Foreclosure and a Triplex - good deals or no? (with pictures)

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Foreclosure and a Triplex - good deals or no? (with pictures)

Beth Teutschmann
Eau Claire, WI · Member since 2018 · 4 posts · 2 votes

Hey everyone! I am a total newbie at real estate investing. I've purchased 1 house, the house I live in. I have, however, a somewhat close relationship with the landlord I've rented from for the 8 years previous to buying my house, so somewhat familiar with the in's and out's and frustrations of rental properties.

I'm just getting my toes wet and listening to YouTube videos, podcasts, reading content on the site, etc. And thought maybe I would jump in with a couple properties that to me seem like they could be good deals, but obviously being a newb not really sure lol. 

There will be unknowns with both these properties, but I'm at the point where I don't even know what to look for (or am slowly learning) or what questions to ask if I did approach the current owner/realtor/etc., and I figured a great way to learn would be to just jump in with a couple example properties instead of using hypothetical properties.

House 1: https://www.redfin.com/WI/Eau-Claire/430-Ferry-St-...

Well-maintained tri-plex. Lower unit is 3 bedrooms; upper units 1 bedroom each. House and garage roof 4 years old. Large lot, almost one acre. Tenants need day before notice. Seller pays water & garbage for all units and heat & electric for Unit 2. Total rents $1,895. Details and images on link. Don't know much about this neighborhood in terms of quality, but as far as I know pretty average.

House 2: https://www.redfin.com/WI/Eau-Claire/862-E-Grand-A...

Foreclosure. East Hill home (which is a good neighborhood here, though this is the less-nice part of that neighborhood in terms of home quality) with hardwood floors, partially finished walkout basement and located within blocks of downtown Eau Claire and Parks. Details and images on link.

I picked the triplex because it's a multi-family home that lists what the current rental income is, and it's been on the market for 147 days so chances are the seller would be willing to accept a lower offer.

I picked the foreclosure because it was one of the few foreclosures in the area that had a price listed, and because of the low price (though obviously I know price does not equate cost). This would become a rental home as well.

Any insights on these? Yay or nay? Things to consider or anything with either property that stands out? Or under what circumstances/dollar point would they be a good deal?

Thank you for the time to anyone to takes a moment to look it over and respond, it's sincerely appreciated.

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Christopher Phillips
Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
8y

@Beth Teutschmann

1-4 family rental decision making is primarily based on cash flow and cash on cash return on investment.

No one can tell you yay or nay without looking at those calculations.

Brandon from BP shows how to do a very simple cash flow analysis in this video:

https://www.youtube.com/watch?v=T_7vhsSBi7c

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  • Christopher Phillips
    Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
    8y

    @Beth Teutschmann

    1-4 family rental decision making is primarily based on cash flow and cash on cash return on investment.

    No one can tell you yay or nay without looking at those calculations.

    Brandon from BP shows how to do a very simple cash flow analysis in this video:

    https://www.youtube.com/watch?v=T_7vhsSBi7c

    1Reply
  • Brent Tice
    Real Estate Investor · Eau Claire, WI · Member since 2013 · 34 posts · 9 votes
    8y

    It is always good to walk through houses when you can to see them.  The house is in a solid location but with it being just 2 bedroom the rent ceiling is probably not really very high if you plan to keep as a rental.  Resale value for a flip would have to be researched, connect with an agent on that to research comps (send me a message if you need a good agent to work with i can refer you to one).  If you can convert it to a 3 bedroom that is a huge plus for a rental or flip.  The triplex is probably like a C/C- neighborhood and the condition plays a big role in how much interest I have in older properties.  

    1Reply
  • Beth Teutschmann
    OP
    Eau Claire, WI · Member since 2018 · 4 posts · 2 votes
    8y

    @Christopher Phillips great, let's start there. I actually watched that video yesterday.

    Here's where I stumble:

    What are the best ways to come up with the numbers you don't have data for yet? Such as vacancy (BP says he estimates 5% generally based on his experience but I lack that experience as I'm a first time rental property owner), Repairs/ CapEx, and rehab budget.

    So for example. I did the 4-square method and I got a cash on cash ROI of 54% given the numbers I plugged in for the Tiplex.

    Now this seems too good to be true to me. Something in my estimates must be off. My question is where, and what SHOULD they be?

    Here's what I put in:

    Income (given in the property description): $1895

    Expenses:
    Taxes: $245
    Insurance: $55
    Lawn/Snow: $50
    Vacancy $100
    Repairs: $200
    CapEx: $100
    Mortgage: $750
    Total: $1500

    That gives a cash flow of $395/month or $4740 annually.

    Cash on Cash ROI:
    Down Payment: $4800 (given what I have now in the bank I could use to invest)
    Closing Costs: $3000 (just went with what BP had in the video)
    Rehab budget: $1000 (it looks like there's tenants already living in part of it it so I'm wondering how much could even be done right away, if much at all)
    Total: $8,800

    Divide it out and you get the ROI I stated above. So that brings me back to, what am I doing wrong? What assumptions am I making that are incorrect? What about the pictures of the houses indicates there will be a lot or very little rehab costs at the beginning (I am not good at estimating that stuff at all)? Certainly there's parts that need work, but I'm not good at knowing what's expensive and what's not, if that makes sense. 

