Making an offer on a quad - Thoughts?

Question

I'm making an offer on a quad tomorrow. I understand that unless you are from my market of Richmond VA, you may have limited commentary, but wanted to put it out there for thoughts.

-PROS

1920's quad in an up and coming historic district of Manchester (south of the river in RVA)

All brick, renovated in 2007 (gutted to studs, new electric and plumbing)

$700 average rent per unit

Rents under market by 100-150. Grad school colleague is partnered with a guy that owns 40% of this neighborhood....he knows the rents and says this is under market. I agree based on my own research.

Asking price is $350k. Offering $300k, will pay $325.

Tenants pay all Expenses

Opportunity to raise rates - kitchens are below market, 2K will allow a 20% raise in rates

CONS

New construction - as an up and coming district, many new units coming on market. Same friend as above has an apartment tower with all modern amenities coming online next year, and another under way. My company has one proposed. Inventory is about to increase dramatically, but this is all new, expensive construction. It will be at the most a positive.

Current owners bought and renovated in the recession. We may be buying at a peak.

Since it was renovated in 2006/7, all infrastructure is nearing average replacement age. HVAC looks great, but given the age could fail any moment.  As I typed that, it gave me resolve to stick to my asking...

Jaren Barnes · Answer

@Brad McGetrick  Hey friend, I don't directly know the answer to your question, but I know if I leave a comment it will bump you to the front and maybe it could get picked up by someone who can.

Thanks for jumping in and I look forward to seeing you around the site!

Best of luck!

Mark Douglas · Answer

@Brad M.  Glad to hear it worked out for you!  One more for your portfolio!

Brad M. · Answer

@Joshuam Rivera It turned out quite well. Ended up purchasing in Oct 2014 for $320k. Rents have been raised from $700 to $875 with no additional improvements needed. I had a tenant ask to leave early due to a job relocation just last month. I agreed, as long as I could get the apartment leased. I had a signed lease at a $50 rent increase within 5 days. That indicates to me I probably could have gotten more, but I'm ok with that. I got a good tenant, and was able to help my previous tenant out.  I will keep pushing rents as they turnover.

The investment has benefited from the surrounding area. Lots of new, very expensive apartments coming out of the ground. I get just under $1/sf/month for my units, the new apartments are going for $2.25+/sf/month.My newest tenant is from the neighborhood, but wanted a larger apartment at a lower rent.

Joshuam R. · Answer

@Brad M. Greeting, I am curious to learn how did this deal turn out for you. - Thanks

Brad M. · Answer

Patience paid off. Tenant issues were resolved by current owner, rents were raised, and I've got it under contract under my original target purchase price. I do have some questions that I will pose in new threads.

Brad M. · Answer

I ended up passing on this one. After a little more due diligence on the existing leases and tenants, there were issues there that I would rather let the current owner sort out, and if it is still around later, I'll take a look.

It would have been an opportunity to negotiate a better price, but at this point, I would prefer these issues get resolved by the current owner, and I'll reevaluate.

Thanks for the feedback.

Wendell De Guzman · Answer

How much is the real estate taxes? Does the landlord pay any of the utilities? To know whether the deal is a good one or not, you need all the numbers.

Josh C. · Answer

@John Hauser

Is the property you own worth 300k? I think the 2% rule is more reserved for cheaper places, like if it's worth 50k you need to see $1000 a month. You would be hard pressed to find a 300k prop rent for $6k a month. Curious what other thought.

John Hauser · Answer

I am curious what your cash flow criteria are.  $300k sale price + closing costs + $8k kitchen improvements is around $325 all-in?  And then 4 units renting at $800 (I'm assuming you're right about the rent increases) is $3200/month.  So you're hovering around 1 percent monthly return, which I've heard on podcasts is not enough to really cash flow (I only have one multi so I'm no Donald Trump but I'm getting over 2 percent so I haven't cut it close yet, and am curious if it can work).  Am I missing something?  Or is appreciation more your strategy than cash flow?  Appreciation potential may be limited after a run-up.

I am curious how these numbers are working for you.  Good luck @Brad M. I have heard a lot of good things about the Richmond market so I hope this works out for you.

John

Dustin S. · Answer

As far as the HVAC and such you may look into home warranty plans that cover that sort of thing I would assume you could get a home warranty plan on a quad for less than $1k/year.