Confused first time investor! Help ?

Question

Hi BiggerPockets !

I have been following biggerpockets forums and articles for about two weeks now and learned whole lot more than doing a google search! :)

So i have decided to dive into investing and did some MLS research but in my target area theres only one or two multi unit properties available as of now. Lets dig into details.

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Asking price: $46000

Status: Bank owned (vacant)

Condition: From pictures that i have seen and what real estate agent told me seems like only problem is the front porch which was damaged by tree next to the house. (i havent visited property yet). As per agent the price of house is negotiable somewhat.

Details: Its a 2 unit property with 1bed on main level and 2 beds on Upper. No garage and has gravel driveway. On inside it looks clean no visible signs of wear and tear but again i have just seen pictures.

Estimate Rent: $700/mo (both units)

Math: This property passes for 2% and 50% rule (based on atleast $40k purchase price)

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My question is should i go for this property as a first time buyer knowing it will need some money to fix porch ? Is it worth the price ? The area where this property is located is decent area very close to almost anything from shopping centers to hospitals to highways etc. I would like to think its worth atleast 55k to 60k when fixed.

My fallback plan:

I am a Software Engineer and currently living out of state for over a year now for work but this property is in town where i am from and will possibly be returning back at end of this year. I was thinking to live in this property myself for at most 1.5 years (i will explain why) and rent out the 1bed lower unit and live upstairs in 2 bed unit. We are family of 4 (wife, 2 yr old kid and -7 months old kid ). My parents will be coming over to live with us in 1.5 years which is when we need atleast 3 bed rooms.

You probably are thinking how is it fallback plan? Well im worried about if no tenants show up ! not sure if its a valid fear since i am newbie in this field. So living there for 1.5 years is my fallback plan and i should be able to get some good tenants by than (hopefully!).

One last thing, The reason i have chosen only this property among many others is because of decent area to live with my family if need be. There are other great deals in lower class area but my fallback plan fails there.

Any advice and guidance of what i should do will be much much appreciated. We all have fears with first property and its very real !

Brian Woline · Answer

You should talk to a qualified agent and go look at the property with that person. If you know a contractor or have a friend that knows about construction  plumbing, electrical, or anything that can help, take them along too. The name of the game is preparation and knowledge.

The shopping complex could make the property more desirable and/or make it appreciate in value more quickly. There are a lot of factors however.

The first and most important is whether the shopping complex will actually be built. Many planned projects of this nature do not become a reality.You can get information on the likelihood of project coming to fruition by looking into zoning decisions that have been made by the local municipality. If the area is zoned correctly, or has a variance and there are permits in place.

Another issue you will want to consider is the zoning of the property of interest. Find out if it would be possible for this property to be used for purposes other than residential.

Brian Woline · Answer

Hi Inam,

I am a newbie to BP as well. I have experience as a Realtor and an investor. I have some questions and I have included some suggestions below.

1. Is the agent you are referring to the listing agent or do you have an agent working on your behalf?

• If you have been speaking with the listing agent, I strongly suggest getting an agent that is working for you and not for the seller.

2. Have you researched the current rental rates and availability for rentals in the area?

• The rental rates near by will give you a realistic idea of the revenue stream.
• The availability of units will give you insight on your concern about attracting tenants.

You should look at the property in person. As I say, "You can't smell the piss in the pictures". Unless you are an experienced investor with a solid team, do not put to much energy into a project without visiting it first and certainly don't buy "sight unseen".

You should have an inspection and get quotes on repairs from a reputable contractor.

Please let me know if you have any questions. I look forward to other's response and suggestions. Good Luck.

Brian

Joel Owens · Answer

"front porch which was damaged by tree next to the house."

The front porch is nothing. I would be more concerned over if the tree has worked it's way under the house or foundation. You are talking huge sums of money in that case.

What year was the property built?? Depending on vintage you can have a huge amount of repairs and problems. Do not get fixated on the low price. Instead look at the problems of "cost to cure" the issues versus what price the bank is wanting and ultimately what the fix up value will be.

You have to quantify the time, aggravation, and expense for the expected return.

Brian Woline · Answer

As Simon Campbell said, the property being a C2 is not a bad thing. The reason I wanted you to find out the zoning was to determine what additional uses there are for the property. The fact that it is a C2 might indicate a greater potential of appreciation in the future. The possibility of owning a piece of C2 property near a new shopping complex at residential prices is what developers all over the country are looking for.

Do the research to find out if the shopping complex will likely become a reality. Talk to a commercial Realtor who is working on projects in that area. Try to find out the probability of the shopping center being built, without necessarily telling them you have a property you are interested in.

You could talk to them about opening a business in the shopping center and ask for general information. You could ask about possible lease rates and any big business planning on opening a location that would draw a crowd. Find out if any popular restaurants are considering the area. They might not be at liberty to say or they might have something to brag about.

Just find out as much information about the property and the area that you can and prepare yourself for the investment. Seek competent legal and professional advice of those in the area.

Simon Campbell · Answer

Just because the property is zoned C2 does not mean that it cannot be used as a residence. Often these properties are grandfathered in. If you start doing a complete gut and remodel then you may need to transfer to commercial use.

Speaking of C2 zoning, this sounds to be a transitional property. Meaning that the dirt as a vacant commercial property could be worth more than the structure.  Talk to a commercial realtor or appraiser to find out. Another option would be to convert the lower level to a commercial use and then rent the upstairs as residential. It is possible that the commercial rent would be much more than the residential.

As to whether this is a good buy, you did not provide enough information to calculate a cash flow. You need to know what are the owner utilities, property taxes (calculated based on a purchase price), insurance, home owner insurance etc. Once you know those, you will be able to get a better idea of the true value of the property.

Inam Rehman · Answer

OMG !

I just did what you told me and found that property is zoned as C2. I think that means i cant use that as residential purposes nor rental.

Great catch ! Thanks a million for your help and deep insight.

Inam Rehman · Answer

Hi Brian,

Thanks for your great feedback. Yes the agent i talked to was listing agent and now that i think with your angle you are right i should probably talk to some one else about this property.

This property is in area with atleast 3 apartment complexes and i lived in one of them for 2 years. So i know this people (not mostly students) look for this area when looking to rent. So chances are 50/50.

One more thing i would like to bring to your attention is this property has empty lot in front and its right next to highway and there are plans of shopping complex built there in future. Does that help my property gain value or more tenants ?

Inam Rehman · Answer

Hi Joel,

Thanks for your quick reply. The property was build in 1915 and yes you are right about tree getting to foundation. I will definitely get someone to check the house before getting into deal.

Confused first time investor! Help ?

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