I just put 7 dupexes under contract,not sure if they are a deal?

Question

Can I run a deal past you guys?  The deal is for 7 duplexes 14 doors all 2bd/1ba about 675 square feet each for $175k Total in Rossville GA. They have a tone of deferred Mantinance 11k per door, but thats to be expected at 12k per per door. This is class c-d property in a area of c property. You would need to put 150k into rehab updates but In the end you would have a income 550 per door or 7700 gross rents. right now it has 3 units filled at 400 each for a total cash flow of $1200. Thanks for helping me decide if its a deal and sharing your knowledge!

Jay Hinrichs · Answer

@James DeRoest  to your point I have two good friends in Oregon that went this route against my pleading with them not to .. as I have extensive experience in those markets and with the asset class.. and they did not.

one sold a fantastic 60 unit at a 5 cap which is what multi trades for here in PDX these are B's  and bought C class 300 units in Oaklahoma city.. not 8 months later she called me in a panic and wanted to have coffee.. they were ready to lose the building... I told her she needed to move there and take over.. she did that it took her 6 years to get it under control and back up to the point she could sell it and just about break even... she HAD to live in Oaklahoma city :( not what most NW folks want to do.. she finally sold it bought a nice 5 cap 20 unit in PDX and a condo in Maui and is quite happy with no management issue that is the west coast.

My other associate.. calls me one day.. I had introduced him to the foreclosure market I was partaking in Atlanta at the time  2011  I bought 54 homes there.. he is a big forclosure buyer here in PDX so he followed me down. and he bought about 75 homes.. we both doubled our money and sold out.. So then he says Hey I am moving into Multi family and I got this great deal in Memphis.. Well I have HML experience in Memphis for years and know it fairly well. he was paying 10k a door and its half vacant and boarded.. but he goes on to tell me the old owners did not know what they were doing they were running it like slum lords etc etc... against my advice he buys the thing for 400k and is telling me he is going to put in a B ball hoop new BBQs a play area etc etc. make it really nice. I tell him C class that's a waste of time and money.. But being born and raised in Oregon were we have no basic vandalism and theft issues and hardly any Section 8 and people pay there rent from auto drafts he just did not know what he did not know.. he dumps another 600k into this does the common area improvements..

Well you know where this ends.. B ball hoops destroyed in two weeks BBQ s stolen playround equipment ruined one murder constant police calls .. got it up to about 90% .. PM ripping them off So now he has to fly out there once a month to collect the rent  LOL.. evictions start happening it starts spiraling down I told him dump it before its in the same shape you bought it. he did that the best offer a local would give him was 600k he took it and licked his wounds. I made him well over a million on my recommendation of buying SFR in Atlanta in 2011 and he lost 400k trying to get into an asset class he had no business in.

@Edwin Fisher

Joel Owens · Answer

Edwin I would look at your numbers closely and challenge yourself as to your projections.

Low income is hard to push rents up.

Let's say 450 a door times 14 doors = 6,300 a month or 75,600 a year gross.

Is landlord paid water customary for the area? If it is not when you rehab can you offload onto the tenants directly from the water company? Tenants use about 30% more water and do not generally report leaks.

Take 60% of gross rents for a D area with higher evictions and make readies and collection efforts with increased bookkeeping.

75,600 X .40 ( 60% costs) = 29,240 NOI

29,240 at a 10 cap is a value at 292,400 ( This is optimistic as D areas trade for 12 caps usually).

175,000 purchase plus  estimate likely 13k to 14k a unit rehab so about 196,000. People tend  to only think about interior rehab only. Old water and sewer lines to the street, tree issues with roots and foundations, roof, windows, parking lot, etc. run up the per door cost to renovate. Also even if you do the rehab are there other duplexes around this? If there are you might not attract quality tenants as you cannot control how other landlords operate around you which is why I want full control of a development. This is also why I do not like condo's unless I have majority control.

As the expected repairs exceed the after repair value that the property might generate in income and the location this is something I would pass on but that's just me.

Jay Hinrichs · Answer

@Edwin Fisher  have you ever owned this asset class before .. do you know what your getting into.. can you drive there in an hour or less. if you don't live there I think over time you will find the property right back in the same shape it is now.. I have seen that play over and over in these D class areas of the country... its a specialty and a skill to own and manage them and get them to actually produce income.. with 14 doors in one spot in a D class area you will probably have one eviction going at ALL times .. so think it through there is a reason these properties end up like this.. and many times its not the owner its the demographic and tenant base that is basically unmanageable.

If the above is something you can do.. then it seems like a pretty decent deal.

what I did in the 80's when RE was dog tough.. 18% interest rates.. I only brokered Owner finance deals. and I took my commissions in monthly payments.. so I made deals work not kill them.. so for this agent you may offer him more commission say 22k and pay him 1k a month until paid.. then give you down payment to the seller seller is happy.. give agent a 2nd..  now if agent thinks he can get a cash buyer easy then probably won't work but something tells me this is not a super hot commodity   :)  but I could be way off base of course just a thought on my part.

Mike Arias · Answer

Edwin

I've made C and D class units that I have purchased very profitable. It took lots of time( (improvements to bring better class of tenant) , money ( investing in major deferred maintenance to bring higher rents/ better tenant class) and some strategical evictions.  I couldn't have done it if I didn't live in same city. If you lack any of these in this class it will be a tough road.

Jason Dillard · Answer

We bought a 24 unit that sounds just like this.  The seller took a note with very low payments for the first year.  Will seller help?

Edwin Fisher · Answer

@Mike Arias, @David Huynh,@James DeRoest,Account Closed

Thank you guys for all your advice, there is too much info to answer all your quesitons individually. You make some excellent points and have given me lots of things to think about! I have self manage two properties in this class at the moment. However as I still have a job my thought was to place this with a PM I know who does lots of work in this class. However I would still be a active owner and visit one time per week. I live 35 minutes from this property. Six units are on one lot a dead end loop the 7th is on the street next street over. Thanks Again for all the help and warnings, avoiding a deal you should not do is  as important finding the one you should!

Edwin Fisher · Answer

@Carolyn Morales LOL I never maried so... yes???

Ian Walsh · Answer

There are variations to it, but essentially you pick your farm area and go and study 50 homes within it.  All kinds of conditions, prices and differences.

David McLean · Answer

Hi @Ian Walsh. Im new and trying to learn what I can about Multi-family. What is the "50 house rule"? thanks.

David

I just put 7 dupexes under contract,not sure if they are a deal?

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