First Investment Analysis?

Question

I'm hoping I might be able to get some help analyzing a 4plex  property I'm considering. This would be my first real estate purchase  ever.

The property is vacant, its bank owned and on the  market for 180k (which is about half the cost of a normal 4plex in my  area).  The price is really unlike anything I've seen here.  I'm sure  It's priced low because the property is a "fixer".  There is one 2 bedroom unit, one large 1 bedroom, and 2 smaller 1  bedroom units.  After some market research, my very conservative  estimate for total rent is $2300 ($700 + $600 + $500 + $500). This  passes the 50% rule (before renovation) even if i put down 3.5% and  owner occupy (which I'm considering)

One negative factor is  that even though it's listed at 180k, it's tax assessed over $400k  (meaning 6k in taxes!). So i basically need to fork over the entire rent  for one of the units JUST to pay for taxes! should I up the 50% rule to 60% based on these insane taxes?

The other issue to consider is obviously the deferred maintenance. I wish I could give an accurate figure here for how much it needs in renovations but unfortunately I really don't know.  My guess based on the low price is a lot.  I'll need to get an  inspection but I wanted to post this before i go spend $500 to get this  inspected.  Unfortunately since I've never owned a home before I'm not  very handy (yet).  I know almost all the carpets need to be replaced. I  know the windows are ancient.  all the interior and appliances are  EXTREMELY old (even some ugly wallpaper).  My preference would be to  replace the carpets and leave everything else "as is" until the rents  pay for improvements but that could be a newbie mistake. The building was built in the 40's so it could have all kinds of other issues.

There are perks to this property

1.  After visiting the property I discovered TWO additional 1 bedroom units  in the basement that were not in the listing! They are not anywhere  near in livable condition right now (nor do i believe I currently have  the funds to make them livable).  Currently they just look like a  basement with a bathroom and kitchen (and ugly ones at that) but they  could one day add $500 each to the gross income.

2. The property  is in a nice neighborhood with a lake view so I would imagine it  appreciates more rapidly (not that I ever intend to sell)

If this helps, here is some other info:

I have about 50k in stocks right now that I could sell if i needed to (i'd rather not)

I make 90k a year at my job

Am I over my head on this one? any help would be greatly appreciated.

Jim Walker · Answer

Regarding the extra two units in the basement.  If it shows as a fourplex on tax records and the listing, those units might not be permitted, Obtaining permits as well as rehabbing would be needed to make those "perks" legal and habitable.

That may not be a good idea, because an occupied, renovated fourplex can get conventional financing. A six plex, no matter, how nicely renovated, no matter how strong the income, will not, ever, ever, ever get conventional financing. Ever. Never!

Because of this inability to ever get conventional  financing on a five or six plex, the result of adding additional units can actually decrease the value of the property even if it increases the gross income. So, don't do that.

Regarding tax assessment: In California, the counties are required by our state law to re-assess valuation to the sale price after any arms length sale transaction. Check to see if that is the law in Washington state, too.

Regarding the $500 inspection. The time to pay for the inspection is after you have the property in contract, subject to your approval of the findings of the inspection report. You can get an inspection on a vacant property, usually within the first week of the contract.

Get a ball park figure from a contractor that wants work, before you get into contract if you can. If you can't get a contractor over there right away a ballpark figure of $20,000 per unit for carpet, fixtures, appliances, stripping wallpaper, texturing, painting, new windows, wood pest repairs, landscaping, systems repairs (heating, air, plumbing, electrical, roof, siding, doors) suggests a budget of $80,000 or more.*  Hire professionals to do all the skilled work. (And it is ALL skilled work! - or at least semi-skilled)  You don't have the skills or the tools to do anything yourself except  maybe, maybe a little bit of light demo, light cleaning, light landscaping. Even if you did, you make 90K per year, dude. If you  work 40 hours a week for that, your time is valued at least $45 per hour. You can hire skilled trades people for less than that and very good semi-skilled workers for half that. Factor in the fact that it will take you three times as long to do their jobs than they do, the value of your own labor would be far less than minimum wage.

