triplex for under 100K, is it worth it?

Question

Hi guys,

I'm evaluating a triplex (2 units of 2/1 and 1 unit of 1/1) in a 100K+ population town in the midwest. The triplex is listed for under 100K, where monthly income is projected to be 1300/month (projected because 2 of the units were recently remodelled). I'm not sure how to estimate capex given it's triplex status. I'm basing my estimation off of @Brandon Turner's blog post: https://www.biggerpockets.com/renewsblog/2015/10/13/real-estate-capex-estimate-capital-expenditures/.

Here's the breakdown:

Capital   Expense

Total   Replacement Cost

Lifespan (years)

Cost per Year

Cost per Month

Roof

$5,000

25

$200

$16.67

Water Heater

$1,800

10

$180

$15.00

All Appliances

$3,000

10

$300

$25.00

Driveway/Parking Lot

$5,000

50

$100

$8.33

HVAC

$9,000

20

$450

$37.50

Flooring

$2,000

6

$333

$27.78

Plumbing

$3,000

30

$100

$8.33

Windows

$5,000

50

$100

$8.33

Paint

$2,500

5

$500

$41.67

Cabinets/Counters

$6,000

20

$300

$25.00

Structure (foundation, framing)

$10,000

50

$200

$16.67

Components (garage door, etc.)

$1,000

10

$100

$8.33

Landscaping

$1,000

10

$100

$8.33

TOTAL

$54,300

-

$2,963

$246.94

Basically I assumed 3x water heater, 3x appliances, 3x HVAC, 2x cabinets/counters, all else the same. When I am actually running the numbers, I am using $3000/year for CAPEX and $700/year for maintenance. Is this a reasonable figure?

Based off of your experience, do you think buying a triplex that on average rents for $425 is worth it since a big portion of its GR is used to cover future CAPEX?

Thanks,

Allen

Pat L. · Answer

@Allen Li no it was a friend of a friend. Never listed just wanted someone to take over. Pop'n is mid sized town but a lot of industry. Demographics are low to mid incomes & apartments are rarely vacant.

Allen L. · Answer

@Edward Liu Thanks for the advice. The town is actually the economic center of that geographical pocket, although I am uncertain if that's a good thing or a red flag. They are vacant because they were recently remodeled after the current owner purchased it from the former landlord who rented it out to bad tenants. It was completely trashed and had pest problem before he took over. I do want to find vacancy rate for the particular neighborhood but was unable to find something like that online. The average vacancy rate for that town, according to HUD research, is around 8%, so I assumed 9% in my numbers.

Edward Liu · Answer

I would be cautious with a small town (depends on distance to a large metro) and 2 out of 3 units are vacant.  How long have they been on the market?  Do not believe it if seller says they are not renting because for show.  Price and projected cash flow is not the only factor.  Do some research on the local market and population growth trends.  Also, who are the large employers in this small town?  any major businesses shutting down soon?

Allen L. · Answer

@Pat L. that's great, I'm so glad you shared that, I've never seen something like this on MLS. Did you find this deal on MLS or through another channel? What's the population size of that town? I am mainly looking at 100K+ population towns so perhaps that's why I'm unable to find deals like this, although I'm just guessing.

Pat L. · Answer

Yes we did.

here's a break down, I did forget the water & trash ($1200/yr) my apologies.

Given the clientel the property does not need any major 'work' as the old landlord took very good care of it, he just got tired. However one unit is close to 1200 sq ft so we may rehab it for higher rent. Updated Escrow shown is the monthly avg of all listed expenses.

ESCROW

$447.92

INS

$575.00

TAXES

$3,600.00

EXPENSES

$1,200.00

Allen L. · Answer

@Pat L., wait, you purchased a triplex for 46K that produces 1600/month?? How much did you spend on fixing the property? I also see your expense figure is quite low, can you explain why that is?

Allen L. · Answer

@Pat L. 2 of the units have been remodeled by the current seller and can rent for about $500/month. The other unit not remodeled is currently rented out. I'm assuming that once I take over the property I will list the 2 vacant units for rent ASAP.

As for total estimated expense.. my estimate is $462.5/month excluding property management and vacancy. Here's the breakdown: $950 property tax, $900 insurance, $3000 capex, $700 maintenance. Other things: vacancy 9% and property management 9%.

Pat L. · Answer

I  am assuming from the breakdown you will be buying it then soon after closing begin the listed work. So if the 'new' rents are $1300/unit, what are the estimated monthly operating costs?

Here's our scenario.

We just signed a high demand (C-B demographic) 3-plex for $46K (new roof last year) & it pulls a mere $1600/month with expenses of $348/month. But I have a 2 house 3-plex about 5 miles from this one for sale for $45K that needs a complete rehab & I mean complete & legal triplexes are tough to find.

Several years ago we picked up a run down legal (A-B area) 3-plex (old units so rents $425-$525) for $135K. We put in a gruelling 24 months of rehab/rebuild ($35K we did ALL the work) & now it's a legal 6-plex with rents ranging from $750-$950/month. Expenses run $1000/month.