Off Market Duplex/Triplex Combo - How to Proceed

Buying & Selling Real Estate
7yFollow

Off Market Duplex/Triplex Combo - How to Proceed

Matthew John
Rental Property Investor · Metro Detroit, MI · Member since 2016 · 277 posts · 269 votes

Hey guys, 

Over the past week, I've been going back and forth with an Owner I found through my Direct Mail Campaign. 

He's an older, retired guy and it seems like Landlording is taking a toll on him. He told me he's 75 and sounded very grumpy. Today he said he was going to court with a tenant and starting the eviction process. It's no surprise he responded to my letter!

He owns a Duplex and Triplex right next to each other. Their taxes are separated by the city, but total it is 5 units. 

He's owned these properties since 2009, purchasing them both for a total of $67k. 

He refuses to name the price he's looking for. Not even a ball park. He wants me to make the first move. 

ARV is a conservative 230k if sold individually, but unsure together because there are not any other 5 unit sales in the area to go off of.

All the units are rented out right now for $3845/m. Landlord pays Water for all units + Gas/Electric for the Triplex (roughly $580/m just in utilities). 

He's owned the property for 10 years and claims to have kept it up to date, but I won't be able to get inside without him accepting my offer. 

I've only done residential up until this point, but I'm curious if this would qualify as a commercial deal?

I talked to my Mortgage Broker and he said they could break it up into 2 residential loans, but then we will be paying closing costs twice. 

The seller made it clear he wants to sell both together & I would want to buy both, but I'm unsure if I should seek a Commercial Loan for this or a Residential. 

I'm also unsure what offer to propose to the seller without offending him and telling me to kick rocks, but I also need to give myself enough cushion incase it needs a lot more work on the inside than what he's telling me. 

I feel like if I offer 150k and find out it needs more repairs, it will be much more difficult to talk him down. At the same time I think 120k would be borderline insulting since other Triplexes in the area have sold for 120k+ (although I'm not sure if he's aware of comps). 

Thanks in Advance for any responses!

0Reply
15 views

8 Replies

Jump to latestLatest
  • Michinori Kaneko
    Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
    7y

    "He's owned the property for 10 years and claims to have kept it up to date, but I won't be able to get inside without him accepting my offer." this is a huge issue. you need to have an inspection done first. He could have kept things up to date in the surface but you never know if there are foundation issues or other issues that is being covered up. Couldn't you just make an offer and have inspection, then lower the price based on inspection response?

    What is the cap rate of the surrounding area? you can try the income approach (NOI / Cap rate). For instance if the cap rate is like 8% in the area, you can take NOI/8%. I'd assume that'll get you close to the ARV number you are providing. You are bundling it so you can go lower though.

    Two closing costs, but individual loans have much lower interest rate than portfolio loans. I would run some number and do the comparison, but I would think closing two separate loans will probably give you a better return in the longer run.

    0Reply
  • Matthew John
    OP
    Rental Property Investor · Metro Detroit, MI · Member since 2016 · 277 posts · 269 votes
    7y

    @Michinori Kaneko I find this a lot with these off market properties. With 5 tenants in there, he doesn't want people disturbing them without knowing we're on the same page. 

    I'd hate to be the guy that he has to arrange times to clear out the tenants and then I offer him 80k and he's expecting 150k. I'm sure it happens all the time...

    I think the inspection is the route to go, just unsure how much negotiating power I'll have after an inspection. 

    I'd think average cap rate for this type would be 10-12% and that's near my ARV of 230k.

    NOI is around 22k when factoring in Vacancy, Taxes, Repairs, Management, Insurance, and Water.

    If I factor in Electric + Gas for the Triplex (which he's currently paying), my NOI drops to 18k. After setting aside money for Capex & Mortgage, it's only netting a few hundred per year...

    I know a Triplex by itself in this area would go for ~130k and a Duplex ~100k. 

    I am thinking of calling him and telling him I can offer 130k. This gives me about ~30k to work with in repairs and I can inspect the inside units to determine what they need. This also gives the seller about 95% profit over the last 10 years so I certainly hope he's not insulted by my offer. 

    0Reply
  • Michinori Kaneko
    Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
    7y

    Have you asked him to provide you with actual financials? That would be the best indication of what NOI you can actually anticipate.

    0Reply
  • Matthew John
    OP
    Rental Property Investor · Metro Detroit, MI · Member since 2016 · 277 posts · 269 votes
    7y

    @Michinori Kaneko Yeah gave me the rent for all individual units and what expenses he pays. 

    All the units are rented out right now for $3845/m. Landlord pays Water for all units + Gas/Electric for the Triplex (roughly $580/m just in utilities).

    When calculating NOI, I have accounted for the utilities he's paying + 40% in expenses from Vacancy/Repairs/Management/Capex. Since the Duplex and Triplex are each on different lots, they each have their own taxes which is nearly $7000 for both buildings.

    According to Income vs Expenses, this property will barely cash flow after all the expenses no matter what price I pay. Just sounds a bit off. 

    0Reply
  • Matthew John
    OP
    Rental Property Investor · Metro Detroit, MI · Member since 2016 · 277 posts · 269 votes
    7y

    Called owner to offer 130k. He said he wouldn't sell for under 400k.

    Welp...Onto the next one! 

    People are crazy in this market!

    0Reply
  • Michinori Kaneko
    Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
    7y

    I don't get it. are you going to finance this deal? If not, based on above i calculate about $900~$1100 of cashflow monthly, depending on how conservative you want to be with your number. 

    $3845 - 580 - $1540 (40% of gross rent per your comment above) - $580 ($7000 tax / 12 months) =$1100 +

    1. Annual NOI = $13.7k. You take the annual NOI / Cap Rate (10%) and the property is only worth $137k. Only $114k if you use 12% cap rate. how are you getting to your $230k numbers? What am i missing?

    2. if you use a 15 yr 6% portfolio loan for 120k (150k purchase price) then you'd barely cashflow (I don't think there is a 30yr option for portfolio loans but i could be wrong). Now lets assume you offer $120K, and take out 90K loan (s). then you'd still be $384/month using a portfolio loan. That's about 13% COC return (with 30k down payment + 5K closing), but this doesn't include any upfront repairs/maintenance. You could argue that if there is already tenants in there, then you don't need any upfront repairs and just repair as you collect money and tenants move out (therefore comes out of your capex savings).... To me doesn't sound like something I would want to finance via portfolio loan. Now, instead you use a 5% 30 yr personal loan with $10k closing cost... then your COC return goes up to almost 20% (again excluding any upfront repairs).

    So I don't think i would offer anything more than 120k, and i would definitely go with residential loans if you have that option... Just my 2 cents!

    0Reply
  • Michinori Kaneko
    Rental Property Investor · NY · Member since 2018 · 571 posts · 332 votes
    7y

    lol saw your post after i hit post. 400k lol he's crazy lol he will never find any buyer for that hahahaha.

    0Reply
  • Matthew John
    OP
    Rental Property Investor · Metro Detroit, MI · Member since 2016 · 277 posts · 269 votes
    7y

    @Michinori Kaneko I'm glad we came up with the right numbers and I was in the Ball Park of a decent offer. There is value that could be added, could probably add $300 - $500/m and reduce the expenses, but this guy is delusional. 

    He bought them at the bottom of the market and thinks this property is now worth 400k+ because of the location. It's next to a big empty lot on a busier road and he thinks it's going to be commercial which will boost the price of the property. 

    It's hard to reason with sellers like this. I explained my offer with Math and he is just throwing out random numbers. 

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free