Should I pass on this rental?

Question

I'm on a timeline due to 1031 rules. I got them to come down 20K in price at inspection, it's a duplex (not a normal one, a studio on one side and a 3 bedroom on the other). Both have their own kitchens, laundry and bath.

But the house needs a bit of work. Mostly cosmetic, current tenants are messy with kids. Supposedly current on rent according to the spreadsheets the sellers agent sent me.

The house had a fire in the attic before the previous owner ever bought it, so some of the wood there is charred.

The concerns are:

-Do I trust their spreadsheet as proof the tenants are current on rent?

-The house is in a rough area near a military base, I'm worried about re-sale down the road. This especially true with the signs of an old fire in the attic. The house had the knob and tube wiring removed long ago according to my inspector.

-The house is in a city that requires rental licensing with annual inspection. Last year the seller had to spend 17K on repairs due to the cities demands. This makes me wary. How do I know they don't have some fix this that or the other demand each year?

Jack B. · Answer

This isn't my first one, and I can't wait for foreclosures to trickle in, as noted this is part of a 1031 exchange, there is a time limit.

Nick Robinson · Answer

@Jack B.

Hey Jack, Have you already sold your property?  The time doesn't start till escrow closes on your property.  I know the residential market is super hot right now with the low inventory and interest rates.  Did you put a contingency on the sale of your property that you find something to trade into?

Dimitri Paspalaris · Answer

@Jack B. this is my opinion and I might be wrong but on the subject of inventory I think it is going to come back after the forbearance moratorium is over. Lots of people have not been paying their mortgages and to me the market is going to correct. I am currently loading up for this because their is going to be some great deals around because people do not want to go into foreclosure. I think based on your original post and your updated post you have an idea of what to do. I would not force yourself to do a deal unless it is the right deal and it is a win for you. I went through many properties before I bought my first one and it took me some time, but the numbers had to work for me to buy. You got this. Let me know if you have any other questions.

Jack B. · Answer

I'm definitely hesitant. Resale will be an issue. I don't trust that there won't be 17K more expenses next year, that must have been some hefty repair and I'm trying to figure out what that was but whatever it was, I don't see any signs of anything new or repaired. Last but not least, this isn't a property I would buy in a normal market. It's the lack of inventory that is plaguing me.

Dimitri Paspalaris · Answer

If your gut is telling you this is a bad deal it probably is. I would rerun the numbers and see if this is something that is in the positive side. If not move on and find another deal

Bob Okenwa · Answer

@Jack B.

You should get an estoppel certificate signed by the tenant detailing the terms and current condition of the lease.

If you're concerned about buying in a bad area, then don't buy. You can change just about anything in a house, but you cannot change the location or the people in it.

Call the city or go to their website and find out what the annual inspection entails. Make sure your property is in good enough shape that it would pass inspection regardless. I would assume this would mean the big ticket items (furnace, HVAC, plumbing, windows, roof, etc.) are in safe working order.