I'm looking for a rental investment, and found a 3 bedroom 1000 sf house for $30,000 in Indiana, currently rented at $600/month. Seller isn't willing to go any lower. I thought it was a good deal, but ordered an inspection and came up with a number of issues including the following:
-cracks in the foundation cinder blocks although told that's easy to replace
- roof has 3 layers. I'm told this will need to be replaced to be insured.
- all windows need to be replaced.
-crawl space is rotting. Told the house could collapse if the supports aren't replaced. Also told this is a signal that it has humidity issues that could cause mold or other problems in the house.
-electrical/circuit breakers unsafe/need some rewiring
-furnace is very old, but the inspector couldn't check it because the tenant couldn't afford the gas. Also because of this some of the pipes have been freezing in the laundry room in the winter.
-inspector couldn't access the attic but says there could be other potential issues there
-the kitchen/bathrooms probably also need updating
The inspector said he estimated it costing at least 8-10k to fix these issues, but maybe a lot more. So does it still sound like a good deal, and how much would these issues typically cost?
Where in Indiana is this?
Those issues would cost a lot more than 8K in my neck of the woods.
I don't know your market at all so I can't really comment but I'll say this- You get what you pay for.
$8-10K hmm....I would budget $30K in repairs at least.
I don't know your market but if the property is only $30K you are probably not dealing with an appreciation play and probably a Cash Flow.
But if you upgrade the property can you get more rents?
will you over improve the property? Probably want to talk to your realtor about ARV.
Agree with everyone else - this is more like $30K. And bank on finding much wrong the inspector didn't flag.
Share the report with the seller with a new price and be prepared to walk. Seller knows he/she will have to contend with them someday - maybe it'll work out for you.
Tenant who can't afford gas is another red flag, especially in Indiana. What sort of tenant are you buying?
Its a suburb of Indianapolis. @John Weidner Yeah, the inspector actually said it could be 30k on the high end. I believe comps for ARV would be 50-60k. So the inspector actually said I'd have to get it for almost free considering I'd have to do so much in repairs. Its not a high end area, so I don't think I'd get much more in rent, maybe $700.
The seller of course claims there is nothing wrong with the property, which tells me he basically hasn't taken care of it - and leads me to think I could find even more issues as soon as I open the walls or look in the attic. Most of these items aren't about improving anything just fixing problems, making it safe livable, and insurable.
In my area, I'd expect to pay this much for the following:
cracks in the foundation cinder blocks although told that's easy to replace ($500 to patch $1500 to do a section of the wall)
- roof has 3 layers. I'm told this will need to be replaced to be insured. ($3500 maybe more cause of the 3 layers)
- all windows need to be replaced. (@$200/per say 10 windows = $2000)
-electrical/circuit breakers unsafe/need some rewiring (breakerbox replacement $700 + $2000 to rewire everything)
-the kitchen/bathrooms probably also need updating ($5-10k depending on finish)
The rest I'm not familiar enough to give a number. At this point, you still have to deal with closing costs, holding, paint and flooring, and the list goes on. Knowing this much, it'd be difficult to reach 1%.
If the ARV can support it, it'd probably be better off to do a gut rehab imo.
@Chris M. I wouldn't walk. I'd run. I know Indianapolis well and the first problem is anything renting for less than $750 is a problem. You're going to have a lot of tenant problems. If you want to shoot me the address I'll take a look at it and give you my thoughts but I'd be surprised if anything would change my initial feelings. Secondly, as others have said, there is no way all of that is an $8-$10K rehab. This is a major rehab that $600 rent won't support.
Sound like you need to be buying notes in that area.
That sounds like a major rehab, I would have to agree with the rest of the posters here. This will turn into a losing venture from minute one and continue on for the entirety of ownership.
Agreed with others. The numbers do not make sense if the repairs are over $20k and it sure seems like they will be.
Walk or maybe even jog from this one
You have a silly seller and domain that needs demolishing.
Nothing about that combo spells a deal to me.
Are you looking at these types of property due to a limited budget or where you just going to buy a bunch of these as your strategy??
Walk, at that purchase price. Determine what purchase price will make sense for you. If that purchase price is not a negative number, use the report to negotiate a lower purchase price. Who says that the owner won't sell this for close to nothing? When faced with the facts, maybe he will sell it to you for $5,000 or whatever your number is. It can't hurt to try and you will never know unless you try. If he refuses, than he gets to keep his problem property and you keep your hard earned cash for the next deal.
The existing tenant will probably have to go. Someone that doesn't take care of their property probably didn't put a quality tenant in so I'd factor in eviction and vacancy costs into your numbers. Good luck!
@Joel Owens I could spend up to around 100k. I found the seller on the myhousedeals website looking for a good deal. I specifically asked the seller about the condition of the property, roof and other items before ordering the inspection and he claimed everything was in good condition. So I'll just have to accept the inspection as a sunk cost and walk. Thanks.
Agreed....Walk. I'm an Indiana investor, and there are FAR better deals than this.
At $600/month and a cost of only $30k, it passes the 2 percent rule, but ti won't even come close once you consider vacancy and repairs.
There are lots of better deals for your money, IMO
@Chris M. You can find properties in Indy for that $30-40k all in price that will rent for $700-750/mo or better. You just have to find the right deal. I am a wholesaler in Indy and I could help you. What is you criteria that you are looking for in a property?
Originally posted by @Joe Gore:
Sound like you need to be buying notes in that area.
Joe, I have some Indy notes I'd sell you!
I'm not familiar with repair costs in your market, but here in the KC area you would be looking at at least 2x or 3x what the inspector estimates. You need to have a good contractor assess the repairs and give you a better bid. I would not trust an inspectors rehab estimate.
Originally posted by @Rodney Kuhl
"You can find properties in Indy for that $30-40k all in price that will rent for $700-750/mo or better"
Rodney, where in Indy can you find anything for $30K all-in that will rent for $750 or better?
@Mike D'Arrigo You may be right, maybe not $30k. But definitely under $40k there are properties in that rent range.
Fly don't run or walk. Seriously you can do much better in Indianapolis even at $600 a month rent. It's not worth the trouble. There are far too many opportunities available out here in Indy.
Personally I'd stay away from $600 p/m stuff. We get calls almost everyday from disgruntled investors both local and out of state that loved the theoretical 25% cap rate. The truth is when you get below $700 p/m in rents you wind up with "professional tenants" who bounce from one place to the next always leaving the previous rental wrecked, stripped and owing $$$.
I know that there are lots of people who's investment model is built totally around the higher cap rate + sub $40K acquisition. But it works for them because they are "all in" on that model,stay on top of renters, and have clear systems to mitigate the problems that following that model bring.
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