies come in to look at the sewer and HVAC. 

The "upgrades" they did were done very poorly and some things need to be completely redone. The windows are terrible and at least 8 need to be replaced along with adding an egress window to make the 1 bd an official 1 bd. I knew it didn't have AC so that was part of my original budget. Since it is forced air, we got a quote for $7,000 to add central air. Windows themselves are going to be at least $20,000 and more if we do them all. Then all the cosmetic upgrades to at least get it rented. I definitely want a value add but not sure this is a true value add. 

In a C neighborhood in Bismarck, the danger isn't just the renovation cost—it’s the "Value Ceiling." If your all-in basis ($215k purchase + $50k rehab = $265k) exceeds the ARV, you are essentially "buying" a job rather than an investment, as you won't be able to refinance your capital back out. Since you are not using a Realtor, you must verify the Maximum Permissible Value for triplexes in that specific pocket; in C-class areas, appraisal caps are notoriously rigid regardless of how many "luxury" upgrades you install. If the property has failed to sell multiple times, the market is signaling that the price-to-rehab ratio is off, and a 7% conservative IRR is far too thin for the risk of a "full gut" on a 100-year-old North Dakota structure. I would use the inspection on Monday as leverage to renegotiate the price down by the $30k budget gap or walk away to preserve your $100k for a deal with a higher "forced appreciation" margin. I hope that helps.