First Out of State Deal - Du or Tri?

Question

Four hours of BiggerPockets podcasts on a five hour drive from Nebraska to south central Minnesota, I had lots of time to learn and think. I arrived in time for a welcomed distraction of supper, games, and laughter with family. The night's sleep with an overactive mind and being away from my best friend and bride was like early cell coverage while driving through the eastern hills of Nebraska, spotty at best. Now my mind is racing and Today I walk through our first out of state rental.

The Find: While working on a possible deal in the same town, I came across an occupied duplex on the MLS that dropped 25% over night. It was listed as a 3Bd/2Bth. On a video walk through my realtor discovered it is a 4Bd/3Bth (2/1 up, 2/1 main, possible studio down)! I contacted the agent and within a few days we had an accepted offer slightly above asking price.

The Financing: We've already signed a purchase agreement and am working with a local bank. The agent shared that it had appraised for 30% above the purchase price for a previous potential buyer who changed their mind. I will be getting an in house commercial loan with decent terms. I asked the banker how we might get a higher loan amount in order to maintain our capital for repairs and improvements. I learned they use an 80% LTV of the purchase price or the appraisal whichever is lower. After a pressed a little, he offered that we could offer a list of planned repairs and improvements to the appraiser and ask for an after repairs value to possibly get a higher loan amount. We may need to put funds into an escrow account to use for fixes with the remaining funds to be released after they are complete. We are getting estimates to include with our work list for the appraiser.

The Future: One week from today, we will close. I will either need to make a 10 hour round trip drive back to southeast Minnesota or we will do a long distance closing using snail mail. Rain, shine, or snow I expect the a postal service to deliver the closing documents over night. After signing, we will return them to title company. Then the fun begins. We plan on splitting the utilities, putting in an egress window and leveling the floor in the basement, make the basement bath functional, upgrading the main floor bath, replacing or refinishing flooring, painting throughout, removing some overgrown trees, doing touch up paint outside, and patch repairing some cement work.

The Friends: This is where you come in. All these things are flooding my mind. Today is a walk through. I want to get this righter than I would alone. What would you suggest that I put on my "do this before, during, and after walk through" list for today?

Ryan Howell · Answer

Congrats! You may have already asked, but I would want to know from the listing agent why the last buyer backed out with an appraisal 30% over asking...seems a bit unusual. Also, the price was dropped 25%? Perhaps there is seller distress and perhaps the other buyer had a unrelated issue that caused them to back out, but I would definitely want some answers to verify to be sure there isn't some underlying issue you aren't aware of.

Tim DeFor · Answer

Thank you Cody, Great list to go on. I know of foundation issues that will need to be addressed in the coming years. It settled in one corner nearly 6 inches over the last 80 years, but there is evidence that it stopped a couple decades ago. Three units together would rent for about $2,000 with a monthly PITI of $550. Between the initial equity and cashflow I hope to have room to address any major and minor issues in the next few years. I plan on a follow-up post later today after inspections. On a side note, a family member let it be known that I'm looking at a property today and an older friend of hers asked if I might be interested in buyer two from her. We are meeting this afternoon to start the conversation.

Milo Milosovic · Answer

@Tim DeFor. I would also check local zoning requirements. Question to ask yourself: Does the zoning and bylaws allow multiple units in that type of property? From experience I had a triplex that was not allowed due to zoning and we had to decommission one of the units. Wasn’t a great day and we learned a lot from that one. Foundations can be quite costly so have a good idea of the real cost of that repair. Sounds like you found a good distressed property from your initial numbers. Best of luck (opportunity + preparation) moving forward.

Cody Moyer · Answer

@Tim Deborah how exciting! 1. I would check how the utilities are metered. 2. Check electrical, plumbing, to make sure they are in good shape. Those could be big ticket items should they need updated 3. Check for foundation and basement walls and look for any major settling, also driveway or sidewalk issues4. Check condition of windows. Will they need updated now or at some point5. Condition of roof and look in attic if possible These are big ticket things I look for on a potential investment property as those can be expensive items and stuff that has to be sub contracted out. I personally manage and complete all other repairs on my investments outside of those items above. Additionally I'd drive around and see other like properties and take note of their condition etc. What kind of things will you be able to do your property that will set it apart from others, ie quality of updates, marketing strategies, etcGood luck and love the excitement and anticipation you shared with us!

Tim DeFor · Answer

We closed! I am not officially an out of state landlord. Our payments will be $475 a month. We are updating the main floor apartment with new floors, paint, countertops, bathroom and light fixtures. At this time we are including utilities. It should rent for $1,000 utilities included. After PITI and utilities, we should have $1,000 left for management, capex, vacancy, maintenance, and cashflow. We will be looking at converting the basement into a one bedroom or studio apartment that will bring in another $550. I'm looking into putting in a coin op laundry for the 3 units.

Tim DeFor · Answer

Follow-Up: We close next Monday. I will put in about $10,000 of repairs and updating to one unit. It will rent for $850. The other is occupied at $750. At this time I will provide utilities at around $200 a month. My financing payments, including repaying the investor who is putting in the down payment and closing costs will be less than $700. After management fees, capex, maintenance, and vacancy, I will still cash flow. Purchase price: $62,000Additional Expenses: $10,000ARV: $90,000Bank Loan: $49,100Private Loan: $15,000Equity: $25,900Annual Cashflow: $2400 CoC Return: 20%The one current tenants' lease at $750 expires January 31. They will either move into the remodeled unit at $900, stay in their current apartment at $775, or move out. If they move out, I will invest in updating their unit and increase rent to $850. My cash on cash return will go down because of additional initial investment of updating, however my equity and cashflow will both go up. This is a good learning experience.

Tim DeFor · Answer

Great observation. According to the realtor, a duplex is allowed. Triplex is okay if the city approves.

Tim DeFor · Answer

Thank you Ryan, The last buyer backed out due to improvements needed. Their agreed purchase price was at the higher listing price at appraised value. I'm purchasing it at 25% below the previous listing price. It definitely has some potentially costly issues with foundation. They don't need immediate attention and the cashflow and forced and natural appreciation will more than cover the estimated costs. Good insights Ryan.