    What am I missing in the assessment that would change the numbers and in turn, change an investment decision? 

    Again, I'm a total newbie so I am well aware there are plenty of things I'm visualizing incorrectly, which is why I'm here asking for help :)

    1Reply
  • Beth Teutschmann
    OP
    Eau Claire, WI · Member since 2018 · 4 posts · 2 votes
    8y

    @Brent Tice oh hey, a local person! That's exactly the kind of feedback I was looking for in terms of, I wouldn't have thought of the 2 bedroom having a rent cap but that makes total sense. 

    And good to know on the neighborhood for the triplex, I truthfully didn't know much about it but hadn't heard any big negatives like I have about some others. 

    If you don't mind me asking (and just ignore if you're not comfortable) what kind of real estate investing do you do in the area?

    0Reply
  • Christopher Phillips
    Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
    8y

    @Beth Teutschmann

    The cash flow makes sense. It's in the right direction. You can get better numbers later. You might be lite on the insurance number. Repairs should be around 8%, CapEx around 10%. But it all seems to be in the right direction.

    I'm assuming you don't plan on living in the property given the rental income assumption. So, you won't be able to buy it for 3% down. You'll need 20% to 30% down as an investment property.

    Closing costs in Wisconsin are between 3% to 5% on average.

    You'll need to see the property to get a handle on the rehab expenses. Could be updated, could be a lot of delayed maintenance. You won't know until you see it. But, that will only affect your ROI, not your annual cash flow. Looking at the photos, everything looks out of date. So, you'll need to see it up front.

    0Reply
  • Brent Tice
    Real Estate Investor · Eau Claire, WI · Member since 2013 · 34 posts · 9 votes
    8y

    The BP calculator would be a good place to start.  Your insurance will probably be 80-100/month, get a quote from an agent.  Here is typically what I use for numbers, these are % of the rent collected. Vacancy 5%, Expenses (repairs and cap ex 13-15%), property management 7-8%.  Even if you plan to manage yourself always calculate property management to know the return if you were 100% hands off.  Also if you know property management runs about 140/month you have to decide if you want to manage it for that or let a company do it. 

    1Reply
  • Brent Tice
    Real Estate Investor · Eau Claire, WI · Member since 2013 · 34 posts · 9 votes
    8y

    Expenses:

    Mortgage: 625 (20% down on 30 year loan) (775/month for 20 year loan)

    Taxes: 245
    Insurance: $80
    Lawn/Snow: 50
    5% Vacancy 100
    15% Repairs/Cap Ex: $285
    7.5% Property Management:140

    Total: $1525

    rent:1895

    Cash flow=370/month (4440/year)

    4440/32500 (20% down plus 2500 closing costs)

    13.6% return with property management on a 30 year loan at 4.75%

    2640/32500 (20% down plus 2500 closing costs with 220/month cash flow)

    8.1% return with property management on a 20 year loan at 4.75% with mortgage at 775/month

    Hope that helps!

    1Reply
  • Brent Tice
    Real Estate Investor · Eau Claire, WI · Member since 2013 · 34 posts · 9 votes
    8y

    We have 7 duplexes and i have assessed many duplexes and smaller properties like this.  I am hoping to move up and get larger apartments in the future

    1Reply
  • Beth Teutschmann
    OP
    Eau Claire, WI · Member since 2018 · 4 posts · 2 votes
    8y

    @Christopher Phillips I hadn't come across it yet that you need 20-30% down for an investment property and that's exactly the kind of newbie mistake/assumption I was talking about needing to be aware of, thank you! And yes, would absolutely need to check it out to get an idea of rehab costs for sure, but I know sometimes people with more experience can look at a photo and say 'wow that's going to need at least 20k of work because of [xyz] I see in this photo,' which is something I wouldn't necessarily pick up on. 

    @Brent Tice that is very helpful! getting the numbers from someone in the area already doing it is great and I'll definitely use that in future assessments. I wasn't actually expecting to find someone in the area right away haha. I had looked a bit for local real estate investing groups and whatnot and didn't find any, so was a bit surprised when someone local jumped in right away.

    1Reply
  • Derek Dombeck
    Real Estate Consultant · Wittenberg, WI · Member since 2014 · 572 posts · 572 votes
    8y

    @Beth Teutschmann

    Keep in mind there are many other ways to buy or control real estate. If you are just getting started with limited cash, I would concentrate on learning these alternative methods. Buying Subject to the sellers financing staying in place ( very little competition with this in our area ) Master Leasing, Options, Lease Options, Highest Bidder Sales, Wrap Loans, and How to structure Seller Financing terms that benefit sellers. I live near Wausau and utilize all of these and then some. Almost nobody is doing any of this around here. I know this because I run the Central WI REIA and most of the real players in the area are only making low all cash offers or using conventional financing. They are not closing to many deals lately. Also, be aware, you will most likely NOT be able to structure deals with most of the above mentioned methods unless you get face to face with the property owner. Listed MLS sellers put the real estate agent in the middle of the transaction and that prevents you from being able to discover the sellers true motivation, which is KEY.

    Happy Investing

    Derek Dombeck

    1Reply
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