Should you buy turnkey or fixer uppers? Pros and Cons anyone?

Question

Hi everyone,

A business partner and I are on the brink of making our first joint venture deal but are faced with two different scenarios.

Scenario 1 - Buy a 4plex (New build - less than a year old)

Asking Price : 600,000$  / 4 x 2 bed,1bath renting @ 1200$ a unit.

Location : Grade A   new suburb / residential

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Scenario 2 - Buy a 6 plex (More than 40  years old, needs new roof, gutted unit (renovations needed) and cosmetic work).

Asking Price : 525,000$ / 4 x 2 bed, 1 bath renting @ 900$ unit.

Location : Grade B minus / : older part of town with mix of commercial

I understand the concept of capturing equity in the scenario 2 but doesn't that get offset with the higher capital appreciation that you would get in Scenario 1 ??

Your thoughts...

Ali Boone · Answer

Will either of those buildings cash flow? Doesn't seem like it just looking at initial numbers.

Steve B. · Answer

Hi Jamie,

I think that is a much better gameplan.  You will gain additional options with an SFR and if things go poorly you can recover much easier.

I looked briefly at your maket in Ontario and I see you can get into a house for 125k-150k that will rent at a 1% GRM pretty easily (i.e.  13000 a month for a 130k place).  Assuming you get some appreciation and a tax write off that would be a fair deal as a start.  I would look into foreclosures and fixer uppers for your best value.  Winter buying may bring the best deals as I remember it's freezing up there.

Jamie Montpellier · Answer

@Steve B.

I wholeheartedly agree with your message, we sometimes "tweak" our numbers in order to make it work in our favor.  I think this deal has made me come to a certain realization, MFU are not in my Wheel house, not that I should never venture towards them but I think there's a reason why the game of Monopoly forces you to buy 4 green houses before adding a hotel.  I'm new in the game, I think buying a few green houses is a great start and making sure those numbers work in my favor from the get go rather than push or force them for the deal to look great.

That being said, I appreciate your feedback on that last message Steve... I'll stop chatting and go find some green houses to add to my portfolio for the time being.

Cheers,

Jamie

Steve B. · Answer

Hi John,

You are somewhat torturing the numbers to make them confess something you want to hear.  Lets ignore the fungible financing / creative borrowing scenarios and look at the big picture.  we can argue all day about the cost of money but I always find it a fools errand when experienced investors talk about after expense cash flow when they have no common standard on the cost of borrowed money.  Everyone has their own non-objective way of saying "i'm cash flowing" but that's always inaccurately related to where and how they acquired their financing and at what rate and terms.    Knowing the property type and class all I would want to know is the rent per door vs. the purchase price.  All the variables like maintenance, vacancy, insurance and property taxes can be adjusted for later if the basic numbers work.  I can tell you that you are below a 1% gross rent multiplier on both buildings(maybe your adjusted figures pushed it up slightly) but your basic numbers are a fail.  That's awful for a multi-unit.  Remember  with multi's/plex's unlike a SFR, you are inherently tied to the RE investor market, not homeowners,  which means you end game buyers are also investors, so you have one less exit strategy and you will never sell at a premium on the market.  Unless market rents can keep up with your expenses your only way of making money is the bigger fool theory in an overheated market, you have no underlying cash positive value at these numbers you presented.

Let me do you a bigger favor even if you disagree with everything I'm telling you.  And I will admit i'm not an expert in this area of RE investing.  Pay either Jon Holderman(from Colorado) or Ben Lybovich(that Russian guy in Ohio) to give you their expert opinions and analyze these deals in detail off line.  If it cost you a  few hundred bucks for an hour of their time it will be well worth it for their opinions  as they are both experts in this area.

Jamie Montpellier · Answer

@Ali Boone  @Steve B.

The second building (6 plex would) would cashflow considering the rental rates are Under market value.

3 top units can rent for 1200 + utilities

3 bottom units can rent for 1000 + utilities

The property could be financed 15% down Commercial @ 5% for 540,000$

Rental income : 6600$ minus 50% = 3300 - financing cost (2720) = 580$ positive cashflow or 97$ a door.

That's the market here and this is considered value as opposed to where I live where a triplex sells for 750 000$.

Jamie Montpellier · Answer

@Steve B.

Hi Steve,

I appreciate any input on this website, I think that's the whole idea within the community is to pick each other's brain and try to help each other out.  Your comment stating those numbers are horrid come with very little advice and although I understand that being in the U.S. affords you much better value, I'm simply assessing what's in my local market and obviously it's not lucrative at the moment.

Cheers,

Jamie

Jamie Montpellier · Answer

@Jerry W.

I appreciate your post and I have ran the numbers over in more detail and although it's a possible cashflow property (6 plex) , I agree with what you said, there are better deals out there.

Thanks again,

Jamie

Tom Waddell · Answer

Thank you @Raymond B.

@Mark Maire, when you say the property needs to cash flow before the down payment,  are you saying we need to always analyze properties assuming 0% down?

Jerry W. · Answer

@Jamie Montpellier, normally I advocate getting equity by fixing up.  In this case I would suggest that neither is a great deal unless you are pretty sure you have appreciation.  One thing we need to know is after repaired value of the 6 plex and cost of fixing it up.  Markets vary a lot, and maybe this is the best deal your market can produce, but I would pass on these to look for better.  If your market is that bad I would go with the new building.  You did not give us monthly rent for the 1 bedroom apartments, so I guessed $600 per month which makes the cash flow almost equal to the new 4 plex.  Will your repairs change those numbers?  What is your fix up cost and time to complete them?  The lower maintenance, higher quality tenants, and less hassle would make me lean towards the new build.  It is not worthwhile to do buy and fix unless you capture significant amounts of equity.  Study your market and start looking for deals.

Raymond B. · Answer

@Tom Waddell,

To make the @ work, do the following: Hold down the shift key and type @? Look below this Window, and you will see a list of names of people that have posted in this thread. Click on the name of the person that you want notified via an email, that you responded to them. If you are a Colleague with anyone that has NOT posted in the thread, and you want them to see your post, hold down the shift key, type the @ and the first 4 letters of their First or Last Name. Then look below this Window and click on that person's name. Raymond

Should you buy turnkey or fixer uppers? Pros and Cons anyone?

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