I wanted to get feedback on my first possible deal. Please let me know what you guys think.
The owner of the home passed and now the son is selling the property. The unit in which the owner lived in is vacant but the second unit has a long term tenant that is willing to pay $400/month to stay in that unit. He is currently on a month to month verbal agreement.
Purchase Price: $40,000
Expenses on repairs & cosmetics: 3K to 4K (Estimate by Agent)
Down Payment: $8,000
Apprx. mortgage Payment: $168 @30yr Term
Rents for each unit: These are fairly conservative numbers.
1st Story- $600 (Vacant)
2nd Story- $400 ($275 now)
Property tax, Insurance, and Water : $350/month
Management Fee: $100/month (10% gross rent)
Vacancy: 8.3% estimated
Individually metered? Yes
Big Ticket Items: Roof, Windows, and Furnace were replaced in the late 90’s. Electrical Fuses were updated to breakers.
Area: Borders the end of rough neighborhood. According to Agent neighborhood continues to improve.
House was built early 1900’s
Exterior of house has an asphalt/asbestos mix
Lead base paint disclosure
Please let me know if I missed anything. Any feedback or comments would be greatly appreciated.
How confident are you in your 350 number for taxes/insurance/water? Do you mean PITI?
You forgot a maintenance fee(which I would put high - around 12%) and your total PM expense will likely be higher than 10% due to leasing fees and minimum payments. You should verify the PM expense pretty early on.
Also, if the agent is the seller's agent, I wouldn't trust their rehab estimate, or that the area 'is improving.' Maybe those are accurate, maybe not.
That aside, the big question feels like: do you want to own this type of rental, in this type of neighborhood? And there's no right or wrong answer to that question.
My initial take is that the numbers certainly look good, so I don't think there is anything 'wrong' about buying it. But there are plenty of red flags that you highlighted, and this isn't for everyone.
@Jeremiah B. makes several good points. Unless the agent is also a contractor AND representing you as a buyer's agent, I wouldn't trust any repair estimates! The agent has nothing to lose by throwing out a number and being wrong, the property will already be yours by the time you figure it out and the agent will have already earned the commission and moved on.
To add to the comments already offered, if the big ticket items were done in the 90's, then you can figure they are over 50% worn out and you will soon find yourself writing big checks to replace them, or at the very least keep putting on band-aids to stretch their life a little more. This means that your maintenance reserve should be higher for your projections.
Regarding the location, I have a very unscientific way to guage neighborhoods, but it generally supports other factors as well (crime figures, lower values, etc.). I look at the following factors on NEIGHBORING properties and the street in general:
1. Is the street and sidewalk covered in litter?
2. Are the roofs on the other houses maintained in decent condition? If not, what percentage are in fair or poor condition?
3. What kind of furniture is on the porch/in the yard? Is it patio furniture or the old couch picked out of the neighbors trash?
4. What do the cars look like in the driveways? Are they average or do many have aftermarket rims and custom paint jobs uncharacteristic with other factors in the neighborhood?
5. At around 1 or 2 PM on a weekday, how many people are there walking around? If the street is overly active during hours when people should be at work/school, this gives me a feel for how many are working and how many have "other" income sources.
None of these are foolproof and there are pluses/minuses for investing in different areas. Lower value areas tend to have very high cashflow. However, they also have higher demands for maintenance and active management. I think it is important to keep that in mind. When I look at properties in marginal areas, I always tack on larger expenses for these 2 items. There will be more drama, but there could also be higher returns.
I'm not familiar with your area, but a quick glance at the numbers tells me it might be worth digging in a little deeper to verify some of the figures.
Dont trust the selling agents numbers they are in it to sell the house as quick as possible to the highest payer. Expenses are going to be higher in an area like you are describing with that being said it appears you can make it work. The question is are you ready to deal with the caliber of tenant that this property will attract?
Hey @Jeremiah B. the $350 for taxes/insurance/water came from the agent. He did say they were conservative numbers. One thing I did want to clarify is that he is not the listing agent and is actually representing me as a buyers agent. I will make sure to call different property management companies for more detailed expense estimate.
Hi @Adam Johnson thank for the great pointers. Unfortunately this property is out of state so I may need to reach out to multiple property managers, other investors, or agents to get feedback on the area. I live in California and this property is in Milwaukee. I used Google Maps, Trulia, and SpotCrime to get a general feel for the area. The Google Street View feature allowed me to virtually drive thru the neighborhood. When doing so I did pay close attention to the type of cars and property conditions. The houses seemed to be well maintained and the cars seemed to be average. Of course this is not the same as driving the neighborhood in real time but I believe it works as a starting gauge.
Hey @Joseph Weisenbloom thats a really good question. With that in mind I think it is going to be extremely important to find a really good property management company.
