Need an outside opinion on this potential deal. Lehigh Valley PA.

[Matthew W.]

Hello Everyone,

I want to get some opinions on this deal. It is for three units - a duplex and a SFR. I went and saw the properties this past Friday. Turns out they are all Section 8. Tenants pay gas/electric.

Duplex

1 BR on first floor. 2 bedroom on 2nd floor.

Listing Price: $96k

Closing Costs: (5%): $4800

Down (25%): $24k

Finance Assumption: 25 years @ 5% = $420.90/mo = $5050.86/yr

Income

Rents: $650 + $750 = $1400 = $16,800k/yr

Vacancy (10%): $1680/yr

Gross Operating Income: $15,120

Expenses

Property Tax: $2500/yr

Insurance: $526/yr

Property Mgmt (10%): $1512/yr

Repairs (6.5%): $1092/yr

Water: $400/yr

Garbage: $324/yr

Supplies/Misc: $300/yr

CapEx (5%): $840/yr

Total Operating Expenses: $7493/yr

NOI: $7627/yr

Cash Flow: $2576

ROI: 7.57%

C/C Return: 8.94%

SFR

3 Bedroom, 2 bath.

Listing Price: $60k

Closing Costs: (5%): $3000

Down (25%): $15k

Finance Assumption: 25 years @ 5% = $263.07/mo = $3156.79/yr

Income

Rents: $950 = $11,400k/yr

Vacancy (10%): $1140/yr

Gross Operating Income: $10,260

Expenses

Property Tax: $1942/yr

Insurance: $430/yr

Property Mgmt (10%): $1026/yr

Repairs (6.5%): $741/yr

Water: $400/yr

Garbage: $324/yr

Supplies/Misc: $300/yr

CapEx (5%): $570/yr

Total Operating Expenses: $5733/yr

NOI: $4527/yr

Cash Flow: $1370

ROI: 7.19%

C/C Return: 7.61%

I met with the property manager. He told me that the tenants of all three units have been there for about 5 years. He's almost never over at the properties - very quiet. Actually only charges an hourly rate, but I'm budgeting for 10% anyway.

When I saw the properties, it's pretty clear that the current residents don't care much for how they live. It seems to me like there will be work to be done if/when tenants move out. However, both properties passed the Housing Authority's inspection recently.

Honestly, the thought of Section 8 concerns me a bit. It was pretty sobering to see the units. One of them had bunk beds for kids - the sheets and mattresses were old and dirty. It was kind of a depressing experience to walk through them.

The currently owner is in his mid-80's, but told me he is "not distressed" - and he's happy to hold on to these "money makers" as he has for the past 30 years. Seems like he's indicating that his asking price is firm - though I think the prices are a bit high considering work that will have be done in the future.

Any advice on negotiating this would also be appreciated. 

Thanks!