2 bed, 1 bath SFR with built on 1 bed 1 bath Apt

[Daren H.]

I need a little advice on the subject potential opportunity. Currently, I only own several SFRs and that is all I have focused on for the most part. I want to make sure I am looking at the subject opportunity pros and cons for a buy and hold. I met with a seller yesterday (burned out landlord) to view a property they want to sell (off market, seller called me on a mailer I sent). Anyway, the property is different from what I am use to analyzing. The apartment is attached to the primary house and the tenants share 1 common wall (they are really two separate living units). The electricity is separately metered but water and gas are not (this would have to be worked out). Nevertheless, I am assuming this should be treated like a typical duplex. Is it that simple or should I be looking at this differently? Would the pros and cons be the same as a typical duplex? From a tax perspective, the property is identified as a SFR. Should I be concerned about this? The neighboring properties are similar looking SFRs except they do not have an extra apartment.

The seller and I will be talking again this evening to try and reach an agreement on price/terms. The Seller asked for $100K during our initial telephone discussion (I didn't get the feeling this was firm). My offer price after seeing the property was $85K. The property could be rented right now but I estimate ~$5K in touch up to boost rents. The 1 bed, 1 bath apartment is rented at $650 and currently occupied. The primary house most recently rented for $750 but comps should comfortably support $800-$850 (now would be a good time to update the vacant unit and raise the rent). Here is a summary of the numbers. Tell me what you think and let me know what I am missing.

$90k offer price (current offer is at $85k but assumes agreement at $90k)

$26.5k (20% down payment, closing costs, rehab). I could lower the out of pocket amount to ~$19.5k through financing part of closing cost and paying myself a commission (use commission for $5k rehab). Purchase price would increase to ~$97k (same net to seller).

Rent $1400 (based on what units currently rent for but I would expect to improve) 

Vacancy $98

PM $100 (my PM flat fee for 2 units)

Leasing $75 (to cover PM fees for leasing new tenants)

Maintenance/Reserves $160

Insurance $65

Taxes $200

Debt Service $392 (30 year fixed at 5.125%)

Cashflow ~$300

CCR ~14%

The property was built in 1970 but is in good condition overall. The primary house is approx. 1000 sqft and the apartment is approx. 700 sqft. The neighborhood is quiet, near park, school, and quick access to a primary highway that gets you to Downtown Dallas (approx. 25-30 mile drive to downtown). The city population has grown rapidly in the past 10 years and schools meet or exceed standards overall.   

[Justin E.]

I like this deal

[Hattie Dizmond]

@Daren H. The numbers on the deal look pretty good.  However, I have a couple of concerns...

1.  I would check zoning ordinances to ensure there is no issue with the multifamily on that lot.

2. Since the DCAD shows it as a SFR, my concern is that a renovation occurred at some point without appropriate permits. I would definitely check with both DCAD and Building Permits & Inspections to insure you're not going to have an issue.

If everything there checks out OK, I would close on that deal and file an immediate protest with DCAD to have the property revalued.  That would get it amended to show as a multi-family and adjust the value accordingly.

Hattie

[Daren H.]

Thanks @Justin E.

@Hattie D.

Thanks for the feedback. In rgards to zoning, permits, and inspections; do I need to check with the county, city, or both?

Why do you recommend protesting DCAD? The taxes are pretty low. I don't want to open myself up to higher taxes. Are multi-family taxes generally lower in Texas?

[Hattie Dizmond]

@Daren H. 

I would protest so that there is no issue with future sales, and I'm a believer in keeping everything on the up and up.

You didn't say what city the property was located in or if it is in the county.  You would simply need to check with zoning & permits in whatever jurisdiction governs the property.

[Raymond B.]

@Daren H.,

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

[Daren H.]

There is something about the computer I am using that prevents the @ from working. Doesn't happen on my home computer.

I am completely on board with keeping things on the up and up. The property is located in Ellis County. I will make sure I check with appropriate County and City authorities. Thanks Hattie D.!

[Andrew Syrios]

I had a bit of trouble figuring out what the rehab is, but overall the numbers look pretty good as a buy and hold. Just remember, it's a bit of an odd set up, so the re-sale won't be easy. 

[Joseph Weisenbloom]

I have a property that is very similar to this one in DFW. This kind of property is considered by many to be a "waldo" property because it is nonconforming from its original use which is a single family residence. I have pondered whether I like these types of properties because there are a lot in my area just like this. From what I can tell here are the pros and cons.

Pros: CASHFLOW. These properties will cashflow easy because they have a lower price. There is no chance you could find a regular duplex in DFW even close to these numbers.

Cons: Low Appreciation. I don't see non conforming houses like this rising in value. Maybe they will appreciate at the same rate of inflation.

Lack of liquidity: like someone already mentioned in this thread selling this house will be more difficult. It may sit on the MLS for a longer period of time.

Higher expenses: You may incur higher repair cost because the house was designed for one family and is now being used for two. Vacancy may also be issue because with the abnormal floor plans you will attract lower quality tenants which means more turnover.

Zoning: Personally I have not had any issues with this because the zoning in my town is very lax. Not sure how things will go in Desoto (I assume the property is at)

Personally I lean towards liking these properties more because the CoC return is still high despite the higher expenses.

[Daren H.]

@Andrew Syrios @Joseph Weisenbloom 

Thanks for your comments. As you guys mentioned above, my concerns too are resale, compliance with zoning, permits, etc), and tenant quality. The property is in Midlothian, just outside of Cedar Hill. The Sellers lived there for a number of years and rented out the apartment (the apartment was added by the previous owner) The Sellers have rented out the property for the past 7 - 8 years after purchasing a new home and say they have no issue getting it rented (to be verified). They did give me plenty of bad tenant stories. They also gave me an indication of how they  managed. I believe of lot of the issues are tenant screening based on multiple conversations.  

In regards to resale, wouldn't resale be similar to that of a duplex? Duplexes are bought and sold everyday. I would imagine that resale would likely be to an investor based on income that can be generated by the property (similar to a duplex). Is this incorrect thinking? My goal is long term buy and hold.

[Phil C.]

how much time and cost would it take to convert to zoning in that area?  

[Joseph Weisenbloom]

@Daren H. These are some great questions that I don't know the answer to but would love to know. For example in my property I paid to have the utilities separated so both units have a water and electric meter. When I talked to the city they referred to the property as multi family because I pay the multifamily rate for water(higher than single family)

The question is what would stop me from listing this property on the MLS as multifamily? I think I could get away with it.

[Darron Stewart]

@Daren H. 

Rather than paying yourself a commission, would reduce price or something similar to eliminate the taxable event.  Think state, federal, and self employment taxes could hit you with about 1/3 of the commission in the end...