questions about 7 unit mulitfamily in CT

[Noor B.]

Hi,

We are in the process of looking for our first deal in the CT area, and I came across this property on craigs list:

asking price: $229,000 7 unit victorian built in 1880, in broad bank, CT (small town near hartford)

some seller finance: 60,000 @6% 15 or 20 years (which would be great since we do not have a lot of capital to start with)

Gross rents: 59,700

Here is where this does not appear to be a good deal:

electric: $6,390

oil:11,167.31

water: 1,825

trash: 2,562

snow 510

sewer 2940

taxes 6497

insurance 4000

and i would also add in property management: $450

and repairs: $450

the tenants are month to month and rents are somewhat below market

and there is laundry in basement for extra income.

So basically the owner pays ALL utilities on this property.

Question is though, how difficult would it be to change the electricity and oil to separate meters and how difficult would it be to start passing that on to the tennants? This seems like it could be a good deal for the person that can lower these expenses. Or should we pass since this may be tricky for a first investment? any input would be greatly appreciated!

thanks,

Noor

[Roy N.]

@Noor B.

I love converted Victorians, but they need to be either done properly or be priced very, very cheap so we can undertake the needed improvements.

Looking at the numbers, when you allow 10% for vacancy you have an effective gross revenue of $53,730.00. The listed expenses are just shy of $35,900.00 (66.8% of gross) before making allocations for maintenance and PM. By the time you add realistic maintenance (10%) and property management (8-10%) allowances, your operating costs are pushing 80% of gross revenue .... there is no room for debt service.

Unless you are paying cash, there is not a hope of keeping your head above water.

Now to your specific questions about utilities:

Electricity:

If we are to take the worst case scenario: The entire property is on a single entrance and that entrance is not to modern service levels. Furthermore, unless the electrical has been upgraded in the past, say, 30 years, there is a high probability you will be looking at 1-3 ungrounded circuits per unit with older cloth wiring or even knob-n-tube wiring.

A complete rewire with seven separate entrances, each at 100amp, could cost you as little as 25K or as much as 40K depending on how big the building is and how challenging it will be to run the new entrances to panels in each unit and pull wires throughout the unit.

Heating:

The 11K/yr oil bill is a strong indication there is no insulation in this building (just your standard, for the day, two layers of lath-n-plaster ... if it is a wooden building).

Do you know if it is an oil fired boiler or forced air furnace? I suspect it is a boiler (probably with period cast iron radiators). If the boiler is more than 20years old, your cheapest upgrade would be to replace it with a modern high efficiency oil (80-85%) or natural gas (95%) fired unit {if gas is an affordable options, I'd go with gas}.

In either case, to separate the fuel costs would require installing a separate boiler or furnace for each unit, each with their own oil tank or gas line. If you were making this big of a change, you might also consider installing a ductless heat pump in each unit (with electric baseboard as auxiliary heat) if the layout of the units support such an approach. A heat pump would have the added bonus of doubling as an air conditioner in the summer {vitally important in a big old Vicky with no insulation}.

Plumbing the existing hydronic system such that each unit has its own direct run to its corresponding boiler in the basement won't be cheap {you want to hope someone has already done this}.

If the current heating system is a forced air furnace, give-up all hope separating the ductwork for seven furnaces ... it would be cost prohibitive, even if you went with the small ducted high velocity furnaces.

Of course, installation of proper insulation into the building envelope could cut those utility bills in half. Unfortunately, our experience with Victorians (wood or brick) is that it is very difficult to properly insulate w/o a back to the studs rehab. Trying to inject closed cell foam, or blow in cellulose into the wall cavities is problematic due to the common, but not systematic, use of cross members. In the case of a wooden building with a windbreak layer of lath-n-plaster in the wall cavity, there is little room for insulation. On a brick Vicky you have the option of loosing the brick - actually you would be turning it into a thermal mass on the conditioned side of the wall which has benefits - by covering the external wall with 2-4" of hardboard insulation and re-cladding. As you may have guessed, neither of these approaches are cheap.

My take is you would need to acquire this property in the range of 140 - 180K to give you a fighting chance of being able to upgrade it to be a modern, efficient, and healthy home for your tenants.