Hey everybody! I'm new to BP and wanted your input on a property.
- Built in 1904
- Triplex with two 3BD /1BA units and one 3BD /1.5BA
- Currently leasing at $600, $700 & $800 mo with long term tenants
- Landlord pays trash/water; all other utilities in tenants' names
- Under contract for $102,500
- Approx $40K in deferred maintenance & updates.
- 3 x HVAC systems replaced @ $5K each = $15K (does not need to be done immediately, units could be serviced in the meantime and replaced in a few years)
- Reno of All Unit Interiors @ $3K/unit x 3 = $9K
- New windows and doors: $300 x 30 = $9K
- Exterior minor lead abatement, gutter replacement, porch and pier repair: $4K
- Contingency = $2K
- After improvements, market rents of $850/mo.
- Gross Income : $30,600
- NOI (50% rule): $15,300
- ARV: ~$130K
- Cap Rate : 11.76%
- The unit is in a good area of town.
- All tenants are month-to-month. I would ask two to vacate. Only one tenant has a written lease with a security deposit. Current owners will provide a letter describing the lease situation for the tenants with the verbal lease.
- This would be my first purchase.
The prospect of vacating two tenants and all of the work is a bit intimidating! What would you do?
I would keep the tenets and move them into yearly leases. If they are long term then they shouldn't mind. Raise rent yearly to get to where you want and use improvements as a reason to raise.
@John Dillon For your first post, that's great detail. But for your first purchase, not so great? Just wondering why you paid (or are about to pay) for a property that will not be worth as much as you have into it by the time the repairs happen? (And if you were thinking of wholesaling it, why would your next Buyer pay the Contract amount, leave alone a higher amount)?
If your rent figures are realistic and sustainable, AND if there is value appreciation likely in its location, you might be OK hanging on to it until that appreciation occurs.
However, if you already WANT two of your tenants gone, then it's likely that the previous owner has already worked out that it's very difficult to find higher-quality tenants, who likely prefer single family homes, probably available for about the same rent? So while 50% is a good "rule of thumb" in theory, what will happen if unexpected vacancies bring that net return to only 40%? There goes your cap rate!
By not offering LESS than ARV - R, you have paid full retail. That's OK if you want to "house-hack" and/or just like it. But it's an investment risk. Do you agree? All the best...
PS. I am NEVER impressed when someone posts about whether they should go ahead with a Contract they have ALREADY signed! Your question would have been better BEFORE you signed anything!
PPS. Welcome to BiggerPockets!
@Kyle Penland Thanks for the suggestion. We might go that route.
@Brent Coombs Thanks for the detailed response. I'm very familiar with the rental stats for the area and it's definitely possible to get better tenants at higher rents. We will either do what Kyle suggested or reduce our offer price to about $75-80K. We're still in a contingency period, so we can walk away with no financial loss.
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