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Updated almost 10 years ago, 01/07/2015
Need advice on this deal
Hi All,
I have been lurking in BP for quite sometime and made my decision to buy my first property. This a 4 unit building constructed in 1916 with roof replaced 3 years back. 2 units has 3 bedroom /1 bath and other 2 unit has 2 bedroom/1 bath + a dinning room. Each unit is around 1000sqft and has a screened porch and a separate stairs to the backyard. 3 units have been rented for $1000/Mo and one unit has been rented for $1100/Mo. The major issue is there is oil heating system which is used to heat the building and provide hot water. The cost to maintain this oil heating system is around $10k. So the basic math is
Cost : $365000
Annual Rent: $49200
Annual Expenses: $21688.64 (which includes $9517.52 for oil heating system)
Property Management: $4920
Vacancy Rate 5%= $2460 (Property is in a very good location)
NOI: $20131.36
My Realtor said I can install four HVAC units (There are no venting system as of now ) and four water heaters. We can pass on the cost to the tenants as they are already paying all the utilities. He is estimating the cost to install this would be $30k. Also another thing we can do is increase the rent all other units $1100.
So projected NOI would be : $33248.88
As a newbie should I consider this property with all the work that needs to be done. Please advice.
Thanks,
Thiyaghu
As a newbie I probably wouldn't have tackled this project.
As is, you are looking at about a 5.5 cap rate. I don't like to pay full price for improvements that I plan to make.
It is great that a $30,000 improvement can make such a difference in the NOI.
I am surprised that the expense ratio will only be 37% after the improvements.
Good Luck.
Bill
@THIYAGHU MUTHUSWAMY My dad owns an large old farm house that is split into a couple units and runs on oil heat. The big problem is that the cost to heat with oil is crazy expensive. It has been up to $800/month just for the ground floor unit in this house and the tenant has has trouble paying this in the past. Just a tip about how costly oil heat is. I would avoid it
@THIYAGHU MUTHUSWAMY have you already closed on the property? If not why not try to negotiate the price to compensate the cost? If you make the units more cost effective for your tenants by lowering utilities then possibly raise the rent and get your cap rate up higher. If there bill goes from 500 a month to 200 a month you charge them an extra 150 to compensate your cost you both win. I would assume this would be a fairly easy sell.
Couple of things I need to clarify.
1) I haven't given an offer on the property yet and can definitely negotiate on the cost.
2) The tenant is currently not paying for the oil so that is reason NOI goes higher once I install the HVAC system.
I wanted to know what would be the cost to install 4 HVAC & 4 water heaters? As such without installing these I won't make money on this deal.
What price should I consider paying for this home? Or should I keep looking for other properties. Please advice.
Thanks,
Thiyaghu
THIYAGHU MUTHUSWAMY
Would you mind disclosing in which state you are investing in?
Norfolk, VA
if you decide to go with another property I'm a wholesaler in norfolk and other cities in hampton roads I would be more than happy to send you some deals I have under contract.
Shoot me an email anytime. [email protected]
My guess by the price and age of the place is you are hopefully in Ghent if you are in Norfolk. If so you are in a good location. If not it is way overpriced. However with the nessecary repairs would put me off at that price eitherway. I would recommend getting estimates from someone who is in the business of installing the HVAC systems not the realtor. I am very leary of realtor's opinions on rentals if they do not have their own.
Yes it is in West Ghent area. Buying this property won't provide me any cash flow unless I install HVAC and increase the rent. Do you know any contractors in that area who can give me an estimate on HVAC & Water heater?
Give Norfolk Air Heating,cooling,and plumbing a try. I have used them for plumbing problems and had a good experience.
It could be a good deal, but the age, work and distance would make me hesitant to acquire this property as my first deal.
I would probably look for something newer that would produce similar income as one unit. Even if the acquisition cost is higher, I think the risk would be lower.
I think you are on the right track in focusing on nicer areas for a long-distance property. However I think the age of the property may introduce maintenance headaches.
If this is a below retail deal and you could get in the low 500s with the HVAC updated, then I would be more inclined to like this deal. That way you could have multiple exit strategies - flip or hold as a long-term rental.
If this is buying retail and you have to exit via the investor market - you could be looking at a 20%+ loss to get out - even if repairs/updates add directly to the value.
I have decided not to proceed forward on this property because of all the work that needs to be done. Thanks for all your feedback.
Hey Thiyaghu,
I am a wholesaler in the area and I get leads for properties in good condition and already rented out all of the time. I run all of the numbers so anything I send you will have all the numbers broken down and tell you your cashflow upfront for you to make a good decision. If you want off market deals just shoot me a email at [email protected]. This goes for anyone else on here as well.
Gary
Thanks Gary. I would like to get the leads.I will send you a email shortly.
-Thiyaghu