How much work is too much for a non-BRRRR/Rehab project?

Question

Currently under contract on a 4plex in North Canton, OH and multi-families rarely come on the market in this area. Asking/offer price- $289,900. Home was built in 1971, all 4 units are rented, newest tenant arrived 2018. All paying well below market rent. Monthly Gross $2,610, Market Gross $3,200-$3,600. I feel like this purchase price would essentially set the market price because no other 4plex has sold in this area in over 2 years. The catch is, the current owner has done essentially nothing in the 20 yrs that he has owned it. All units outdated, 4 furnaces are original and 50 yrs old, roof has about 5 yrs left, central AC units are 20 yrs old, 4 second story decks unsafe and not built to any sort of code standard and 20+ yrs old. Driveway is mud and hasn't been re-stoned in 5 yrs. I'm looking at $50,000 just in CapEx and remodels, but I feel it's priced as a turnkey. I'm in this game as a buy and hold investor, so I'd be looking to own this place 20+ years. Is it worth buying a place in a very desireable area, having to dump $50k into it and operating in the red for 5 years before turning a profit? They had multiple full price offers day 1 and my offer was first so I got it. Ten days later I did the inspection and first walk through and found all this. Home had a previous deal fall through and the realtor said due to financing. I'm starting to think the first person walked away because of the upfront costs needed. Any advice, stories, or perspectives are greatly appreciated.

Matt Miller · Answer

@Anthony King My wife and I are investing in real estate in Perry/Canton areas and ask this all the time. How are people paying full price for all these properties and making numbers work?! Trying to start our off market campaign up because we keep offering and striking out because things are going for full asking in our area

Steven Foster Wilson · Answer

@Anthony King i don't have experience in North Canton, but id say that is overpriced. If the same thing were down here in Columbus it might work, but even then Id say the rents don't justify the price. Ideally you'd want market rents to be at $4,500 after all of the repair.

Tony R. Yagiela · Answer

My one duplex is a couple miles from this 4-unit and water tends to be the first question I get over the phone.  "Does this unit have city or well water?"  So much so that I put that at the top of my listings now ***City Water***.   I guess people just dont like the rotten egg sulfur smell.  I dont either but what I dislike more than the sulfur well water are the the iron stains it makes on the sinks/showers/and toilets.  Personally, Ive had applicants be okay with paying $1050 (1225 sq ft) for one side of my duplex when a brick-for-brick identical unit with well water a mile away is available at $900.  I certainly dont have enough data to make any concrete financial decisions, but I wanted to make sure you knew that this is a factor in rent rate and talk to your PM about it.

Tony R. Yagiela · Answer

Hi Anthony - if I had to guess, this 4-plex is probably located somewhere down off mount pleasant area closer to the airport in 44720?  Down that way are the only 4-unit multifamily  in 44720 I am aware of.  I want to give you a word of caution that I suspect those units could have well water?  Maybe its the water in 44720, but I have never seen well water have such a tremendous impact in rent rate so make sure you are factoring that in to what you suspect is market rent.  I am getting between $0.90 to $0.95 per square foot for units with city utilities, attached parking, and private yard space.

Caleb Brown · Answer

I would say value wise after updates it'd be worth .8/1% of the R/V. So lets say if rent is 3,600 per month the ARV would be 360K+. This is what I see in my market but it'll depend on how the area is and how desireable.

Stone Saathoff · Answer

After reading your post I have to admit that it does not sound like a home-run deal.

Any way to verify that they actually had multiple full price offers? Some agents will say things like that as a sales tactic.

If they did then I would say it's a safe purchase since you could just sell it again worst case.

Lamont Chen · Answer

@Anthony King

If your not going to BRRRR the property you can calculate your CoC return for this place vs other 2-3 family properties in the area since 4 families do not come up as often. That way you can determine if the CoC is worth it or significantly below what you can make buying a smaller property.

Carlos Ptriawan · Answer

If you are buying MF in CF market that doesn't have CF and you spend lot of capex: run away. There's no point of getting into a deal just to make a deal.

Anthony King · Answer

@Tony R. Yagiela That's the one, and it does have well water. I was not aware what effect that had. Why would a tenant care? I'm unfamiliar.

Anthony King · Answer

@Stone Saathoff that's a good point and I'm not sure how I could verify that. I do know from shopping for months around Ohio, and selling a Pittsburgh home in Aug that there are multiple offers on everything and my home sold in 4 days for $310k when asking was $270k. It's a feeding frenzy on the MLS and asking or higher seems to be the going rate. Even when asking price seems overinflated. I don't get how people are running these numbers and justifying this.

How much work is too much for a non-BRRRR/Rehab project?

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