Need suggestion, should I buy it or walk away?

Question

While I am looking for my first deal, my broker brought this property to my attention. First look at the property, I thought it was a smoking deal, however after walking through the house and meat the renters, I am hesitating now. I wrote down the pros and cons, would like some opinions from experienced investors.

here are some numbers:

This is a off market property. Asking price is 350K, Last appraisal 5 years ago was appraised 430k, zillow estimated value is 450k. It's a single family converted into 7 units. The heated area is 4300 sq ft. the total rental income is $3800, owner paid utilities 1000 per month. I have to take out commercial loan @ 7% interest rate, monthly loan payment will be 2200, so it will only leave me 600 income for other expenses. however, I can increase the rent right away.

here are pro and con:

Pro:

1. Good location, near to downtown, houses building in early 1900, hold value very well.

2. Last appraisal is higher than current asking price as I mentioned above.

3. it's a old house with old house's charm, high ceiling, wood frame around the windows. It has a lot of potential if I restore its original charm.

Con:

1. It has been utilized an asbestos wrapped furnaces. It's huge and made out cast iron. It works so far, however not sure how long it will last. (should I replace it with new furnaces or not? ) . it divided into 4 zones, however, the house is divided into 7 units, so I am not sure how these 4 zones lines up with the units.

2. there is only one electric meters, that's why owner has been paid the utilities bills. If I rewire the house with separated meters, it'll cost lots of $$$ and time.

3. out of 7 units, only 2 units have their own washer and dryer. other units are sharing a washer and dryer in the basement. and I don't see how can I put washer and dryer in each unit since each one of them is soooo small.

4. there might be foundation problems. There are cracks in several places. The top of the bricks used in the foundation are not lined up anymore. Seems like some part is holding more weight than others, thus they sunk more. ( not sure if this make sense).

5. When I walked through each room, every room has water damage mark on their ceiling. some was caused by the bath upstairs, some were caused by the roof. Owner said partial roof was replaced 4-5 years ago (not the entire roof).

6. more than half the renters are on welfare I believe. Owner only increased their rent about $20 per year.

7. All the windows are wood frame, some of them rotten out , need to be updated.

8. Owner own it for 12 years, hasn't done any major renovation. The interior and exterior are extremely outdated.

I was thinking pay for a inspector and foundation guy to walk through the house. after I wrote the pro and con, I am not sure if it still worth to do it. I worry about me being emotional about this house since it definitely has the old house charm, just not now.

I really appreciate if any experienced investor give me some honest opinions. thank you!

Ashley Zhang · Answer

John, you have a very good point! Thanks a lot!

Ashley Zhang · Answer

Kevin, thank you for your detailed response! I would like to appoint out this property is not locate in Denver, CO.

John Warren · Answer

@Ashley Zhang unless this is in a really cool, upcoming area I would take a pass. I tell all of my clients the same thing when we are shopping for investment properties. Try to find "purpose built" properties. You want the units to be metered correctly, and you want the use of the property to be sort of obvious. Chopped up old houses make for pretty lousy apartments.

Kevin G Abruzino · Answer

Ashley, the numbers seem ok, the items your concerned with could be negotiated through the purchase and even if you get zip, still are not deal-breakers. You can over time upgrade units/bldg and tenants so rents can be raised as you stated. So far so good. Then you state the Appraisal from 5 years ago is almost $100k higher.....what? Then you say its a SFR converted into 7 units....what (2x)? What is the zoning on this property? Then you say "the heated area" is 4300 sqft." What is the un-heated area? Next, I don't think its possible to get a multi-unit property close to downtown and is 4300sqft that can be had for $450k let alone $350k? and is a legal? I think that would be over 1990's pricing. I don't think that exists and hasn't for many years. But hallelujah if does and you got it. But something doesn't seem right here, dig into that a little deeper and mostly on the zoning and insurability fronts. What is the "un-heated area" of the property and why is there an unheated area?Pro's1. "Good location, near downtown" - Good.2. "Last appraisal is higher than asking price" - hmmm, that is good...why? What is your logic there? If it was done a week ago then maybe it's good but begs a lot of questions that I won't get into here for time and just cut through to bottom line. You need to know what the value is!!! Appraisals are not something you should be using to evaluate for many reasons but mostly due to changing market conditions (time - 5 yrs ago is forever ago in Denver's current market), who did it and why (bank for a refi, seller for private purposes like divorce, previous attempt to sell and got ahold of it through the buyer, etc, etc, etc), What does your Broker say? And more so what does your Brokers data say? What does their CMA say or MLS data show you? Do you have that info? And Zillow and Redfin and an Appraiser are all not anyway to evaluate value in my opinion. Raw Data and learning how to attain it, process it, and then evaluate it and use it by yourself is the only way to become a successful investor and that is the answer to this item. You need to know how good of a deal this is yourself and KNOW IT. You have to do the research until you know the market or at least your specific areas your searching in and their micro-market to be successful and more importantly, not make a big mistake. So start doing your homework. It's all on the computer. Once you do your homework, you should be able to know if its a buy or a pass from hearing the address and price before you even go to see it. You got to do the homework on your locations and know them inside and out. So put the time in and do the research yourself and then you don't have to ask this question or put your trust in anyone. Your broker/agent's value to you as an investor is bringing good deals to you, especially deals off-market which this one did. 3. That is a double edge sword but yes....on paper those things are good but they are also expensive and need lots of upkeep. But let's keep them in the Pro's column for now.Cons1. Furnace - how long will it last you ask....it will fail usually at the worst time is my experience (right after closing or in the dead of winter on the coldest night). But furnaces are pretty cheap depending on the set up and ducting there should be workable. The asbestos is an issue but you can prolong that or deal with that a couple different ways and I won't get into that here.2. This brings me back to the 7 unit converted from a SFR in the first paragraph but let's pretend that isn't a problem for now. Big deal, figure out the utilities and bill everyone. Rewiring isn't the big cost, its the meters when its time to do it.3. W/D - don't make a problem where there is one. In fact put in some coin operated ones in the basement and create a new revenue stream.4. All of denver has foundation issues. The question is are they big or small or somewhere in-between. get and inspection and you will find out. Otherwise, its still there and will be in another 10-15 when you sell it. You'll have to fix it and maintain it, but ask the seller to do it and if they won't, put it in your budget for year 2 if you can. If it can't wait that long, then ist probably more serious.5. This one, sounds weird. The roof leaked enough to got through a 2nd floor unit and make it to another floor lower????? I think you have plumbing above that is the issue and an inspection will find that.6. If your renters are broke then you know you can't raise rents. So you either need new renters or your only getting $20/more a year like her. Unfortunately, they got to go. But..is this city or federal assisted living like Section 8 or is it not? Do you know what that is and the difference? Find out.7. Yup, charm and character....$$$. Can you afford to do it or do it eventually? If so, no big deal. If not, then yes, big deal.8. This is the least of your concerns. I would get through Numbers 1-7 of the Con's and most importantly if the house is zoned for what it is being sold and is it legal? Then move on to the other items in an offer and through negotiations. Then an inspections. I have no concern about the price your paying. The concerns are deep elsewhere so do the due diligence with your agent prior to an offer on the zoning. If you get past that and its all real and right, the other items shouldn't be navigable. Hell, If you can get a 7 unit close to downtown that is legal and fixable....BUY IT! Probably can flip it and not do a damn thing to it.