Can I have some feedback on this deal?

Question

Hey BP!!! It’s official I have my first accepted offer (phew). I was hoping to get community feedback on the numbers. I’ve got some feedback from my biggest critic, my dad, and he’s advising against it and pretty much rentals altogether even though he’s had success with MFs and garage rentals for decades.

The property is in Providence, RI, in a  family neighborhood. It’s a couple streets away from a gold course and 2 miles from Rhode Island college.

It’s a 2 family, side by side 1232sq/ft total. Built on a slab foundation in 1982, has electric based board heating broken into in 3 zones. All the plumbing looks great windows have been updated over time and the roof is 12 years old. The only capital expenses or repairs in the next few years are the two electric hot water heaters (13yrs old) and carpets and maybe some interior paint. The carpets and paint I would do after closing before my first tenant in one apartment. The other has long term low income tenants that I won’t touch to start. The other unit is vacant.

It’s been listed for 112 days, coming down monthly from $185k to $160k. My offer was accepted with some provisions at $145k and I’d pay my closing costs. It rents for $1800/mo and I’d only have to cover water, sewer, snow removal and maintenance. I’m accounting $100/mo for water and sewer. Snow and lawn maintenance will be on me. Also it’s an hour away, ugh. I’m preparing for insurance at $125.

One item to highlight is RI sales law that will charge an owner who lives out of state (I live in Massachusetts) a whopping 6% off the top which hurts.

After budgeting for repairs, expenses, and property management I’d cashflow $170. Without property management it would be $360.

So at $145k with an 25% down and an interest rate of 4.875 (I’m paying one point at $1,087). Real estate taxes were $3452 in 2018. My PITI is coming in at $946.

I realize I probably put this in haphazardly, my apologies, but I’m hoping I can get some feedback on this deal to either reinforce my decision or to have my dads back and convince me out of this deal.

Thanks everyone!

Anthony Thompson · Answer

@Matt Charette you mentioned in the other post you made on this, that the property is on Victoria St. It's an OK area, last I was over that way it was kind of B-. Did you check out the neighborhood and potential tenants (who live around the area), or did you buy sight unseen?

I'm surprised it's a slab foundation, that's not common in Providence so I'd recommend trying to understand why it was done that way, and definitely get a professional home inspector if you're still in the inspection period (which you should be, if your offer was just accepted).

If the hot water heaters are 13 years old you should plan to replace them immediately after closing, I'm amazed they lasted that long. Unless you like emergency-no-hot-water calls (which I do not :)

Electric base board heat can be a little harder to rent, I have a couple buildings with that. Tenants believe, not entirely wrongly, that it can cost more to heat, especially in a cold winter. So you might want to factor in a little more vacancy than usual.

It looks like it's currently owner occupied, so you should know that if you're not living there, your taxes will probably increase since the non-owner occupied tax rate in Providence is significantly higher. (They say it's a discount for owner occupants, but the effect is a higher tax on landlords.)

Also Providence is in the middle of re-doing their assessments so that's another reason your taxes will probably go up, especially as a recent sale of the property itself is certainly good information the appraisal company will look at.

On the 6% thing for out of state owners, I think you may have gotten confused; that's non-resident withholding when you sell, not during the period of your ownership. And you can get some/all of that back when you file the tax return for that tax year with Rhode Island.

Generally I think the price is OK for 2 units and you'll probably do OK but I think you might find this one a little more challenging over time than you might expect as that area (Chalkstone) is a bit rough in places, and the house having no front yard, while certainly easier for lawn mowing, also gives it a tougher feel.

So I would be very careful with who you pick for the units as I think you're going to get a lot of "C" type prospective tenants coming through, and comparatively fewer "B" types who you really want.

I think you'll probably do OK but I would plan to be pretty hands on for the first 3-6 months until you really make sure it's stabilized and you have decent tenants there. Also like I said, be sure to do thorough inspections on this one during your inspection period!

