Should we close on this 4 unit?

[Allison Escovedo]

We are under contract for a 4 unit apartment complex in Taft for $170k.

Each unit rents for $575. Currently, there is 50% vacancy. It was advertised as fully occupied. I talked with one of the tenants who has lived there for 10 years. She says it has been vacant since October, although sellers financials say it has only been vacant for one month. She only speaks Spanish, so I could've misinterpreted her but I'm 90% sure that's what she said. She also said the other units on the block are cheaper and do not require a deposit. She said that the current owner would sometimes take 20 days to respond to maintenance requests (she is the acting property manager) and at one point they didn't have hot water for a month. So there is definitely room for us to do a better job landlording. 

They are all farm workers, so the work is seasonal and I'm concerned with the drought we are facing now in California we will be seeing a slow down of farm development and thus a loss of farm worker jobs. Taft is a town of 10,000 oil/ag workers, but it also has a community college and a prison. 

Accounting for 10% vacancy, prop management (10% of income), insurance (.5%/year), prop tax (1.34%), maintenance (1%), water, garbage, sewer ($250 per month) in our analysis originally we have monthly CF per door of $125 with cap rate 7.58% and Cash ROI 11.76%. If we lowered the rents to $535, monthly CF per door is $92.50 and cap rate is 6.70% and cash ROI is 8.71%. But with the vacancy rate at 50% currently, we are going to ask for a reduction in the purchase price. Any advice/ thoughts/ insights would be extremely helpful as this is our first deal and we don't want to TOTALLY screw up!

[Jacob Pereira]

Maybe I'm the strange one here, but when I see things like high vacancy rates and deferred maintenance on a building, I think MONEY! Our job as real estate investors is to add value by solving problems others are too lazy/scared/uncreative/etc. to take care of themselves, so when I see problems, I don't think whether or not I should do a deal, I think "what do I need to make this deal work?" It sounds like you're thinking the same way by looking at ways to fill your vacancy. 

That said, with the info you're giving, the deal seems slim. What I would do is a bit of market research (call the for rent signs and find out their vacancy and what their rental rates are, if you have a realtor, pull MLS comps for both sales and rents, gather demographic data, etc). Armed with that you can give them an educated counter-offer with an explanation of your numbers. Should they shoot you down, it sounds like there are likely a lot of other motivated sellers in the community that would jump at an unsolicited offer from you.

My first deal was worse than what you're looking at, and I would never consider it now, but it gave me a lot of education and I've been able to turn it around into a better-than-mediocre investment. Be cautious and conservative, but don't be afraid to make mistakes.