37 Mulberry - why is it a bad deal?

[Neil Timmons]

Greetings,

I am a new investor looking for his first deal.  I found what I think may be a good deal but I am highly skeptical.  Can someone comment and fill in the blanks as to why this deal isn't a good deal?  

37 MULBERRY 37-39 St HAGERSTOWN, MD 21740

MLS# WA8756783

Price: 160,000

Gross Income: $30,600

Reported Expenses: $12,000

4 rentable (and currently rented) units upstairs, 2 additional units available after egress windows are added

ground floor is rented to a business which needs rehab into residential units (not zoned commercial). 

I observed the property.  While I am not a licensed inspector, I did not see foundation damage or brick damage.  Some cosmetic repairs are necessary and the 3 car lot needs refinishing.  The agent does not know the condition of the roof, but (again, I am not an inspector) visually it looks like there are no issues.  

Why has a unit that apparently cash flows well with lots of room to rehab been sitting on the market for 48 days?  As a new investor what am I missing? What other red flags have other investors seen that I should pay closer attention? 

Thank you in advance for your time, 

Neil Timmons 
(currently still looking for his first investment!)

[Beth L.]

@Neil Timmons Personally, I would never own anything in downtown Hagerstown. I think that dealing with the type of tenants that would rent there would not be worth the trouble, and you may want to check with PM companies to see if they would even take it on. Also, be aware that in the city limits there are rental license fees of $75 per unit per year, plus they have mandatory inspections inside and out and always come up with something that they want you to fix. If they decide it needs a new sidewalk, you have to fork out the thousands needed for a new one. Plus you have to abide by the city rules, like making sure that the sidewalks are cleared within 24 hours of snowfall, etc, etc.

That being said, many people own investment properties in downtown Hagerstown and are OK with it. So I'm not trying to discourage you, just make sure that you know the ins and outs of being a landlord there, before you decide jump in.

Keep in mind too that you cannot rely on the numbers provided by the seller. Ask to get copies of the current leases and find out what tenants are actually paying for. Get copies of expenses and confirm them. Check with the county and city tax office for exact taxes, city of Hagerstown for the expenses of electric in common areas, if there is gas or oil there, get that figure too. Call your insurance company and get an estimate for it. Pad the numbers nicely for maintenance and repairs, as those are bound to happen and are always more than anticipated.

Since this building was built in 1961, MD lead laws are in effect. Plan on paying $30 per year per unit to register your property with the state and paying about $175-200 for testing at every turnover (depending on the size of the unit and if it has original windows or not).

I recently was looking at a 7-unit in Hagerstown's north end and on paper from the seller it looked like a great deal, but once I ran all the expenses myself, (oh yeah, they left out a bunch of stuff!) it would barely break even.

Good for you for asking lots of questions. Due diligence is king! I wish you the best in your search!