Thoughts on this Potential Deal

4 Replies

Someone has brought me a potential deal.  It's a single-family home that has been renovated into 3 units.  Gross rent is $2300 per month.  Asking price is $150k with owner financing.  

Proposed deal:

$15k down

$135k purchase price

$15k loan payoff fee

Owner financing 1-yr balloon with 20-year amortization at 5.5%

Our PM charges us 8% of gross rent as a monthly fee.

The problem that I'm struggling with is that the units are not individually metered, and the rent includes all utilities.  I'm guessing $250-300 per month for electric and $75 per month for water/sewer, based on public information and experience.  In addition, the building uses oil heat.  The owner says that he fills the 280 gallon tank every 4-6 weeks during winter.  I'm concerned about the risk of runaway utility costs.  I'm not even sure with these assumptions, the deal makes sense.

The house is 115 years old, but is in good shape. It needs paint and carpet in two of the units, and one unit could use updated appliances. After the initial year, we would need to refinance it into a commercial mortgage (we own our properties through an LLC).

Thoughts?

15k loan pay off fee? To whom? The seller/note holder? 

Originally posted by @Eva Salas :

15k loan pay off fee? To whom? The seller/note holder? 

 Yes, to the seller.  I'm waiting to hear back from a real estate lawyer, but the way it was explained to me, is that this is essentially party of the selling price ($150k), but the deal is structured to reduce the state transfer taxes based on the $135k sale price, defer capital gains income into the next year for the seller (frankly, I think the 15k would not be capital gains, but I'm not sure), and reduce our monthly mortgage payments over the year.  

oh now I understand, enough anyway :-) Is the home a legal tri plex? I have a bldg where nothing is separately metered so I build it in to my marketing of the units, but for sure residents probably don't give a hoot if they leave on the furnace, or lights when they go out. :-( There are companies who do the separate energy  billing for you, however. 

I think they base it on number of ppl living in the unit and other criteria. I don't use them because too much work for mgt with 10 units and if 1 or more falls behinds not worth the hassles. But could be worth it for you. 

Originally posted by @Eva Salas :

oh now I understand, enough anyway :-) Is the home a legal tri plex? I have a bldg where nothing is separately metered so I build it in to my marketing of the units, but for sure residents probably don't give a hoot if they leave on the furnace, or lights when they go out. :-( There are companies who do the separate energy  billing for you, however. 

I think they base it on number of ppl living in the unit and other criteria. I don't use them because too much work for mgt with 10 units and if 1 or more falls behinds not worth the hassles. But could be worth it for you. 

 I'm awaiting word on whether or not it is. That's one of the questions that I have. I'm not sure I can make the numbers work unless I can find a way to bill out the utilities and not have to reduce rents by an equal amount. 

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