*Even this $80K is suspect to be low.  If comparable, fully renovated move-in ready, or occupied fourplexes are worth $360,000, the list price is only $180,000, that suggests that the seller and listing agent estimated a full rehab budget (with skilled workers)  may be closer to $180,ooo than it is $80,000.

No one leaves a full hundred grand in equity on the table for a newbie buyer in this price range.  - unless - unless they have priced it for auction style bidding, and $180,000 is the ground floor for minimum bidding?  A good Realtor /  agent in your area can figure this all out. If Mack McCoy is in your part of Washington, I would give him a call.

Susan Gillespie · Answer

Hi Sebastian, you found an intriguing opportunity. Your questions/comments are a mix of strategy, financial evaluation and practical advice. I would consider:

-Your strategy. Is the condition livable, or does it need major rehab prior to occupancy? If you owner-occupy, you could get favorable financing, tax treatment and may be able to include money for renovations in your loan. You could live there initially and eventually convert to full rental when you move.

-Your team. If you haven't, make local contacts who can help you asap. This includes a mortgage banker who can walk you through financing options, rates and pre-qualify you; a contractor to help with bid/rehab estimates; an investment-savvy realtor with access to the MLS; and a property manager who can advise on rents, rentability and demand. Even if this deal doesn't go through, you'll learn a lot from each of these contacts and your time will be well spent making connections. Do you know a local investor you trust and could get their opinion?

-Your time. Your full-time job might make the purchase possible, but do you have time to take on a second job as investor/property manager? I worked full time during several investment purchases and sacrificed a lot of personal time and energy on the front end. Be realistic about the time and effort you'll spend.

-Your evaluation. It's critical that you get rehab and startup cost estimates. If there are major structural issues, I might pass as a new investor, but it's critical that you know what you're dealing with up front. Also get numbers for utilities, trash, insurance, closing costs, etc. What utilities do renters pay vs you?

I ran some conservative numbers, and if you live there without paying rent, you're close to break even cash flow, but this depends on your specific expenses. The scenario becomes much stronger if you can collect your full rent as listed above. I can send you my evaluation if you want.

Other thoughts:

-You could argue taxes and probably get a better rates as an owner-occupant, assuming you get a homestead exemption.

-I would pay for an inspection only after you get the property under contract.

-If you owner-occupy, do your own property management and fix this up over time, you have the opportunity to build some nice equity.

Feel free to message me if you have other questions.

Sebastian King · Answer

Thanks everyone for the advice,

@Bryan R. can you give any specifics on the challenges for this property?

right now I'm leaning toward passing on this one (although part of me feels like I'll be kicking myself in 5 years for it).  If it seems too good to be true it probably is right?

Bryan R. · Answer

@Sebastian King

I'm familiar with the property you are interested in. That property has enough challenges that I wouldn't recommend it for a first time investor.

The repair costs to get it rent ready are significant and the Seller is looking for a cash offer.

Sebastian King · Answer

@Chris Piper

Actually I have another 60k in another trading account that I could sell as well.  I could potentially offer 110k (probably wont fly but you never know).

@Graham Mink

Thanks for that book I'll definitely be reading that.  One thing I've considered is buying the property and living in it while I fix up one unit at a time over the next several years.  If I sell my stocks I could put a large payment on the property and get down to a very small mortgage.  I have very few expenses right now so I could probably throw 2k a month at it until its up to par. Is that a bad Idea?

Chris Piper · Answer

@Sebastian King How are you planning on financing this property? A bank won't loan you the money for a "fixer-upper." You might have to buy it with all cash, or use some hard money temporarily to get this property, then maybe you could get a mortgage on it. If you buy it as a land trust, you might be able to simply transfer ownership of the property within the land trust to acquire a mortgage on it. Then, you could do some "rehab" using some of your $50K in stocks to get it to pass an inspection by the bank prior to applying for a mortgage.

As far as taxes go, if you become an owner occupant, you might be able to reduce the taxes with some exemptions like homestead. Just a possibility.

Also,  I wouldn't waste the money on an inspection for a property you don't own yet. You can have a few contractors meet you at the property and give you quotes on all the repairs, plus it's free.

First Investment Analysis?

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