Acquiring a property with uncooperative tenants

[Solon S.]

Hi all,

I'm jumping on the forum today to ask a tough question. I found a good property in NYC, located in a somewhat rough neighborhood but close to 2 subway stops. It's priced currently at around $250K and ARV is over $450K.

The biggest drawback is that uncooperative tenants are in the property are in the property and are delinquent in their rent. The current owner has just started the eviction process to try get them out. I won't be able to look at the property, but from photos released, it looks like it's in bad shape and will need good rehabbing. It's also something that will take a cash buy to begin with. 

My question, with the scarcity of good deals at the peak of a market, is it worth taking on this project? I'm estimating that if I BRRR this, I'd be able to pull out at least $350K, if not $400K and it will rent for at least $4-4.5K per month. Please let me know what you all think.

[Kenneth Reimer]

@Solon S. Solon, I don't live in New York, nor have I ever been there (but will be coming in March). Therefore, I can't speak to the market in which the property resides. However, what I see as being your biggest risks are your timeline/timing and your inspections.

1. It sounds to me like your timeline is to close on the property, remove the current tenants, rehab it, rent it out, and then refinance. Simple BRRR strategy, sound in reason. However, what could throw a big wrench into your plan is your potential inability to remove the tenants. Depending on how sophisticated the problem tenants are, especially in a state like New York that is very tenant friendly, you might be battling them to leave for months on end. What you might think of doing, is cash for keys. Obtain signatures of the tenants that if you buy the property, and pay them X dollars, they'll give up occupancy and get out. Depending on how long it takes you to go from eviction/cash for keys to rehab and renting, to seasoning the property for refinancing, you might have challenges obtaining the rate and terms you're underwriting at. In an environment of rising rates, time is your most crucial factor.

2. You mentioned you won't be able to look at the property. Does this mean you won't be able to get in it at all before you close? That is a massive red flag. Not doing your due diligence is extremely risky, especially if the pictures show it to be run down. Ensure that no matter what you do, you know exactly what you're getting yourself into. If the current owner has awful tenants and a property in disarray, who knows if he has skimped on routine maintenance, leading to a lot of deferred maintenance (which you need to underwrite into your financial modeling).

Keep this thread informed as to your progress!

Kenny Reimer