Friendly Advice Needed

[Terry Madden]

Hi BP Community, 

I don't post often in the forums but do actively read through them. I know there is a lot of knowledge and wisdom to be gained by such a great community, so I was hoping to get some advice on a current deal I'm in contract with. Sort of conflicted on what direction I should go.

Overview:

The purchase price of the house is $170K in which I negotiated down from $190K. This is a triplex with an option to also rent out the garage for storage. So multiple streams of income. 

This is a rental town, hence I'll have an easy time getting tenants and it comes with 2/3 units already occupied. 

With 25% down and fully rented out at maximum rent, should cash flow $1,000+ per month after taxes, principal and interest. 

Dilemma:

Even though I was able to get the purchase price down to $170K, based on the comps in the area, I'm paying a fair competitive price, not a low price. 

The house is about 100 years old. After the inspection report came back, the house will need the following work (and this comes directly from the inspector):

• 1-The two oil-fired boilers must be professionally evaluated and serviced by a licensed HVAC technician to determine the life expectancy and the evaluation of the firebox as well as its efficiency.
• 2-The asbestos in the basement must be professionally encapsulated or removed.
• 3-Need to have a licensed plumber REPLACE the corroding electric water heater for the rear unit.
• 4-All items listed in #8 that are asked to be replaced, should be professionally replaced or given appropriate credit for replacing by new owners.
• 5-Need to have a licensed electrician examine, address and replace all wiring throughout the house and garage. Due to the extended list of improper and outdated wiring mentioned in #10, we need an exact quote on how much it will cost to repair all electrical issues throughout the premises.
• 6-Must install all appropriate carbon monoxide/smoke detectors as needed all throughout the living area space; including basement, stairwells and other living areas. 

Based on this report, I have asked the seller for an additional $10K at closing to make up for some of the costs I'll be incurring from the start. The seller is willing to give me only $5K right now and I'm trying to get them to come up to a minimum of $7,500. 

Even if they agree to give me an additional $7,500 at closing, do you think this is a good deal to get involved with?

Please also not that I already spent $1,200 on the inspection and appraisal.

Any advice is greatly appreciated. 

Thank you very much and have a great day! 

[Jim K.]

@Terry Madden

All right, you're buying a 100-year-old property. You've cut and pasted six points from an inspection report that references items numbered 8 and 10. Then you're asking for a cost estimate of the six items, and an evaluation of the deal based on the work that needs to get done.

I can't answer your question in full, but I am able to give you some more information that I hope you'll find helpful.

1. You've referenced two oil-fired boilers. How big are they? How old are they? What kind of pumps are running the hot water or steam up to the apartments? With 100-year-old properties, it's quite likely we're talking about converted hot water gravity systems and in a place like Jersey City, converted coal burning systems. This is all obviously not your wheelhouse, and that's not good.

The good news is that your primary worry here, wondering about the life expectancy of the boilers, is probably ungrounded. When you have a hot-water system fired by a boiler, typically the boiler can last practically forever with regular maintenance. The pump that is used to circulate the hot water through the system is the component that typically needs the most regular maintenance. Get multiple quotes.

2. Where is the asbestos in the basement? How much is there? Is it pipe insulation, boiler insulation, some kind of blanket insulation? Again, this is clearly way out of your comfort zone. The good news is, once again,is that this is quite typical of older properties like the one you're describing.

3. How big is the water heater? Why is it an electrical system in Jersey City? Usually, something of that age would be natural gas in western PA. But even so, replacing a regular water heater, electric or gas, isn't a dealbreaking expense.

4. You see my point. Who could say anything useful about this with no access to No. 8?

5. So with many of the circumstances you describe, it's probably all knob-and-tube or, at best, rag wire. This is a big ticket item, on the order of $20,000 and up for the sort of full-on replacement you see listed here. Normally, you wouldn't replace everything. But Terry, you can't be buying places like this knowing squat about old electrical work and not being about to communicate effectively about it. What's No. 10?

6. This is cheap with battery-powered materials, if your local code allows it, significantly more expensive with hard-wired models if your local code doesn't allow them. The fact that you don't already know what your local code does or doesn't allow limits you here.

So finally, this place is going to cash flow $1000/month for three doors if you get this place dialed in. You mention taxes, principal, and interest. You say nothing about estimated reserves or property management. This post is clearly part of figuring that out.

Your profile mentions that you are in sales and lists nothing of any sort of experience in renovation. I am a self-managing, fixer landlord specializing in older dilapidated properties. This place is right up my alley and I'm pretty sure even with the gaps in what you've mentioned that I could make it work. It would not be up your alley at all. I don't know what your contractor network looks like, but given what's likely, you're probably going to get soaked renovating this place from where you're at. Even from the sharply limited amount of information given here, it sounds way, way, way out a hands-off investor's comfort zone. This is a grand opportunity to drive the price down with the seller if you're buying with the right fixit-man skill set -- you're not.

If you do this, you're making a major commitment, the kind of thing so far out of a typical hands-off investor's comfort zone that it will take her/him into a danger zone. I'm not saying you can't renovate and operate a place like this, but learning how will probably change your life and you will have to deal with many of the building's problems, and not from a sky-high perspective. Are you willing to make that commitment? Do you WANT to be the kind of investor who knows all sorts of stuff about hot water heating and replacing knob-and-tube wiring? This isn't the sexy part of investing in real estate, running numbers and leveraging debt and automating rent collection, not by a long shot. Ain't no turnkey here. This is a blood, sweat, tears, and toil kind of thing to learn how to profitably renovate an old MF building with tons of deferred maintenance issues and turn it into a tight little ship that puts a lot of money in your pocket.