To persue or to run?

Question

Hi guys,

I have been looking at this deal. Its a duplex, listed for 48k. Combined rents for 1300. Owner paying water,sewage, and garbage. Taxes are 800 a year. C+/B- Area

The numbers sound great, but I walked through the property today. It looks nice cosmetically, but I am worried about deferred maintenance. The owner says the roof is only 5 years old, but the tenant showed me a spot where it was leaking. The owner says that he had his handyman fix it. All the windows are original and need replaced badly. The furnaces and hot water tank are both new. The part that really concerns me is the sewage smell when you walk down into the basement. He says that it was just a pipe that needed capped but the smell was still there when I walked through. The front porch also needs replaced or fixed.This is a great deal numbers wise im just concerned that it will be a money pit and turn bad quickly. The tenants seem to be very frustrated with the current landlord about how he fixes things.

Let me know what you guys think, thanks in advance

Justin Stanfield · Answer

Replace shingles on the roof should not cost more than $300

Scott Hollister · Answer

Hello @Taylor Kennison,

I would run it through the BP Calculator and add in Cap ex, maintenance, and property management (Even if you are the property manager now, you might not be able to do it one day. Whether thats too many properties or you get sick/hurt)

If the numbers still look good (and you have accurate repair budgets with extra just in case) then I would bid on it below the asking price.

Problems to be solved:

• Roof: It most likely wasn't repaired correctly (Could be an easy fix, get a contractor or roofer in there to give you quotes) Does he have documentation for the repair of roof? Trust but verify.
• Windows: Just add this in the budget, subtract it from the 70% (of ARV) value you get. Can you replace windows yourself? If not, get a contractor to give you a quote. In New England we can get averaged sized windows installed for around $400 each. (Good quality) This will change based on your location. 
• Sewage smell: If is just a cap then why won't he do it? For me that is a no brainer to fix RIGHT AWAY. I don't know how it keeps tenants... Get someone knowledgable in there. 
• Porch: Get a contractors quote or do it yourself.

Positives:

• You have frustrated tenants, which means the landlord might be sick and tired of the business (Good for you!)

As for the money pit, ALL houses are money pits but if you can make a decent return on it then its a wise investment. My advice would be to really hammer out those numbers and make sure they are correct. And if this is your first property, be careful and increase your budget by 25%-50%

I call this the emotional mistake percentage. When you do your walk through you get caught up in the property and forget certain things or don't account for safety protocols (Fire alarms and extinguishers) cost of materials, taxes going up, etc.

Best of luck Taylor!