Would you buy this house?

Question

Hey everybody, I've been an accidental landlord/inadvertently involved in REI for about 5 years but I'm about to put an offer in on a 4plex in San Antonio-my first deal that I've actually analyzed and I just want to run it by the group mind to make sure I'm not about to get in over my head.

My plan is to pay cash and the pull all the money back out with delayed financing, thereby leaving almost nothing in the property and preserving my capital for future deals. The numbers look good but the property is pretty grungy-definitely a tired old building in need of some major work in the next few years.

3/4 units are rented to long term tenants who have been there for years and have no plans to leave. The vacant unit (#4) is a small 1/1 in need of a kitchen remodel and a coat of paint (budgeting $4k). Currently rents at $550 but after the new kitchen/paint I'd raise it to $625.

The Good:

Acquisition price (including closing costs, appraisal): $140k

Current gross rents @ 100% occupancy: $2630 ($2705 after kitchen remodel of unit 4)

Operating Expenses (PITI, taxes, Capex, mgmt, etc): $2053/month

Cash Flow after refi (per BP BRRRR calculator): $6-700/month

Location: Solid "B" neighborhood. The neighborhood is mostly well-kept SF, there are elementary/middle/high schools within walking distance, as well as Trinity University. Close to highways, close to downtown, close to grocery stores/restaurants/parks/museums.

The Bad

My goal is to create the nicest possible rental property (and to charge higher rents), and to accomplish that there is definitely some major remodeling on the horizon. The property is filled with "previous landlords have done the absolute bare minimum for many many many years" type of stuff, for example:

Units 1 and 2 need to be gutted-new kitchens, bathrooms and layouts.

There's no insulation in the attic.

Electric/water are shared amongst all 4 units in a confusing hodgepodge of wires and pipes.

Only 2 water heaters for all 4 units.

Some units have gas stoves, some have electric-not sure how gas is split up currently.

No central AC/heat. Window units and rolling electric heaters do the job for now.

Old crappy wooden windows throughout.

I live in Austin and it's 1.5 hours away, so managing contractors will be a logistical challenge.

My thinking is that I can buy it now and be cashflowing strongly even in the current condition, and then over the next 3-4 years reinvest that cash flow back into the property, making continual improvements as units turn over and increasing rents accordingly. Since it's a 4plex I can be remodeling one unit and still be collecting rent from the others, which will reduce carrying costs during remodeling. When it's all said and done rents should be well over $3k/month, cash flow over $1k/month and it'll be a really nice place to live.

So....thoughts? Am I insane? The numbers and plan seem solid to me but I would love the opinions of those with some more experience. Many thanks in advance!

Eddie Lehwald · Answer

@Betty Cruz you can refinance 70% of the appraised value, so 70k for every 100k of value, so if you buy waaay below market value you can theoretically pull out even more cash than you put in. For this particular scenario, I'd be using a nifty trick called delayed financing, which-provided you paid cash-allows you to quickly pull out your money up to the purchase price OR 70% equity, whichever is lower.I'll be buying this property for $135k, which is under market. I'm hoping that it will appraise at at least 193k, because then I know I'll be able to get that 135k back (135 is 70% of 193), thereby leaving very little money in the deal, and preserving my capital for other things. Since my strategy hinges on the math of the appraisal, I've made my offer contingent on having an appraisal done, and I've talked the strategy over with my lender, so even though this is a cash deal I'll have the appraisal done during the option period to make sure that it plays out the way I want it to. Hope that helps!Good to hear that my instincts about the area are well-founded. Since this is my first out of town investment I've been a little worried about that, but it seems like a pretty nice neighborhood-I'd live there! It's kind of in between Norhmoor and Montevista on the east side of I-10.

Betty Cruz · Answer

@eddie lehwald - This sounds like a great deal, especially in the area you described. How do you get "all" your money out of it? As I understand it, you could re-finance 75 percent of the purchase price. I would love to know if I'm wrong about that. I also don't know how you can be sure a bank will lend on it before the bank orders the appraisal. It's been my experience that each appraiser has his/her own take on what's lend-worthy. I'm doing one right now and just crossing my fingers they don't have issue with the foundation. I'd love to chat with you about this. I will PM you.

Jason Hirko · Answer

@Eddie Lehwald How are you accounting for maintenance and repairs, for things that aren't necessarily capex? A place like this is like 70's build or earlier? and you mentioned the landlord has done the bare minimum for years, so make sure you are ready for tons of little piddly repairs. Also, is your $2,053 after your refinance?

Dave Melton · Answer

Are you planning to use cash to close and immediately doing a cash out refi? You might find it more difficult to cash out with little to no seasoning. Will you have the capitol to cover the rehab? Keeping in mind your plan is to operates at 75% occupancy and that means 75% of income meaning pretty much no cash flow while you are not only paying the mortgage but also paying to rehab the vacant unit and any incidental costs that pop up. It can still work just be prepared to have Murphy waiting behind every project in every unit.

Betty Cruz · Answer

@Eddie Lehwald. Thanks for the update. I was wondering how that deal was coming along. I would love to chat about it and other San Antonio opportunities. Sent you a PM. Look forward to hearing from you.

Eddie Lehwald · Answer

Hi everybody, thanks for your input, here's the updated news re: the 4plex.I ended up getting over my initial anxiety and signing a contract, and then after an eventful weekend the seller backed out! Back to square one for me, sigh. This was great practice in analyzing, running numbers, figuring out how the refi would work, planning a rehab, and many other useful skills, let's hope the next one goes all the way.

Betty Cruz · Answer

@Eddie Lehwald Excellent explanation! And yes you confirmed what I thought but I have never thought about the contingency that it appraises. Great plan. I just bought one and am just HOPING it appraises so I can get most of my money back. My deal isn't NEAR as good as yours since you are hoping for ALL of your money back. I would love to chat more. Where did you find this deal?

Eddie Lehwald · Answer

@Ernesto Hernandez well said! That's definitely the terrifying part of it.

Eddie Lehwald · Answer

@Jason Hirko, maintenance/repairs are included in that $2,053 and that number is also post-refinance. House is definitely older than 70s, Zillow says '36. It's pier and beam and was moved to its current location sometime in the past. I'm thinking that a lot of the little piddly repairs will be be wiped out by the complete do-over of units 1/2.@Dave Melton I'm planning on using the delayed financing exception to refinance quickly. I'm having it appraised to be certain that I'll have enough equity to pull all of my cash out right from the start. If I can't get my cash back then I won't be doing the deal.

Ernesto Hernandez · Answer

It sounds like you feel pretty strong a out your fundamental numbers. That's the science part of it. Whether or not your incremental investments in higher end amenities will yield incremental rents via higher end tenants is the art part of it.