Duplex Analysis - First Rental Property
Hello BP Community, thank you very much for reading. I am hopefully going to be acquiring my first rental unit, a duplex, shortly, presenting offer tomorrow. It's an interesting situation, explanation and analysis below. I would greatly appreciate any feedback and insight from the experienced folks on there, thanks again in advance.
Acquisition Situation - Tax Lien Foreclosure
-One Tenant Paying Below Lease Value on Informal Agreement with Landlord (more info below)
-This is a duplex in Hunterdon County, NJ.
-The property is owned free & clear, but there is a $54,000 tax lien on the property as the owner hasn't paid taxes in 4 years. He received a notice from the lien holder that they will start foreclosure proceedings soon. I still have time to pay off the lien if he agrees to my terms. If he goes into foreclosure, he'll lose a $350,000 house and walk away with nothing.
-Current tenants in both units on leases through November, however the current owner/landlord has bent to his tenants and is renting well below market value, and I would be inheriting the tenants on their current rates. The current lease also says the tenants have the right to renew the lease for another year with it's current terms and rent rates, locking me in for another year on these rates.
-Unit 1 - 3 bed/2 bath - Rent is $1,800 a month (fair market is $2,200). The lease says $2,200, but the tenant lost his job, and landlord agreed to take $1,800 a month until he gets a new job. So, technically, the tenant is not paying what is on the lease currently.
-Unit 2 - 2 bed/1 bath - Rent is $1,200 a month (fair market is $1,500)
-The ARV is 350,000
-I am stepping into a property well below fair market rent, and need to adjust my offer and terms accordingly.
-In speaking with the seller, I've already set him up to be open to the idea of me paying off the tax lien, paying him a monthly annuity, and eventually cashing him out.
My offer to the seller (please analyze and offer feedback, offering soon)
-$230,000 for the house
-$60,000 down (paying off lien, avoiding foreclosure, I'll cover closing costs)
-Seller financing for the $170,000 balance at 3.5% ($495.83 payment to him monthly) interest only for 5-7 years (seller's choice)
-If he takes the offer for 5 years, he'll net $259,749 for the house
-If he takes the offer for 7 years, he'll net $271,650 for the house
Overall I think this is a very fair offer and not a bad way for him to get out of this situation considering the alternative.
Property and Cash Flow Analysis based on Current Rents
Offering Price: $230,000
Closing Costs: ~$2,500
Rehab: ~1,000 for some exterior painting
Down Payment: $60,000 to payoff lien, closing costs. The downpayment will be financed by a private lender.
Mortgage Payments:
-$350 to private lender ($60,000 at 7%)
-$495 to seller (170,000 at 3.5% interest only)
Monthly Costs
Property Taxes: $833
Sewer: $100
Insurance: $120
Lawn Care/Snow Removal: $100
CapEx: $100 (new roof, windows, everything is in good shape)
Vacancy (5%): $150
Repairs (5%): $150
Total: $2,398.17
Monthly Rent: $3,000
Monthly Cashflow: $601.83
I am still unsure of how to approach the tenant who is paying $1,800 instead of the written lease terms of $2,200. According to the lease, I can evict is the tenant does not comply to the terms of the lease. I'd rather not start this off with an eviction. My thinking is it's not a bad cash flow to start considering none of my own capital is invested, and if/when I can raise the units to market value, cash flow will increase.
Again, this is my first buy and hold, I welcome any and all feedback and thoughts. Thank you very much!