Thank you guys for the feedback.
Any other feedback or comments would be greatly appreciated.
@Victor B. if you PM me the address or the neighborhood I can give you an assessment of the area as I live in Milwaukee.
I don't like it.
1.It's a duplex for away from you and creates extreme risk and management issues because of it's small scale.
2. There are other small buildings and houses likely around it that will affect the feel and look of your property (this is out of your control).
3. The building was built in the 1900's. Tons and tons of issues with such a property that can easily equal tens and tens of thousands of dollars or more to fix.
4. It's a duplex and your breakeven occupancy level is not as desirable as a 4 unit. 2 units and one unit goes vacant you are at 50% vacancy versus a 4 unit at 25% vacancy. This is important for cash flow and servicing the monthly debt.
I could go on and on ............
If you have 2 units at 400 a month that is 800 by 12 = 9,600 a year. If landlord pays utility with really old buildings the annual costs will be much higher around 60 to 65%.
Conservative 65% 9,600 x .35 = 3,360 NOI at a 10 cap is 33,600 before immediate repairs needed. No way the properties only need 2k per unit unless just carpet and paint etc. with minor patches.
So I am already in the 20's for price now on this property.
Some people can do the work themselves and save on labor but since you are out of state you will need to use contractors.
Just my personal preference and the tons of calls I get from investors who buy little properties out of state and then lose their shirt. It goes well for a few months and then their investment starts going bad. I am just not a big fan of buying little properties if you are not local as it is very hard to control and manage the investment from far away. Especially since you say this borders a rougher area.
@Joel Owens as usual make very good points
Victor - I’m more than willing to check out property and take photos
you don't know the area
It will be high maintenance (age),and you will have to depend on PM for everything
That is a headache waiting to happen
Victor I am from California and own two properties in Milwaukee. I generally like to get more rent, than $1000/mo. so unless you are in a great neighborhood I might pass. Message me if you want to talk further.
Hi @Joel Owens thanks for the feedback. You make several valid points. I am currently working with the realtor to get more detailed information, but I will definitely take into consideration your feedback as I continue to look for a deal.
Hey @Andy Collins thanks for your input. These issues are definitely top-of-mind.
Shout out to @Mehran K. for referring me to this part of the site. I'm getting a lot of great feedback from everyone.
I just don't get why you would want your first property to be 2000 miles away, rather than getting a feel for the business in your own area. I understand that numbers may be better elsewhere, but I think it is way easier to gain experience when you are less than a 2-day round trip away from your investment.
Other than that:
Lead based paint: For an old property, you can safely assume that there will be lead based paint somewhere, unless some actual lead abatement has been done. Wouldn't really be a deterrent for me, as then you pretty much have to exclude 95% of the buildings in the city (and from your description I assume your target building is within the city of Milwaukee).
Google Street view does not replace a drive-by. I've looked at so many houses, and Google was always part of the research. But many were crossed off the list once you turn the corner. And one block can be ok, the next can be worse. And in the last 5-6 years since the little Google car came through, a lot can have changed.
You didn't mention the number of bedrooms. Is it 2 down and 1 up? The rents would suggest that. I think there are better deals in the area with better returns (in a similar price range).
You can also check the city web site, the Department of Neighborhood Services has all the info about violations and permits, that often tells a story about the property. Water Works lets you actually look up past water bills, too, gives you a feel for what it will be.
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Yes they switched their format so now you have to look up by account number, not by address.
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Hi @Uwe K. I would much rather invest in state but the prices here are out of my price range and wouldn't yield much cash flow. I did want to confirm that the duplex is a 2BR lower and 1BR top. Thanks for the feedback and advise on how to do further research.
@Uwe K. are you still able to look up past water bills at Water Works? Recently they switched their search to only the account number and not by address like before. This should be public record, but cannot figure out how it works now. Thanks
Dang, didn't know they changed it. A few weeks back it still worked. Now I need the water bill to look up the water bill. I guess it was overdue anyway, quite a privacy concern with the previous method.
I had privacy concerns with the water bills too, even called in a while back to see if they could tighten it. When I talked to them they had said it was public information though.. Not sure if they are getting rid of the whole public information and going to private or if there is another way to get the information.
@Andy Collins nailed it.
I've owned several older built rentals & they are nothing but a money pit and headache [I live nearby]. That just multiplies when the owner is out of State.
I'd much rather see you buy a 1960's built brick ranch SFH on a slab for about the same price and with rent of $750+. Much easier to rent, maintain & multiple exit strategies...
Also, is your agent an active investor/landlord? If not, I would suggest you only deal with an agent that is.
Just my two cents.
Hope that helps.
Hi @Shawn Holsapple , thanks for the feedback. This definitely helps.
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