First Deal - Three Family in Plymouth, MA

[Bob D.]

I have an offer accepted on a three family in downtown Plymouth, MA. There are two three bed units and one two bed. We are currently negotiating P&S and have some fairly big issues to work through:

Three existing long term TAW that are all paying well below market. We initially thought we would "work with them" to keep them in there, but now we think the best policy would be to deliver vacant. At their current rent it is nearly flat ($250/mo) for COC return (after reserves). If we brought the property to market (for current condition) it would be 5 - 7% COC returns ($600 - $800/mo). If we upgraded the units we could get it closer to 10% COC but we would rather wait a few years to do that. Is there any reason to keep these tenants in place? It will be a big sticking point with seller because it will push out closing date but based on everything at BP it seems like a no brainer.

It's also a very old house with a few "classic" problems (asbestos, lead paint, etc.). 

Lastly, our lawyer is pushing us to use a bank loan so that we can purchase in an LLC, rather than buying it in our own name to get a 30 year fixed and transferring to LLC later. Has anyone ever had a bank call a loan on them for being in an LLC?

[Charlie MacPherson]

@Bob D.  I probably know the property.  If you want to know what market rents are, let me know.  

As to the loan type, I'd listen to your lawyer, but if you buy in one name and transfer to an LLC, I've heard others say that this can trigger the due-on-sale clause. I also remember hearing on a BP podcast that this virtually never happens, so I don't know what to make of that whole thing. It does seem like a risk I wouldn't want to take.

I'm sure you will, but be careful to use insured and licensed remediators for lead and asbestos, if for no other reason than liability.  You'll also need that de-leading certificate for when the time eventually comes to sell.  Your insurance carrier may also want it.

If it were me, and I could afford to carry the property vacant, I'd move the tenants out and rehab the whole place at once.  You should be able to keep the reno crews busy with all 3 units, rather than dragging it out and renovating one unit, renting it out and moving on to the next.  My thinking is that rescheduling the crews for 3 separate projects will cost you time vs making it one big, continuous project.