What would you pay for this 4-family building??

Question

4 unit apartment building - current rents are $480 (2BR), $435, $425, and $365 (all 1BRs).  Landlord pays for trash ($840/yr) and water/sewer, which is $125/month.  Property taxes are $1,400/yr.  Insurance will be about $k/yr.  We had some inspections done and the electric is shot and I have a quote for $4k in necessary repairs. Plumbing is in okay shape, but definitely will be some issues to deal with in the future.  I don't think there is a lot in the way of immediately necessary repairs to the apartments themselves.

The $365/mo tenant has been there for a long time, and, while he always pays his rent on time they say, he is a major hoarder, and mentally unstable. Has pictures of women's underwear ads taped all over the apartment, and the place is a filthy, packed mess.  When we were doing the electric inspection, he thought we were going to be asking to look in his apartment again, so he stood at the top of the steps and started screaming, "I'M TIRED OF THIS F-ING SH!#!!!"  Would want to get rid of him asap if we buy it.  He's on month-to-month lease at this point.  Could also then increase rent amount for new tenant.

Not sure what I'm leaving out that would be helpful, but looking for thoughts as to value.

Thanks!

Wes Brand · Answer

Sounds like a headache waiting to happen and I probably wouldn't take it.

If I had to buy it for some reason I'd offer somewhere in the 30-40k range. I figure you have about 10k / year NOI and you need an unknown amount of extra work (at least 4k, probably 8-12k). The low base rents and problem tenant make it seem like a not-so-hot area. You'll have quite a bit of cleanup work to do once you move him out of his unit, if you can move him out. A 30-40k offer gives you about a 20-30% return, which would be enough to make me think about jumping through the hoops to get the person out and the unknown risk that my rehab costs balloon closer to the 12k range. But...that's me. I don't want problems with my investments so my numbers for problem cases tend to be ridiculous.

Erin K. · Answer

and insurance about $1k a year - just noticed typo in original post.

The current electric is only 60 amp with fuse box and our insurance co will only insure fuse box system that is at least 100 amp.  Thus the repairs to put in breaker boxes and upgrade entrance electric, etc.

Erin K. · Answer

Any others care to chime in with thoughts as to value? We have this property under contract and need to decide by Monday whether to move forward. I had been watching this property for a while and the price suddenly dropped by $40k and we made offer that was accepted. We are in inspection period and based on electrical systems needing $4k in work, need to decide whether to pursue or not.  Thanks!

Jay Craig · Answer

I don't think it's too bad of a deal as long as you buy low. I would buy especially low to make sure you prepare yourself for the damages the problem tenant may have caused.

Best of luck

Erin K. · Answer

As far as the low rents, I think that is more a factor of the area we live in generally. I have nice duplexes that I rent for only $350 for a 1BR unit, $375 for a 2BR.  Cost of living is very low around here. In addition, I don't think the current owner has been very aggressive about keeping rent as high as it could be.

Thanks for your thoughts!