Possible deal in East Providence?

Question

Hi all! I may have a deal on my hands in Rhode Island, but need some advice before I submit an offer on this "seller by owner". A quick low down on what it is:

• 1. Four 1 bedroom units, currently renting out for a total of $3,200/month (all utilities included, also $200 below market rent), with the possibility to convert a finished basement into a legal fifth apartment (2 bedrooms). The problem with the finished basement, is that there is not a second form of egress. We looked up the town's codes for converting a basement to a legal apartment, and according to what we found, we need to increase the size of one of the windows (and probably much more). 2. Three door garage. Currently is not being rented out, but owner has had previous offers to rent out the garage for upwards $1,000/month.
• 3. Solar panels, in addition to a 2017 installed roof. Current owner says the rebate for the solar panels is an average of $100/month.
• 4. Billboard on property. Currently rented out to neighboring business for $400/year, with potential ability increase. 
• 5. Some other features/notes: Large, newly paved driveway, units may need some slight cosmetic updates, property located on main road, property kept in great condition.

I ran the numbers with an asking price of $360k, but being that the rents are fairly below market value and includes all utilities, this doesn't scream your typically "deal". BUT with the potential for the extra income with the garage and possible fifth unit, what are your thoughts? Am I trying too "hard" to make this a "deal", or is there actual potential here? This would be my second investment property--so I haven't come across something of this caliber yet.

I'm also interested in exploring privately funded options when it comes to purchasing this--any suggestions on how I should go about that?

Thanks in advance!

Jaston

Matt Romano · Answer

Hey Jaston! I agree with the above posters, and wouldn't bank on the likeliness of being able to convert the basement to a 5th unit.  It appears that there's definitely room for some rent increase though.  Especially if the current tenants have been there for many years and haven't been brought up to the current market rent. In my experience, 1 Beds in EP should be able to rent out for at least $1000 / mo, and even more since utilities are included.

If I were you, I'd call the utility companies, Water, and Gas (if applicable) to get accurate averages to factor into your expenses in helping determine if this makes sense or not.

Regarding the 3 car garage, not sure what the use would be (business, storage, etc).  But The typical rate I've been able to achieve for garage rentals is between $100-$150 per stall.  I have a 3 car garage that I rent out on my property (for storage only) and collect $400 / mo from 1 tenant utilizing the entire space for storage. It's nice bonus income.

Hope this helps a bit! And good luck! Let us know how you make out!

Matt Romano · Answer

Hey Jaston.  I know, it's been a while! Glad to hear you're doing well and already working on acquiring your second investment property!

I've never seen a situation where the current landlord successfully raises rents immediately before selling.  But most of my experience comes from on market deals, where even if a buyer made that request, there would be plenty of buyers willing to take the property as is and deal with it themselves.  I wouldn't necessarily count on the landlord increasing rent prior to sale. After all, if it's something they were willing to do, I'm assuming they would've already done it to increase their profit over the years.  There are ways to go about it once you've taken possession of the property yourself. It's also going to largely depend on if the current tenants are on leases that have them "locked in" at a certain rental amount. Or if they're "month-to-month". Regardless, if it's the latter, you're going to want to have your own leases drafted once you take ownership. And if it's not, those leases will be transferred with the property, and valid until the dates within.

If the garage can in fact rent for $1000/mo, thats definitely some solid bonus income!

Keep us posted with this one and how it goes! Best of luck!

Jaston Robinson · Answer

Hi Matt, It's nice to hear from you--it's been a little while since we've last connected. It's helpful that you've confirmed the rents are below market and there's definitely room to increase. To increase this rent, do you suggest we have the current landlord increase to market value before we buy? Or secure the deal, and then increase the rent? Thats a great idea--will be following up with the utility company to get a more accurate number. In regards to the garage, the current owner stated that he's had businesses approach him about renting out the space since it's large enough to fit commercial sized trucks.

Jaston Robinson · Answer

Hi Nathan,

Thanks for your response! I'll definitely message you privately--I'd love to connect further on this.

Jaston Robinson · Answer

Hi Emiton,

This garage is a non commercial space, however the doors and driveway are big enough to fit industrial-sized trucks (ideally for contractors, landscapers, businesses of that sort), so I'm assuming that's where the $1,000/month came from.

Nathan J Fortes · Answer

Current investor in East Providence and grew up here as well. I would not bank on the the fifth unit with my experience with the building inspector here. Besides that, the numbers check out for a four unit in this area. It is a very hot rental market and only going to get better I believe. Also, I agree with Emiton about the garage space. Feel free to PM me if you have any additional questions, I am very familiar with the area.

Anthony Thompson · Answer

@Jaston Robinson it doesn’t sound bad compared to what else is on the market these days. I wouldn’t count on being able to convert the basement to a fifth unit (towns usually strongly oppose basement units) but as a 4 unit it seems worth a more detailed look. Is there significant deferred maintenance?

I always look at current rents and with the owner paying all utilities (even with a small offset from solar) I’d say the numbers are so-so. There are a lot of “could do Xs” here. But again, compared to what else is on the market these days, it’s worth making an appointment to assess the condition.

Your best bet for private funding will be friends and family, especially if they have old retirement accounts from a previous employer you could help them turn into self directed IRAs to loan you funds for the deal. You’ll usually be able to get much better rates and terms from a private lender like that than you’d ever get from a hard money lender.

Most private/hard money lenders are going to ask you to put down at least as much as a bank will, and will have a much higher rate (e.g., 12%+). A HML you’ve never worked with before will often give 65% LTV (so, 35% down from you) while banks will usually go up to 75% or so with a much lower rate such as 4 or 5%.

Also, not sure if you’re planning to live there, but no HMLs I know will do owner occupied loans, while banks usually love them for 1-4 families and will give you even better terms.

Emiton Alves · Answer

Is this garage a typical 3 car garage or more like a commercial space. That 1000/month figure sounds super if we are talking non-commercial space. If it is a typical 3 car garage, I've seen many people get between 60-100 door in the Greater Providence area.

Possible deal in East Providence?

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