Conflicted during due dilligence inspection

[Mason Keith]

This post is long, you've been warned.

Here is the orginal deal:

Purchase - $75,000

Down - $18,750

Mortgage - $56,250 ($285/month @ 4.5%)

Here's where things get a little more difficult. The current owner hasn't increased rents in several years, currently is renting the two 1bd/1ba units at $250/mo, average in the area is right around $500. The 2bd/1ba is renting at $490 and average is $650.

So of course I plan on increasing rents in line with the fair market value and actually expect at least one of the tenants in the 1bd/1ba to leave (they've been there 8 and 10 years).

So current Rent - $990; Adjusted Rent -$1,320 ($1,500 * .88 Occupancy)

Expenses - $541/month

NOI - $449 ; Adjusted Rents - $779

Cash Flow - $164 ; Adjusted Rents - $494

Now during our inspection, we have found that the roof needs to be replaced, actually only $4,000 surprisingly. But also the electrical all needs to come out at $14,000. I previously looked at a reno loan and a $20,000 was about $311/month. So it seems like the choices aren't great.

During this inspection, I also received a call from our agent informing us they have a client looking to sell an 8-plex, triplex, and duplex as a block which I can definitely buy if I don't go through with this current triplex, may be able to buy both depending on what additional repairs I pay for up front or if I pull in another partner for the additional 13 units which I'd rather not do. These 13 units are all currently occupied save one of the units in the 8-plex.

Of course this is all happening 2 days before my due diligence period is over, thank you for whatever insight you might provide.

[Joel Owens]

Does landlord pay water??

If so I would take current rent at 990 X 12 = 11,880

11,880 X .40 ( 60% costs) = 4,752 NOI

47,520 sales price at a 10 cap with no deferred maintenance.

47,520 - 20,000 ( estimate repairs but probably worse) = 27,520 purchase

This one is a loser of epic proportions. Seller leased low and didn't fix anything for years and sucked out the cash flow and now wants a sucker to buy it. The tenants have likely just stayed there because it's so cheap and have dealt with the issues. As soon as you come in saying raising rents they will all be gone. I think you under estimate how hard it is to raise rents on tenants and how hard they will fight you on it. Even if you make it brand new the current tenants might not have the financial standing to pay more if they wanted to. You would have to review the lease file for that and validate on your own.

I NEVER pay for potential. If I am going to work for that increased return then it's at my purchase price. Has to be a great deal going in for current status and an excellent deal if I can turn it to what I think it can be. If it's a good deal if I turn it but a loser at current income levels versus what the seller wants then it's a NO GO.

The only time I would consider this is if the property sits on a nice piece of land slated for redevelopment where I know with my land development back ground I can get a great return selling off and having it torn down. I would make sure tenants in that case are month to month so I can sell and have flexibility for the buyer. I would keep the property the same and put no money into it while waiting for the buy out and tear down.