First Investment Possibility, Duplex North of Pittsburgh

23 Replies

Ok. Finally took the first leap on REI, been reading and searching and paying attention to everything under the sun. Afraid to be the guy that regrets never making the move later in life.

Found a Mentor, local friend that is a great guy and seasoned investor for decades.  Had similar ideas and structure around his investments...Build equity, save for college education for kids, retirement.

I'm keeping my full time job but saved up about 14-19K right now to make the move. 

Found a Duplex listed at 65,900.  Each unit is a two bedroom with third floor bonus loft/room.  1 bath in each.  One rents for 520 a month, long term tenant for 10-12 yrs, the other slightly updated (paint, carpets, and cabinets) rents for $600, that tenant has only been there little over a year.  (clearly a bit more messy on that side). Taxes are about 2k a year, and this is accurate rent for the area, maybe more around 600 for the what is basically a 3 bedroom. with small back yard.

Did a walkthru with mentor and he thought it was a decent starter rental.  Depending what the inspection says.

I offered 58,900 with 6% seller assist, just to keep more cash on hand, in case i needed it.  The seller accepted.

Had the inspection yesterday evening.  Inspector found issues, main drain to sewage needs redone, roof has a few squares that need fixed or replaced, a bunch of the windows basically suck, some water stains in the basement for what amounts to poor grading, and disconnected gutters, shower that doesn't even work on the side of the 12 yr tenant (who apparently just uses a tub?), some shotty repairs but nothing that looks like its gonna fall down, "he's def seen worse", a lot of typical things for a 80+ yr old house, some water stains here and there, minor plumbing... yadda yadda....

So, what do we think?  I've still got outs based on the inspection, but would love other opinions.  It's in a great location based on me.  Its 10 minutes from my house, its the ugliest house on the street, next door neighbor has same exact duplex redone, new windows and new siding.  Eventually I would get there.  Its not a great area overall, but this is a nice little neighborhood, blocks from a grocery store, clean and safe.

I've basically be listening to every podcast all week, and podcast 61 has me a little gun-shy all of the sudden.  I'm open to advice...

Anybody with any thoughts?

That sounds similar to the first rental we bought, half decent house half decent neighborhood. One good long term tenant, did you use the rental calculator? How do the numbers look? I am not a huge investor however we do own 4 duplexes (8 units) we do well with. Based on the little you have said it sounds like it would be a decent starter rental, Also I like that you know you need cash on hand to be a landlord. A new furnace for example is a couple grand, and you will at some point need money to do repairs like that. Before you do anything though run the numbers. Also make sure you have enough in savings to cover not only repairs but holding costs. In our opinion a rental vacant for 6 months is better than a bad tenant. One tenant has cost us over 8k in repairs alone and he only lived there for a year!

http://www.biggerpockets.com/buy-and-hold-calculator

Thanks Issac, I am still hoping its a good shot. I'm running through the numbers right now. There are some little things that need done and some stuff just from it being an old building. Still nervous.

Sounds like you're wanting to save as much cash as possible, which is a good idea.  You need to calculate what repairs need to be done immediately, and what can be financed through cash flow over the next couple of years.  

For any potential dealbreakers, you should ask the seller to make those fixes ahead of closing, or at least see if you can reduce the price.  

I like the seller to make some of those immediate repairs because it saves cash and improves my cash on cash return.  Others on the forums might say the seller is incentivized to do cheap work, and that you'd want to do it yourself to make sure it's done right.  If you go the first rout, you can at least make the purchase contingent on a satisfactory repair of those issues.

Jordan,

Thank you so much.  I was thinking along the same lines.  I was thinking of asking the seller to fix some of the issues before they move out, specifically the main drain in the basement, maybe some of the windows, including a home warranty and maybe some money back too...  Not sure what they will agree to.

Total Monthly Cashflow using 50% Rule:$261.09

Monthly Income:
$1,120.00
Monthly Expenses:
$633.91
Monthly Cashflow:
$486.09
Pro Forma Cap Rate:
13.79%
NOI:
$9,420.00
Total Cash Needed:
$24,125.00
Cash on Cash ROI:
24.18%
Purchase Cap Rate:
15.99%

Those are my numbers that doesn't account for the seller already paying 6% of closing costs.  So they are a little better.  Also doesn't account for whatever concessions I ask the seller to make for closing...

Its a wife that just got the property in divorce and not sure what she will wanna do herself, but again, I'd rather have her do the needed repairs now rather than save incremental money on the mortgage my renters are gonna pay off for me anyway, and keep more cash on hand.

thought?

Still seems like a decent starter property.

Needs some work, but have current tenants in with month to month lease on the one, and 12+yrs on the other. They pay ALL utilities and are responsible for all yard work.

Love more advice...

Scott,

The big question I would have about your property is whether or not the utilities are separated, mainly gas and electric? If they are not separated, and you're only getting the rents listed, I believe you will struggle to make any money. One thing that stands out from looking at your numbers, your monthly expenses seems low, although I don't know the exact neighborhood you're in. If its a so-so neighborhood, you'll want a 10% vacancy, plus sewage, water, and garbage (unless you are in city limits, than Pittsburgh taxes cover garbage), and possibly gas/electric. Then you need to include repairs/maintenance, and CapEx, especially for these old Pitt homes, and there seems to be some deferred maintenance. You may need to have somebody mow the lawn as well.

