Could use some advice on my first deal

Question

Looking at buying my first 5 plex, on a land contract. 200,000 sale price, 20,000 down, 4.65 interest rate for 2 years then to 5.65 for third. Hope to refinance through bank after two years. After all expenses I will profit 833.00 a month. This is based on all units rented. Property is good shape and i have done all the repairs for last 4 years as i am the handyman for this property. Owner has moved hours away and does not want to deal with property. All the tenants are somalian immigrants that work at a meat packing facility here in wisconsin. I am really new to this and am trying not to make a bad decision. I have a lower paying job and make about 38000 a year driving milk truck and doing electric and plumbing repairs on buildings. Any advice on if this is a smart move would be appreciated. I plan on holding property for a long time to help with my retirement in 25 years when im 65.

Thank you for any advice

Account Closed · Answer

Could be a good deal. How do you know $200k is a fair price? Have you done an inspection? Insulation, storm damage, underground sewer and water inspection, heating system, etc A bank will assume 80% to 90% occupancy not 100%. Have you talked to a couple of banks about your plans to see if they have suggestions so that you can actually get financing in year 3? Have you had a CPA look at the rent rolls? Is the property current on all taxes? Do you have a Title report? Is landlord insurance in place? Do all of the rental units have renter's insurance? Will you be buying the place in an LLC to protect yourself a little bit? Are you having a real estate attorney draw up the agreement? Is it in a flood zone? Have there been previous insurance claims against the property that will prevent future claims? Does someone in the Somalian community speak good enough english in case there is an emergency? Do you have separate rental agreements with each and every adult living there? Do you have umbrella insurance in case there is a lawsuit?Those are the quick thoughts that come to mind.

Arun Iyengar · Answer

@Austin ManorWith $20K down, if you are netting $833/month or $10K/yr, that is a 50% cash on cash return. This is a fantastic investment. However, make sure that you are fully calculating the expenses. If the property is older, you will have repairs and upgrades, so you will likely have to set aside some money to have a safety net when that occurs. This is usually at around $200 per unit per month. What is the vacancy rate in your area? If this is in the 8%-10% range, you will need to lower the monthly rents to account for it, even if the property is fully occupied the day you buy it. Do you have adequate insurance for all the region appropriate hazards included in the expense? If you have taken all the above into account and still get $10K per year (50% CoC return) on a $20K investment, this is an excellent opportunity. I usually am happy if I get 10% CoC on my deals.

Austin Manor · Answer

Great advice, thank you

Michael Guzik · Answer

@Austin Manor Welcome to BP man! Just a quick tip type the "@" button followed by the BP members name to tag them so they can see your response. My opinion is you need to look at the population growth and average home price for the area you are looking in. How much are market rents? How much is the average home price? You always want to invest in an area with a growing population and that has an average home price of over 90k. Another thing to be careful of is that you are depending on that meat packing facility A LOT. You shouldn't invest in one horse towns because one bad year or season and your tenants are out of jobs which means you are out of good paying tenants. So make sure there are other big companies or plants that employ people in that area. I suggest you learn more about real estate and seriously look at all aspects of the deal before signing. It seems like you are emotionally attached to the property and are just excited about getting one. Focus on the NUMBERS because that is what matters. Look at what repairs are needed especially things like the roof, plumbing and fondation. Look at how much it is bringing in per square foot and how much he is charging per square foot. How much are the tenants actually paying? Are they paying on time? What is their lease like? There are a million things to consider, I'm not trying to scare you but really dive in and examine the deal from all sides before you sign on it! Good luck!

Austin Manor · Answer

Thank you for the responses, I am trying to cover all the bases before signing on the line. I will be having an attorney draw up all paperwork for this deal. I know the furnaces are 2 years old and roof was completely new 2 months ago, there was a insurance claim on roof for hail damage. I am not sure what landlord insurance is. All the tenants are month to month. Should I look into having them sign leases instead? Property appraised at 195k one year ago, and all taxes are current. Tenants do not have rental insurance. I talked to the credit union that holds the note now to see if me buying under a land contract was ok and they said yes.