Having second thoughts about four plex under contract

[Jack B.]

King County, WA. 550K purchase price. Only comp available as well as brokers report shows one similar four unit selling for 50K less. Tenants seem decent but low end. Deal seems to cash flow less and less the more I look into it.

Rents(under market due to older but decent kitchens and bathrooms): $4,250 total.

Mortgage payments including insurance and taxes (earthquake insurance): $2,800 a month.

Reserves $800 a month.

Water/sewer/garbage: $500 a month proforma...

Law mowing: $200 a month. Just found out today the owner does this himself right now...

So basically $50 in the hole each month other than $500 a month principal pay down. UNLESS I remodel the kitchens and baths and charge higher rents. I might be able to get $1,500 a month then per unit. Maybe...that's what similar places with updated finishes go for. 2K a month cash flow in that scenario.

Also, I wasn't too pleased with the tenants. A couple copped attitudes about me wanting to look inside. Heck the listing agent had an attitude about it. I guess I'm supposed to enrich him and the seller buying a half a million dollar property without even looking inside.

Inspection panned out OK so far, but I won't have the full inspection report until tomorrow morning.

Bail while I'm still in the inspection period or move forward?

For what it's worth, 40 minutes even further south of the big city, similar properties in gang areas go for the same price and pencil out the same. Then again the only comp I could find for this went for less than this place.

I'm on the fence with this place...If I could get a 50K price reduction from inspection, I'd be more likely to go for it, but as it is, it seems like lower end tenants with attitude, no cash flow, and a lot of risk. Then again everything in my market is looking like that, so I will have to sit on the sidelines to add to the portfolio if I back out. Give me your thoughts please....

[Jeshua Patrick]

First, if it doesn’t cash flow it’s not worth it. Don’t throw good money at bad deals. However, if it doesn’t cash flow because rents are too low due to deferred maintenance but catching up on maintenance and raising rents to market value puts cash flow back where it should be then that’s different.

Second, if comps are $50 lower then amend your offer to no more than market value. Most likely it won’t appraise anyways if comps are what you say. Maybe you should take a little more time to learn your market if you are struggling to properly estimate values prior to making offers.

Finally, is this an on or off market deal? If it’s an on market deal and there don’t appear to be many on market deals that doesn’t mean the deals aren’t there. It simply means you aren’t looking in the right places. Go to REIA meetings and start networking to find reputable wholesalers and let them know what you are looking for and where you need to be on them. Learn how to do yellow letters, door knock, call for rent listings and ask if they have properties they want to sell, etc. It might take a while at first but if you are patient and put in the work the deals will eventually come.