Questions on Six unit under contract

[Jim Kaufman]

I have a six unit under contract in Pittsburgh and I am doing my due diligence. Purchase price is $35k per unit. All six are rented. It is in a nice solid neighborhood one block from police fire and bus line and ten blocks from where I live. Rent is $500 to $595. They are all one bedrooms with LR, DR and eat in kitchen. I plan to convert the DR to BR2. Max rent for area would be $675 if they are fixed up. The low rent units will be raised asap trying to keep 5 of 6 rented, one open to rehab at a time.

Heat, water, sewage and trash are paid by landlord at $104/mo. per unit. Heat cost is $50/unit (two newer boilers). Foundation is solid, brick is good, shingles are good, flashing needs replaced around four chimneys and should be done prior to closing. I would hold building for 20 years.

The maintenance is a classic case of defer everything. Kitchens and baths need redone. It is lathe and plaster, typical of the age. There are new electric boxes for all six units split out with a couple circuits run up to each unit, probably just in the kitchens. The majority of the electric wires in the walls are knob and tube.
I have gone through some great forum discussions on landlord paid utilities (most discussions say run away fast :-). There are also similar discussions about knob and tube. The preliminary electric estimate to re-wire each five room unit correctly is $3,500 or about $20k for the entire building.

I have 5 sfh’s but they are all newer, out of state and under management so this will be my first hands on project. I just became semi-retired and want to move into RE investing full time.

Option 1 - My original thought was to go in to the first unit that becomes vacant and do a full rehab. I would refurbish kitchen, bath, electric and floors. My estimates for the five room 900 sq ft was in the $15k range which I think is tight given the electric costs and the fact that I am more of a GC than carpenter.
After the shock of coming up with a $15k budget, I am now thinking that I may be better off doing a lighter rehab.

Options 2 – Upgrade electric, fix walls from electric installation, upgrade just what is needed, paint, floors, rent at market values.

Moving utilities to the tenants - one option is to add baseboard heating units, especially if we are already working on the electric. I have not worked with these before but it looks like the hydronic units were running about $1,200 on the high end for five rooms. Most of the units have metered natural gas but I am not sure if there are good options there for individual heating. I will check on passing on trash costs.

Option 3 – Pass on this deal. I do not expect this to be my best ROI or a great deal to brag about how much money I am making. I do expect this to solidly get me into multi families and set me up for better future apartment building purchases. As long as I protect myself from a loss on the property, I should be ok.

Cap rate – If rents are all raised to $640, if I use 4% vacancy, 5% maint, no management fee (not sure if that is normal), and add baseboard heating, I would increase the value of the building by $75k (10% cap rate), which I could theoretically invest at $12,500 per unit and breakeven.

I would love some feedback on the above. Any help is appreciated. Thanks, Jim