Would you pay a premium for the house next door?

Question

I own a 4 unit property on a quiet, dead end street. I have the chance to purchase the already rehabbed home next door for $368,000. It is a duplex purchased in 2017 for $340,000. The owner bought the house so her mother could live in one unit and the mother suddenly passed. They did some improvements to the property-replaced the sewer line and finished the basement. I can rent the property for $3400-3600 month. My question is, do I pay the premium of $368,000 just to own the house next door? The owners are not landlords and have zero experience which makes me worry about my property next door.

Oscar Pinto · Answer

I'd pay a slight premium. Having two properties next to each other has its advantages. That advantage can be taken in consideration when doing your numbers. All of a sudden you own the whole block and now can rename the street Sokol Way!!!

Good luck

Joe Splitrock · Answer

@Amanda Sokol obviously I don't have all the specifics about the deal or the property, but looking at what you shared, I am not sure the $368,000 price is a bad deal considering what they paid and what they put into it. Some people have the incorrect perception that to get a good deal you have to buy distressed properties. There is lots of value in a property that is rent rent. There is opportunity cost. At $3600 per month rents, a three month rehab would lose you $10,800 worth of rents. Of course there is rehab costs and more importantly your time spend coordinating. Most people don't figure in all these costs when looking at the TOTAL cost of the distressed property.

There is an advantage being next door from a management standpoint it is easy to stop by both properties. As you pointed out, you can keep up the properties so two nice properties helps increase the value of each. Also if by chance you have vacancy at both around the same time, you can market to the same tenant pool.

One other comment on something you said. You mentioned you contacted the person to tell them their rents were too low. When landlords work together to increase rents in a market, that is considered price collusion and it is illegal. You can share what you get for rents, but you don't want to be telling landlords to charge more rents. I am sure you were innocently trying to help and talking to one person is hardly going to land you in jail. I just wanted to share with people reading this so they understand working together with other landlords to hold prices higher is not a good practice to get into.

Dennis M. · Answer

realistically look at your rent potential and  Be conservative . If the property passes the 1% rule then I’d probably go for it . If you think you can get approximately 3500 then I’d offer 350k and no more . So what if they dumped money into it ? It might sit on the market for a year before they ever get an offer . Whatever you do , don’t buy with emotions . There are too many good calculators and formulas out there to be doing the deal on anything except the solid numbers . I don’t care where it’s at , It must stand on its own two legs to be worth doing ! There is no room in business for emotion . Run your numbers

James Wise · Answer

I guess the 1st question is how much of a premium is it? If it's not to big of a difference I'd go for it. Having two neighboring properties allows you to quickly build an economy of scale. To ignore the value in that would be short sighted.

Rick Bassett · Answer

I would and have paid a premium to own contiguous properties on several occasions even when the #'s were not perfect and I'm glad that I did.

For instance, in early 2012 I bought a house for $145k and put $25k into it = $170k. Then at the end of 2012, the house behind it (abutting backyards) came available and we bought it for $155k plus $25k into it = $180k. Then late 2016 the house next to the 2nd one came available at $187k (turnkey), yep we scooped that one up as well. So we ended up with 3 properties that touch each other and collect rents that average $1,750/mo on each of them. Our banker loved it a refi time and each of these houses is now worth over $210k.

Having said that, there are times when we passed on contiguous properties when the numbers were so far out of whack that they would never make sense.

Rick

Amanda Sokol · Answer

Thank you for all of the information. I honestly did not know that about rent collusion and will be careful going forward. Luckily for me in my email I did word it in a way that I was sharing what I receive for rents in the same town.

Wesley W. · Answer

Remember, if you are buying it without her putting it on the market, she is saving the sales commission.  Minimally, I would expect that savings to be split with you.  I think you are selling yourself short - you should be negotiating from a position of strength - here you are, a willing buyer with the funds to close who is able to help them out of this unfortunate situation virtually hassle-free.

Redgy Saint-Germain · Answer

@Amanda Sokol

"It’s far better to buy a wonderful property at a fair price than a fair property at a wonderful price."

Keith Weigand · Answer

I would run the #s and not pay anything more then you would for any other property. I wouldn’t pay a premium just because it’s next door to you. All investment properties should go through the same scrunity and if the #s work, go for it. I’m not sure having a property next door is worth anything more.

Would you pay a premium for the house next door?

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