My First Potential Buy and Hold: Potential Pitfalls?

Question

I think I found a good deal, a 4 unit building, sold as-is, in North Philadelphia and it's listed for $55,000. It has a 3, one bedroom apts and 1, two bedroom apt in it. It doesn't look bad on Google street view.

Rents in the area range from $500-$700 for 1 bedroom and more for a 2 bedroom. I am going to see it today at noon and ask if I can get an inspection to see what the cost of repairs would be. I have a realtor and my wife and I are going to take note of potential repairs that need to be made and try to estimate the costs - I think there's a tool on BP for that from what I've heard. I have a mentor/partner who has a GC to do the work if I need to and I know another GC I trust also so I can get multiple quotes.

I would be ok renting out the 1 bedr. units for $500 and the 2 bedr. one for $700 since the rent alone would more than pay the loan on the home in about two years. I am planning on putting 20% down and financing the rest with my HELOC, which I am transferring those funds to my LLC. I am closing on the HELOC on Tuesday and it is $45,000. That gives me a lot of cushion for potential repairs if needed. I would also be creating an LLC to buy the property.

As a first-time buyer of a rental property, what advice do you have? This is my first real deal (my wife and I each have a home in our own names and rent one on AirBnB and it's paying for the mortgage,  utilities, and a little more. Would love to hear back from you all! I appreciate your feedback as a newbie to the game.

Best regards,

Jake

Joe White · Answer

Account Closed. The LLC is nice; but it will hurt with funding later, especially if you are doing a BRRR method. Most sellers will allow you to take a contractor through to give you an idea of the costs to improve. However, the contractor probably won't be allowed to really interact with the property. A home inspector will and that might be the smartest route - an offer contingent on the home inspection report so you can get out if need be.

Rolanda Eldridge · Answer

Account Closed...Sounds like a good plan.  Allow room for contingencies and take Action!!!..GL!

Bob Derwin · Answer

There are some pretty rough areas in North Philly.  The neighborhood would be my main concern.

Mike B. · Answer

Account Closed - I advise you confirm with the city (obtain a C&O) that it is legally zoned as a 4-plex.  Just because it's zoned RSA-5 does NOT mean it's legally a 4-plex.  Yes, you can check the zoning archive online and if there's an APPROVED application for a 4-plex, likely you're fine. However would confirm that directly with the city (I think they charge $100 or something) before you buy.

And Jake, I want to make sure you understand this place needs A LOT of work.  Yes, it has good bones, yes it could be great, but from what I've run into before, from the pictures, looks like it's going to need a decent amount of work (at least $50K.. I think more towards $100K for the whole building).  You can see knob & tube wiring in 6th to last picture (it's in the ceiling).  so likely you need to rewire the whole building (which may include a required alarm system +/- sprinkler system.. check code rules).  In addition, lots of drywall, flooring, kitchens & baths to do, likely new roof, repair wood rott, brick pointing, windows/doors.  After pulling permits, etc.. I think you may be lucky only putting $75K into it (that assumes you're hiring out for everything).

Bottom line:  Make sure you're ok of spending upwards of $100K in renovations (assume the worse.. like water damage) and it's worth it (check the comps) to be sure when all is said and done, you can cash out refi and not be under water.  I'm unfamiliar with the area, so just putting all of this on your radar.. not to discourage you at all, but to paint a realistic view.

Ryan Cameron · Answer

Account Closed I'd do some background digging on the property. You's want to be sure it is properly zoned for 4-units. As far as an LLC goes, I don't see a problem buying in that entity or funding for that matter.

Just do your homework: allowing for vacancies, management (Even if you manage yourself), and capex will give you a better idea of the property's ability to cashflow

Best of luck to you

Account Closed · Answer

Thanks @Ryan Cameron, @Ali Boone, @Mike B. - I think this house is too overwhelming for my first deal and you're right, the house needs a ton of work which I'm not in a position to finance even though the rents might be steady. And yes, $500 a month tenants would not be high quality, so there's that.

I appreciate your help everyone! I think it was a good exercise for me to walk through the house and consider all the variables you mentioned to make the decision not to pursue this one. I feel like I learned a lot from you all, very practical advice.

Cheers,

Jake

Account Closed · Answer

Thank you Account Closed The block is not bad, as in my wife and I would not mind living there, it has plenty of parking, it's tree-lined, clean, and close to a middle school. I confirmed it's zoned RSA5 and found the zoning documents online. I see it has an application for a 4 family property so I assume it is zoned correctly for that. The application dates back to 1983.

It is being sold by Premiere Asset Services, a dba of Wells Fargo - do I have other options of going straight to the bank to buying the mortgage?

My biggest concern is the construction cost as my wife doesn't want to take out any more loans. It took a while for me to convince her that a HELOC was a good way to get started with our own financing, but we only got approved for $45K. I'm going to put in an offer and see what happens, can't hurt right?

Account Closed · Answer

Thanks everyone! For context my wife and I livr about 6 blocks away so it's in walking distance. The neighborhood is pretty good for North Philadelphia. It sounds like buying through an LLC could hurt funding. Can I buy through the LLC if I put more money down and get someone else to fund the rehab costs?

Ali Boone · Answer

I would do a lot of research on tenant quality and the risks of having bad ones! Tenants paying $500 for a 1-bedroom apartment are going to be much higher risk, on average, than higher paying tenants. I would in general learn as much as you can about risks.

Check out this one-

https://www.biggerpockets.com/renewsblog/risks-own...

Just be sure you do really through due diligence on everything.

Jamal Pitts · Answer

I would double check the zoning to make sure it is a legal four unit building.  55k for a four unit building sounds very cheap.  How is the block?  Are there any vacant lots or boarded up properties on the block.

My First Potential Buy and Hold: Potential Pitfalls?

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