New REI/BP member looking for help on 4-unit investment opp.

[Ryan Alguire]

Hi all,

I've been using BP for just under a month now, and only crunching out Real Estate Investment opportunities for about three months. Under the guidance of my friend (business partner) who has been an active investor for a few years, I have taken a particular interest in getting into something close by so that I can gain a better understanding and respect for being a landlord. I've scoped out a number of deals in the last two months, and nothing has quite presented itself as seriously as the one we are looking at now. I am really hoping that some of the great feedback I often read on here can be as helpful for me if I share the numbers on the property. So here we go; and thanks in advance!

Property is located in Windsor, NS. It is bank owned and the price just dropped from $210- $198,500 It is a (very) large 4-unit building that is around 100 years old. The foundation is made up of mostly brick, but there are some sections of rock and cinder blocks in some places (more on this later). There is a number of upgrades/renos that need to take place, but we were able to come up with a rough estimate on operating income and expenses. Here are the numbers: 

Purchase: 180,000 

NOI: $19,895.00

Monthly Inc: $2,750.00

Monthly Exp: $1878.74

Cash flow: $871.26

Although the numbers look great, there are lots of things to consider with potential upgrades that could impact the numbers either way. We are also hoping for a decent ReFi amount (increase in value) so that some equity can be used elsewhere in 3-5 years, partner can be paid back for reno costs/ better return on money. All units are on their own power, but use oil for heat. Due to the age of the building it is proving to be quite difficult (expensive) to move the units over to electric heat (only 60amp service). Also, two units need a decent amount of work to get up to operating standards. Total construction estimates could be as much as $16,000 before we have even had a true estimate on a potential foundation repair (bricks are soft and crumbling in a few places). Electrical upgrades could range from $6000- $20,000 depending on what we decide to go ahead with. We could also just simply do a bare minimum reno and operate as is for approx. $14,000 but the income will be impacted slightly and the value will not increase.

All and all, we are a little stuck in not knowing what to do while reno/upgrade costs keep raising and the sale price remains quite high for the area. We know that we are dealing with the bank, and that they typically follow a pretty strict price decrease structure. Can anyone offer any suggestions on how to proceed with a potential offer? At the current list price, even if we do the bare minimum in renos, the start up costs are too high for my partner to get a decent return on his investment and for me to be able to afford the start up.

All feedback, on any of the above, would be greatly appreciated! Thanks again!

- Ryan

[Roy N.]

@Ryan Alguire

Welcome to BP!

I think I know the property of which you write ... I looked at it about a month ago.  It was originally a Victorian townhouse and is now four units.

Are you sure the entrances are only 60amp?   The pictures of the panels in the attic appear to be a 100amp and {possibly} 200 amp panel.   With the heat pumps installed, each entrance should be 100amp and the one with electric resistance baseboards already must be 100amp.

The issue with the spalling brick in the basement is new to me ... have you had it examined by a foundation specialist?  Are the bricks buckling at all?  Assessing and correcting water management around the exterior of the foundation may stall the deterioration sufficiently that you can operate for a few years before a "big dig".

Does the 20K electrical estimate include relocating the ill placed panels and rewiring everything?

You should also assess the building envelope and determine if it has been insulated at some point in the past.  If it has not been insulated, is there a lath-n-plaster wind-break in the stud cavities?  If there is not, then you should be able to blow packed cellulose or closed-cell spray foam into the wall cavities.  If there is a wind break/screen in the wall cavities, you may have to remove it (which means a to-the-studs gut) before you can add any useful amount of insulation.

My quick, back of the envelope, get it rent-ready with some efficiency improvements estimate was about $20-25K in total - that included removal of the three oil-fired boilers and hydronic system.   If you keep the hydronic system in those three units and installed an electric boiler, you would be rent-ready a lot cheaper.    

I am still undecided whether the attic should be re-separated and attached to the units on the respective second floors or whether it would be better to pursue a fifth unit.  Initially, I would just insulate the attic (such that the air handlers for the heat pumps were in the conditioned space) and defer the decision.

If you can get the building in the 165 - 180K range, then you have breathing room to properly finish the half-done HVAC conversion, fill at least three of the units and then start the efficiency upgrades to the building envelope as you turnover units.