Analytical Paralysis, Help!

[Casey Charkowick]

Hey BP Folks!  

I've been VERY trigger shy over the last few years, and as a result missed out on a few good opportunities. I have one in my lap now that I think is a go, but still a bit paralyzed. It's a 3 family, two 2 br and one 1 br. List price $250K. The seller is a retired contractor who doesn't have it in him to do the reno and management. Place is FILLED with junk, which I am willing to keep to make the offer as clean as possible (I know I can make good use out of lots of it anyway). The listing agent says that the place needs $100K. I strongly disagree. I have a background in carpentry, with capabilities in electrical and plumbing as well. I think I can get all units rented with $10k and sweat equity. Exterior will eventually need $25K in upgrades, but not to get it rented initially. The property has an added bonus, there's a small, roughly 600 sq ft. "shed" out back. It is insulated and has power with a loft upstairs. This can be renovated and rented as a standalone cottage as well. That would be the last project. 

I have an investor who will front the down payment. I figure I can cash flow $2780 once all units are rented. Being conservative, I plan on $0 income in year one, then if I can keep it rented 9 months/year, $25K/year after that (full occupancy would be $33K). 

My biggest concerns are: 1. heat is electric, and this is New England; 2. no laundry in any apartments, and it would be challenging to add hookups; 3. exterior needs new siding, and probably lots of unknowns; 4. I can do all work myself, but I work full time so I actually cant - I do not have a contractor and would have to rely on unknowns if big issues arise. 

I have an offer letter in hand and this place will be gone within 24 hours, so I have little time to worry...

Any feedback would be greatly appreciated!

Thank you! 

Casey

[Anthony Thompson]

@Casey Charkowick I spent a little more time analyzing this, and I'm not sure how you get a payment of $1380 with a 75% LTV on a purchase price of 260K - maybe your mortgage payment includes escrows for taxes and insurance?

It also wasn't clear who would be paying the utilities. As you pointed out, electric heat is tough in New England winters. If you'r paying for it, it's going to eat into your cash flow with higher operating costs. And if the tenants are going to pay it, you're going to have a little tougher time renting it since a lot of tenants shy away from electric heat (one of my first buildings had it so I know).

Assuming 30 year financing at 5.5% it could be an 'ok' deal but there are two things that could really hurt your return on this. One is the rehab cost, which has to be added in to the down payment when determining cash on cash return (since it's money back yearly vs. money you had to bring to close AND make the units rentable).

The other, as I said, is that if you have to borrow the down payment, what are the terms of paying that back? My quick analysis didn't account for a second loan payment or other arrangement with your investor, it assumed you had the 65K down payment and all the money for the rehab. So that's a big question you'd want to factor into your analysis.

My gut says - and I could totally be wrong here - that you seem to think that you have to buy something now because if you don't, all the great deals will be gone gone gone!

To be honest I saw the same thing in 2006 and I'm seeing it again now - attendance at my last REIA meeting was literally "standing room only" and it makes me very nervous. I also know a lot of experienced investors who have been selling for the past year or two so it kind of makes you wonder.

I'm trying not to generalize here, and you clearly have some experience doing some work so if anything I think that could help you out if you get in over your head, but generally speaking this is the environment to start being cautious, not getting caught up in the fever.

I do think that the Fed's recent change will buy us some more time, maybe a couple of years, but markets are based on human psychology, which hasn't changed, and I still think caution is warranted now.

In any case, the offer is in, and if it gets accepted and the source of your down payment passes muster, given that you can do some work yourself it'll probably all work out. But if you get beat out on this offer, I'd take a step back and try not to get caught up thinking that all the good deals are going fast.