Existing Renters in a New Purchase

[James Jacobs]

Good morning, everyone!

I do not own any rental properties and am looking to make my first deal. I visited a large duplex (10 bedrooms) property last night that I am interested in. Both sides are rented. One side is month-to-month, the other side is under contract to October. It is located in Michigan.

Pros:

• Good location
• Analysis shows good cash flow and good CoC return and fits my model
• Good building structure
• Finishes are fairly tenant-proof for the most part
• It is listed at a fair price, but definitely not at a discount at all
• Seller is moving out of the area and seems fairly motivated

Cons:

• Both renters have pets
• I am told the one renter works 2 jobs and the other side renter has 3 jobs (doesn't sound too encouraging) for the financials 
• The unit on one side is an absolute mess and there is visible damage from the renter (probably a few thousand dollars worth)
• Since both sides have pets, there will probably be quite a bit of clean-up at moveout time that I'm not sure who would pay for (maybe it's in the lease agreement?)
• With a conventional mortgage and 20% down, it would tie up quite a bit of my cash. I don't want to get too creative with financing on my first deal. If I tie-up a fair amount of my cash, I want to make sure it is setup for success.
• Both sides have finished basements (maybe a risk for leaks?)

I feel like most of the cons are pretty short-term, but it seems like a lot of cons for my first deal. All thoughts and words from the wise will be greatly appreciated!

[Kevin Cenna]

If the seller is moving out of the area but still wants "fair price", they aren't motivated yet.  If you really want the property, negotiate the heck out of that purchase price.

If there's damage, expect you will be paying for it.  If you do purchase the property, make sure you include language in the contract that says you will get all of the security deposits & if you buy after the 1st of the month, everything is pro-rated - rents, utilities, etc.

With a finished basement, you definitely want a professional home inspector.  One of the first things I would do is replace the sump pump (if the house has one).  They run ~$150 and last ~5 years but if they fail, you can get a flooded basement.

I second Raphaela's comments about the tenants having multiple jobs to make ends meet being a red flag.  Ask the seller for his past 3 year's Schedule E tax returns to see how much rent he's actually collecting from the tenants.  Seller may be "moving" because the tenants aren't actually paying.

The one thing that bothers me about this property is the size of the duplexes.  I don't have experience with this, but how confident are you that the area can support multiple 5 BR units?  How robust is the tenant pool that is looking for a 5 BR?  Finally, can you reasonably expect to rent out each side for a higher price simply because they have more BRs?  Obviously a 3BR rents for more than a 1 BR because most people are looking for a 2 or 3 BR, but is the same true when comparing a 3 to a 5?  Check rentometer.com to see if there are comps for what a 5 rents for in that area.  If there aren't comps, that might tell you that the market for 5 is weak and you might be stuck trying to find "just anyone" as a tenant.

Good luck & let us know how it goes.