Increase investment in C/D class triplex?

Question

I am one of 4 partners in a triplex deal which includes 2 adjacent empty lots. Im considering buying out one of the other partners to increase my share but unsure if I should put my investment into a deal in a better neighborhood or back into the triplex. This is a C/D neighborhood because from the property I can view a trailer park, the house across the street is in disrepair with disruptive tenants, but the neighborhood is also fairly quiet with lots of big trees. It is located on the East coast of FL 1 mile from the river.

We purchased the triplex 4 years ago for $100k(including repairs) cash. Every year there has been some kind of large expense(roof replaced, AC replaced, etc). We have completely remodeled one unit. Our last few years net income has been $13k, $11K, and $8k. Total rents have been raised and now total $3000/month.

The one partner who is willing to sell said he would want $50k for his share(initial cash input $25K). I think he would probably even be willing to do seller financing.

We have finally turned this into a good cashflow property but again it is not in the best neighborhood. Looking for advice to see if I should put more capital into it for cash flow, or look to finding a different deal altogether. In general housing is very expensive in my area and difficult to cash flow. Thanks for any advice

Chris Davidson · Answer

@Corey Smith to me it sounds like you don't have the time or desire to go out and find another deal. So the next step to me would be if you think it is worth putting more money into the deal. With out knowing the gross rents in the prior 3 years its hard to back out NI. But off the prior 3 years NI would be $3,250, $2,750, and $2000. Thus averaging 2667/ year historically. If you didn't expect that number to change then you would be looking at ~19 year payoff just on cashflow or roughly 5.3% return on the additional 50k. This excludes any equity build up through appreciation, and loan paydown. Based off this it doesn't seem to be a great deal, but one that is just convenient. Since you know the gross rents during the prior years project out what you expect NI to be this year and see if those numbers make sense to you. All the above is the most basic run down. If you have a plan to sell off the empty lots and recoup some funds that could really change the deal but what does your agreement/ plan with the other two partners?

Chris Davidson · Answer

@Corey Smith what are your goals? How much time do you have to spend on these goals. Do you have the time to go find another deal? Are you looking for more monthly cashflow or have funds and ready to start building long term wealth?If you have fixed all major Capx items your cashflow should start increasing as roof and Ac shouldn't need work for years to come. Is the NI of the last years been your share or the property as a whole? If you have easy access to capital and see that growing cashflow may not be the best way to grow. However if you are tight on capital this could be a good time to level up and level out your income for future investments easily. Lastly, getting a property stabilized is the hardest part and sounds like you are there and one partner is ready to jump out just when things are going to smooth out. Best of luck!

Corey Smith · Answer

Over nearly 4 years of ownership the NI keeps getting crushed by capex items. After a/c install this year the NI should be just over 13K. At my initial purchase price were still doing well with ~13% return. After really looking at past years performance I agree with you guys buying my partners share at double what we put in initially doesnt make much sense. I will let him know what numbers work and if he wants out fine, if not I'll keep searching. I think valuation at 150k, 8.6%return, would be worthwhile to me. Theoretically without capex catastrophes next year we should really be making NI ~25k, gross 36k. Total rents have increase from year 1 @1800/month to current year 4 3000/month We also need to keep shopping insurance. We pay 5300/yr currently.Thus far all partners get along well. I am by far the youngest, the other 3 partners are either retired or nearing retirement age which is why I brought up a buyout with one of them.Perhaps the next investment would be to monetize one of the other lots...new multifamily build, storage, etc.I will continue to work with local realtors and hopefully build a network of investors with the same goals locally.triplex

Corey Smith · Answer

@Chris Davidson Goals: slowly increase investment property holdings, 1 per year. I work full time(medicine) and real estate investing only gets a small part of my time/money, mostly due to analysis paralysis :(. I dont feel confident enough to direct more savings from 401K to real estate yet. I prefer to invest local(Brevard FL) and housing is certainly expensive here. I think leaning towards monthly cashflow keeps my spouse more interested although she really doesnt want to be involved because she doesnt want a "second job". Im in my mid 30's so I have plenty of time to just hold long term rentals. If I were to go out and seek my next property I would still need to have partners in the deal. If I were more heavily invested in this triplex my "work" would stay the same which is a pro, I would not need to find a deal, partner, remodel, etc. I just worry that it is in a lower class area, but then again I have never seen a property cashflow this well in my area. To clarify the net income from my original post, all numbers pertain to the whole property not just my 1/4. Total rent this year has been increased to $3000/month(total of the 3 units). The last 3 years Net income has been $13K, $11K, $8K per year for the entire property. I feel that buying out my partners share would be the easy thing to do. Basically nothing changes for me day to day other than I now have $50k debt to pay off for their share. Seems about as passive as and index fund. I guess my main question: Is this still a good investment if I were to purchase now at a valuation of $200K? Triplex + 2 empty lots. rent $3000/month gross. C/D class neighborhood. 1 new roof, 1 new ac, 1 unit complete remodel over the past 3 yrs. Empty lots are fenced in, have a shed for tools, but otherwise have no creative cashflow purpose. (I would buyout 1 of the 4 partners at $50K) The A/B areas I have been watching the past few years a duplex would sell for 550K-700K and rents 1500-2500 per side. Like any area deals off the MLS can be tough to make the numbers work. At that price point its very intimidating. -Corey

Amit Chawla · Answer

Personally I would maybe pay for an appraisal to see how much the property is now worth. If it comes back at a 200k appraised value then you can think about it. But based of @Chris Davidson's reponse above it doesnt look like a great money maker. However if it appraises for say 150k, then Id offer the partner 37.5k for their 1/4 ownership. However I would run the numbers again as to what your actual return is.If the 5.3% return is good enough for you then do it. It seems like the easier option instead of devoting more time to find a deal