Biggest Mistake or Biggest Opportunity?

[Jonathan Bombaci]

I feel like we’re close to being over extended and looking for some overall advice involving an off market 12 unit multi-family that we have an accepted offer on and just completed the inspection. Larger Multifamilys are tough to find in this particular market and this is within our very narrow target area which is walking distance to the local downtown. Maybe 1 of these comes up per year the last one was a 10 unit / 2 building property that sold for $360k in the first weekend and needed work/evictions.

Background info:

My wife and I have W2 jobs, I’m in finance and she’s in HR we make about $170k combined and are working towards FI. I also do real estate part-time on the side. We’re 30 years old with our first baby on the way. We have a net worth of about $500k

$50k cash

$200k investments (retirement)

$280k real estate equity

-$30k credit card (0% interest for 18 months).

The $280k is made up of 17 units including the duplex in MA that we live in, a 3 family in CT that I house hacked, a 5 unit and 7 unit in NH which we’ve acquired in the last 6 months. The goal is to get to 24 units in a market we like in northern NH. We’ll sell the duplex and 3 family in the next 3-6 months cashing out on ~$160 in equity.

The 12 unit is made up of 2 buildings (8/4) the majority of them are 1 beds, there’s a 2-bed and a 3 bed. All tenants are up to date and units are in good shape/clean. 1 tenants smokes in his unit but that’s the worst of it. It’s an off market deal that we have under contract for $410k the sellers rebating us $60k at closing for a net of $350k. Assuming it appraised at $410k (which it should) we’d put in less than $30k cash. Which based on our cash position currently leaves us pretty cash poor until we sell the 2 properties mentioned previously.

The property brings in $8400 a month ($100,800 per year). Total annual expenses $34,300. PM fee, vacancies, and $10k per year repair budget = $21,088. Debt servicing will run $22,107. Resulting in +$23,305 in annual cash flow ($162 per door) and a 12.1% CAP rate.

+ there is some room to increase the rents ($100 per unit would be market value).

Now for the problem we knew the property needed a roof and a furnace in the next year but since we have our salaries the plan was to just reinvest all the cashflow back into the building over next few years to get it up to snuff. After the inspection we discovered $30k worth of electrical problems, and to do the furnaces the right way will be $35k. In total with the roof, those 2 projects, and a few other surprises it’s going to cost between $80-100k in the next 18 months to get the property squared away.

But if we get this property and sell the 2 smaller ones we’ll have call it $150k in cash to cover us. Then we’d have 24 units in a centralized location which in 5 years could replace one of our salaries and bring us to Lean FI on their own. The risk is without the sale of those 2 properties we realistically cannot afford the repairs needed on the 12 unit. We did ask the seller to reduce the purchase price by $50k but let’s assume they flat out say no. Is it worth the risk?

I may have included to much info or not enough. Let me know if I missed something important.

Thanks in advance for any advice I feel like this could be one of those biggest mistakes or biggest opportunity moments.