6 plex - Issues, concerns, repairs, etc...

[Shane H.]

Hi everyone, I do not even know where to start with this one as there are so many variables and things to cover, but I could really use an outside opinion.

My wife and I are looking to get into our first rental property. We have an outside investor willing to help us get started by giving us a loan for $40,000 @ 5.25% interest only for 8 years(interest payment of $175/month). While this was excellent news for us, it provides complications with obtaining traditional financing as she wants to be listed as a lien holder and no institution would finance me if the down payment isn't really a down payment, no skin in the game on my part so to speak. So I am basically looking for owner financing with a 30 due in 5 and that is where I will start with the deal I found.

6 - plex facts:

Owner owns free and clear, willing do owner financing due in 6 years. asking price $259k, he said he's already received an offer for $245k and that's as low as he'd go. He wants $30k down and 5.75% on the amount he finances. tax assessed value of property is around $210k according to a property program I have access to at work.

Rental income currently at $2700 per month

Taxes are $2990 a year

Electric for outside lights are $70 per month

W/S/G - $405 per month

Insurance - $110 per month

3% ish vacancy - $972 per year

Estimated Mtg payment $1254 per month

Payment to my investor $175 per month

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other facts:

6 plex is 5 units at 2br/1ba and 1 unit at 1br/1ba

there is a low income housing complex 1 block down that charges $550 per unit.

Old folks home directly across the street

Police officer is living in the house next to the unit

The owner lives out of state, has owned the last 25 years

The roof was replaced 3 years ago

Aluminum siding

Prop mngr referred to himself as a "slum lord"

He said the typical tenant is a SNAP or just out of jail tenant that has gov subsidy to get back on their feet and pays their rent for first 3 months.

typical lease is 6 months

all tenants are on mo to mo except one who just signed a 6 month lease

I live 35 minutes away and work M-F 9-6 which would make managing difficult.

Issues:

Actual property value is unknown, but let's assume $250k for this example. If I put $30k down on $245k that leaves a balance of $215k. If I carry that note for 6 years, I will still owe $195.7k (78.3% LTV not including the $40k I would still owe my investor.) In order to refinance it to a traditional loan I would need it to be around the 65% LTV mark as it is considered commercial property since it is over 4 units. To play it conservatively and assume 2% appreciation, the property would be worth $276k at the end of that 6 years, which would mean 65% of that is $179k. So again, setting aside the $40k I still owe my investor, I would need around $17k plus closing costs to refinance. Okay, so lets add $4k to $17k and say we'll need $21k to close and refinance the property out of owners name. I don't see this being too big of an issue, baring some major catastrophe. We do not need any of the income from this property, and would leave all rental income in the business account to build year after year.

sigh... I am going stop here to apologize mid way through for this bombardment of information, but it is all very important when it comes to deciding what to do.

All of these numbers are assuming I give him exactly what he is asking for, but wait, there's more!

After visually inspecting the property, I am not impressed with the upkeep up to this point. There is some liability in missing hand railings, broken exterior lights, etc... I would estimate somewhere between $15k-$30k in repairs and maintenance are needed before getting up to par. (though as we all know these numbers are probably way off.)

All of that being said, my wife is now completely turned off due to the fact that it's not a "cute little apartment complex".

Here are my thoughts with what I would need to make this fit for us.

PP go down to $175k-$190k

Owner finance at 5.25%-5.5%

Some agreement on either decreasing the $30k down payment or having owner fix/invest in a certain amount of things before I buy. (unlikely IMO)

I would want to renovate the complex and change its "image" to go from average rent of $450 to a new average rent of $550-$600. I was thinking it would be smart to ask that all units be vacant other than new 6 month lease. Two reasons for this is that it would be very difficult to do that one unit at a time and tell the new tenant their rent is $575 when everyone else is smoking weed for a living and only paying $450... And it would be much quicker to renovate and change the whole image quickly if I can repair 5 units at one time. This is risky though as I would become financially unstable after 2 months of no tenants in 5 of the 6 units.

I could possibly get up to $60k from my investor which would help with this, and if successful I would have a completely renovated complex that would be bringing in an average of $550 per unit x5 and $500 x 1 for a total rental income of $3250. My mtg payment on $190k @ 5.5% would be $1079. I would owe 5.25% on lets say $60k from investor that would be a new payment of $263 a month.

I will leave my thoughts there as I am getting mentally winded here...

I know there a LOT of "If's" in everything I suggested. And there are hundreds of other miscellaneous thoughts and things I've probably left out, but this should paint a fairly full picture.

Though it is tempting to own a 6 plex and owner financing is the only way I can seem to go at this point, I am by no means "stuck on trying to make this work"

If you've made it to this point and have not fallen asleep, then I am very grateful for you having taken the time to read all this regardless on whether you leave feedback.

A couple of questions:

1) First and foremost, do the numbers make sense?

2) Do you foresee any issues with my creative financing?

3) Do you think a 6 plex that is farther away too much for me to bite off as an initial investment?

4) Do you think the owner would go for any of my suggestions?

5) Should I run the other way screaming? Or grab the bull by the horns, buckle down, and end up with a start to a hopefully long and prosperous career in rental properties?

Thank you,

Shane,