Colleen F. · Answer

On a slab vinyl may be cold unless you do a subfloor.  This is one of the rare instances in which you could consider laminate.

Matt Charette · Answer

@Colleen F. thanks! The unit which is getting delivered vacant will have the rug replaced. Either vinyl throughout or up to the bedroom and then carpet there.

Colleen F. · Answer

If you are a buy and hold investor the 6% tax is irrelevant since you pay when you sell.  Make sure you register with the State and local government as an out of state landlord.   Electric heat is an issue because electric is high and people don't like it as much but they are small units, you have a couple of zones which helps and it is easy to maintain.  Don't love the carpet but on a slab it is a reasonable choice.

Matt Charette · Answer

@Lien Vuong It is small, no question there. They're both 1 bedroom units. They've been renting for $900/mo each, but I want to see the financials and proof of income.

My insurance quote came back last night at $1260/yr, I put the $1500 as a safe high number. I wouldn't be surprised if the taxes do go up, so I'm keeping some numbers higher as a buffer.I had considered the South Coast, but for two reasons it doesn't make sense. I grew up in Tiverton, RI - I'm familiar with the area, but the neighborhoods aren't as nice and the economy, job market, and rents don't compare. I feel better about the long term outlook of Providence. Secondly, the distance would change for me. The drive to this unit vs. south coast is nearly the same depending on traffic driving from Stoughton ~45-55 minutes

Lien Vuong · Answer

Thing that I am curious about: it's 1232 sq ft TOTAL? That's the smallest 2 fam Ive ever heard of. How would that gather $1800 of income? I dont think they're anymore than maybe a 1 bed and a 2 bed unit? Is this projected or current? Price is very attractive, I think your insurance estimate is quite high consider property value, I would run those numbers with an online platform and see what it actually is.

If you're okay with this numbers why dont you try to go to a MA property so it's an easier drive ad avoid that 6% tax? I think there's some properties in the South Coast that would be matched to these criteria and easier for you to manage..

Anthony Thompson · Answer

I think 8% vacancy is fine in this market. I only assumed it was owner occupied because the mailing address for the owner on the tax assessor page is at the property itself, which is usually how the city makes the distinction as far as I know.

I'm glad to hear you checked out the area. I remember some parts of Chalkstone being dicey, but as you get further away going north it does get better. I briefly lived on Samoset maybe 15 years ago but haven't really been in that pocket of a neighborhood. As long as you're comfortable and it's not sight-unseen :)

Matt Charette · Answer

@Anthony Thompson thanks! I didn’t mean to double dip on the post, but realized this general forum location gets more attention.

I did enter the property, which was clean on one side (the low income tenants that will stay), the other was a mess because they’re moving out. The neighborhood was nice and quiet. It was all family homes in the street and far enough away from the college renters. All of the neighbors yards were nice and well kept.

If you look at the unit (34 Victoria) both it and an identical unit were built at the same time on slab. The other unit is vacant (30 Victoria) which I’d  try and scoop up next if it became available. I think the slab was just the builder’s choice since they built these 2 properties side by side presumably to just be rentals. I have my inspection next weekend

Good point on the lack of front yard and the impact. There is a very small back yard that I could possible level and gravel or add grass, but it still would be lacking.

How much vacancy would you suggest given the electric heat and lack of yard? I’m at 8% now, should I go to 12%?

It’s not owner occupied, it was appraised at ~$108k in 2018 at 3.31% that looks on par, but I do expect it to rise also.

Thanks again for your feedback, it’s really helpful.

Matt Charette · Answer

Thanks @Carolina E.! Real estate taxes were $3452 in 2018, so they should stay the same I'd think. I do think the assessment was low though.

Carolina E. · Answer

@Matt Charette Hi Matt, awesome that you are getting started.  I offer only suggestions, I would see if you could get the actually expenses from the owner.  Also, make sure what the property was assessed at in 2018 to get a better estimate on what your taxes will end up actually being.  You might find the property was assessed way low, or high and you will have to fight it.

Can I have some feedback on this deal?

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