Looking for advice on a buy and hold duplex in PA.

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Looking for advice on a buy and hold duplex in PA.

CJ Witmer
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
A long time friend is looking to cash out of his duplex rental property to get away from tenants and pay off his primary home. He has it on the market now for $95k. He said he'd sell to me for $60k. - Property grosses $15,400/yr - 2 units at $625 and $675/month - He has all receipts and is happy to share - Owner pays for heat, all other utilities paid for by tenants - Furnace is old and will soon need replaced - Electrical is older but he said "doesn't need attention immediately. - New warranty on roof transferable to me - Besides electric and furnace, he says it should be turn key - Could use some paint - I used the BP Rental Property Calculator and even figuring in $65k (instead of $60), lower rent, painting, lawn care, CapEx for furnace ($4k and redo electric at $8k) and a few other cushions, I still come up with about 13% ROI. What am I missing? Happy for any and all input! I had another friend who has 5 rental properties who looked at the website and said it'd be a good deal, even at $95. Then I told him I could get it for $60. He said if I don't buy it he will (although I know he wouldn't do that). I plan to go through the house whenever my friend is in town. What do you guys look for? I know nothing about electrical! Please go easy I'm a newbie, but this seems to have "deal" written all over it and I don't want to get stuck in analysis paralysis!
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Jason Krick
Investor · Reading, PA · Member since 2014 · 196 posts · 118 votes
10y
I can certainly see you are excited, and it looks good on the surface. There are two things I will suggest for you. The first is to VERIFY everything. He is a friend, so I understand the desire to take his word on everything. If landlord pays heat, ask to see the bills from the precious year. Look for any signs of deferred maintenance, that can increase acquisition cost quickly. Things like appliances, condition windows, carpeting, painting, etc. Also, do you know his historic vacancy rate, and can that be verified? The second is to ask yourself what his motivation is and why it's so strong. If this deal is that amazing, why isn't he sitting on it and reaping the rewards? Are there issues with tenants rent payment history? He wants away from tenants, you said. Are you prepared to deal with the problems that an experienced landlord decided he no longer wants to deal with? Why do you think he is basically giving you a $30,000 gift? I have friends I will go through the fire with, but I don't think they would give me $30,000 just for the sake of getting out of a property. I'm not trying to discourage all the enthusiasm, but this is business, with real money at stake. You need to treat this as such. The friendship makes it more complicated, in my opinion than easier. What if you buy it, and then find structural and plumbing issues to the tune of $20-30,000 that he didn't disclose? Will you ask him if he knew about it? Accuse him? Are you prepared for how that can affect a friendship? Just remember to take all things into consideration and assume that things may turn into worst-case scenario. Then you will be prepared.
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  • Patrick LiskaPro Member
    Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
    9y

    CJ, 

    Did you have luck with your bank financing through an LLC, if not, PM me and i will give you a bank and the person i deal with.

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  • CJ Witmer
    OP
    Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
    9y
    Patrick Liska please let me know your bank of choice. Hopefully the private message comes through as I seem to be having problems getting them. I did find a local bank, but they want 25% down and there is a pre-payment penalty if I pay it off sooner than 5 years. He said I can pay extra on the principle without a penalty, but I can't pay off the loan before 5 years without a penalty. I can see the bank wanting some guarantee in their return, but why is it a problem if I pay them faster! My plan was to refinance between 6 months and a year from now, get some equity out of it and repay my father ASAP who is helping with the down payment. We did get through the house yesterday with the inspector and both he and the friend (who I see as my unofficial mentor) agreed it was "above average" condition for age, etc. and both also agreed it'd probably be a good deal, even in the $85k range, so I do feel a lot better about that! The inspector was not as concerned about the furnace as I thought he might be, but he did recommend having an electrician come in to give me quotes on eventually bumping up to 200 amp and addressing some loose sockets and gfi outlets around the sinks. He didn't indicate a full re-wire as I was dreading. LLC paperwork is submitted so we should be an LLC in a week or so. We're heading in the right direction!
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  • CJ Witmer
    OP
    Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
    9y

    Went through the property with the inspector last Friday.  The house is unoccupied.  Current owner let the tenants trickle out when he knew they were going to sell.

    As for Property Management, I have reached out to the company who managed it previously.  They charge 8% and are familiar with the property.  She is willing to work with me on aspects of the house to increase rent as long as I consider her for business going forward.

    As for the heat, the inspector recommended going up to 200amp.  So, the plan was, down the road, to remove the radiator style heaters on 2nd floor and put in electric baseboard and just let the furnace heat the downstairs unit.  This would split the heating and it could then fairly be passed on to the tenants.

    Lawyer pinged me this morning to confirm the LLC name as what we wanted previously had been taken. I also called the electrician to have him in to look at the electrical repair recommendations from the inspector.

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  • Account Closed
    Philadephia, PA · Member since 2016 · 28 posts · 0 votes
    9y

    @CJ Witmer Hey CJ, How is the process going? Im in a similar predicament with the LLC and Refinancing through the bank.. I refuse to wait the 5 years, did you find any ways around that prepayment penalty? Is the prepayment penalty only because you have it set up as a LLC, as it is in my situation..

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  • CJ Witmer
    OP
    Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
    9y
    William Dutrieuille I haven't actually pulled the trigger on that loan, so I'm working with two other banks at the moment (filling out paperwork). I was up front with them that I plan to refinance and at least the one bank didn't care and I'm pretty certain the other was OK as well. Both of them are 20% down and the one where I would've had a 5 year pay-off penalty was 25% so I'll definitely stay away from them. So to answer your question, I do not know of a way out of the payoff penalty. I'll certainly chime in if I find a solution for you though and please post here if you find a way.
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  • CJ Witmer
    OP
    Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
    9y
    Got a commitment letter from bank A and the unsigned sales contract is in my inbox. Hoping to start the formal loan process next week!
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