I don't necessarily have an opinion either way, but just pointing out some items to make sure you are included in your numbers. For myself, I find it difficult to have the numbers really make sense with rents at that level, in most areas around Pittsburgh. Not that they are bad, just that there are better deals out there with more returns and without the risks and headaches with less than desirable neighborhoods.

Just make sure you are doing all the numbers:

Capex (I normally use 5-7%)

Repairs (7-10%)

Vacancy (7-10%)

Management (7-10%)

Utilities

Taxes

Insurance

Once you run the numbers and they make sense and the condition and location are what you are looking for then buy it!

Ian Hoover, Real Estate Agent in PA (#RM423721)
724-492-8312

Thanks guys.  Appreciate the info.  I'm nervous to say the least.

The area is Ellwood City, not a booming metropolis, but a nice few streets and close to my home to keep and eye on it. Affordable jump into the market 65k ish is the price i'm looking and I believe it will still cash flow...

Separate utilities across the board.  The tenants pay all utilities, and maintain the yard themselves. Gas and Electric are separate, the water is separate as well.

I just got them to drop the price by $3000 and fix a bunch of the inspection issues, as well as provide a home warranty on the property.

Monthly Income:
$1,120.00
Monthly Expenses:
$780.65
Monthly Cashflow:
$339.35
Pro Forma Cap Rate:
11.14%
NOI:
$7,392.40
Total Cash Needed:
$24,441.00
Cash on Cash ROI:
16.66%
Purchase Cap Rate:
13.22%

Thinking of pulling the trigger today.

My mentor says he thinks it's a good deal.

New info:

One of the tenants is moving out in June...

Gives me opportunity to get in and replace some windows and things.

The dirty sloppy tenant.

@Scott L.

I have a cousin that lives in Ellwood. I've been there once or twice, drank some beers in a cute pub downtown- I think it was called the Pour House? Seems like a cute small area that is pretty quiet, off the highway, and not very far from Pittsburgh- maybe 30-40 minutes? Anyways, goodluck! :)

@Jen

Yep thats the spot.  Simple small and close to my home for pop-ins and issues.

Did you pull the trigger?  On your first deal, just make sure you're confident that you won't lose money...that the furnace/HVAC/roof won't cave in immediately, that you can get the other unit rented out quickly, that you can find a competent, aggressive property manager.

Also, while you're turning over that one unit, you might try to tenant proof it as much as possible...take out the garbage disposal, and someday when the carpet needs to be replaced, put in laminate floors. 

I don't see why you need a property manger for a Duplex and since its your only property it will be very easy to manage.  You should be "popping" in.   The seperate uitilities are just great, especially the water being seperate.

You are lucky to get rid of your sloppy tenant.  Renovate his place nicely and raise the rent.  The next tenant will be taking a shower beneath your new shower replacement.  I think you should also raise the rent of the long term tenant.  I would do that after I got a new tenant for the other side.  Pay a lot of attention to that main drain, speak to someone that knows all about drains and plumbing and find out how to maintain that drain.

Do all the important repairs as soon s possible  You say: 

"Had the inspection yesterday evening. Inspector found issues, main drain to sewage needs redone, roof has a few squares that need fixed or replaced, a bunch of the windows basically suck, some water stains in the basement for what amounts to poor grading, and disconnected gutters, shower that doesn't even work on the side of the 12 yr tenant (who apparently just uses a tub?), some shotty repairs but nothing that looks like its gonna fall down, "he's def seen worse", a lot of typical things for a 80+ yr old house, some water stains here and there, minor plumbing... yadda yadda...."

Renovate the emty apartment nicely, raise the rent and find yourself a good tenant.  The house next door that is renovated is also a plus/

Attend to the gutters the first thing and get some advise how to handle the "poor grading" and do the regrading.  speak to a drainage person.     Water is an enemy.  Replace the roof shingles.

You did it.  You bought the place.  That's wonderful.  It sounds very good to me.  Its also a tax credit,  and you will be paying down the principal.  This place will be a bench mark for your second place.

Good luck and keep us posted about your new adventure

This post has been removed.

@Barbara Goodman

Wow.  Thank you for the in-depth reply and the confidence.

I agree, I am going to manage the duplex myself, and pay myself the 10% for property manager.

I am thinking that when I close, going in after the messy renter and renovating some things for sure.  There are some need for new windows, some are broken and just using storm windows.  I am wondering if I should bite the bullet and redo the siding on the entire house at the same time, or if I should just wait a few years to do that?  It doesn't "need" it, just would make the outside look a bit more attractive.  It has nice condition white aluminum siding.  The next door neighbor did it to the exact same layout building.  I would imagine from the outside alone they get decent rent.

Inside is in pretty decent shape aside from the need to replace some windows.  maybe I'll just replace the windows now, make the rent and worry about redoing the siding for a few more years down the line once I am actually making some money.

I did get a home warranty as well, so if anything major blows the first year, at least I have an emergency plan, made the seller pay for that as well.

hi

just curious if u have closed and how you are doing ;)

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