OK to buy a break-even deal if the cash flow is positive?

Question

I have an opportunity to buy a triplex in a small-ish town. The owner is 80 years old and just wants to retire from landlord duties. She owns it free and clear. The list price is $80K, but after doing the comps in the local area for similar properties, it's value is $73K. If you go buy the 10% discount rule in "Hold," then I should offer something close to $66K for the home. I haven't walked through the place yet, but based on conversations with the owner it sounds like I'll need to make $10-15K in repairs. After repairs, the property may be worth closer to $100K. All that being said, all three units already have renters and the monthly gross income is $1800. Using the BP rental calculator, I'd still cash flow about $400 a month if I bought the place for $80K and paid the repair costs out of pocket, effectively buying a "bad deal" by all intents and purposes. So the questions:

Is it OK to buy a break-even or bad deal if the cash flow is so positive from the get go?

Thank you for any and all inputs. I'm fairly new to this. This would be my third property and first multi-home deal, so help me see myself BP family!!

Thank you.

Langdon

Is it OK to buy a break-even or bad deal if the cash flow is so positive from the get go?

Thank you for any and all inputs.  I'm fairly new to this. This would be my third property and first multi-home deal, so help me see myself BP family!!

Thank you.

Langdon

Lee Smith · Answer

I am in Indianapolis.  Currently, the way I see it, you are talking yourself into this deal. There are plenty of deals like this out there. Being in a college town and close to an autoplant are not deal makers. You can go into a big city and have just as much if not more interest.

couple of things.

• Vacancy rates are much higher in multifams. I have several multifams. Single Fams rent in 2-4 weeks in Indianapolis, Multifams are more like 4-8 weeks... Sure you get better cashflow, but your tenants don't stay as long in multifams(1 year average) as they do in single fams(3+ year average).
• You are paying utils on this deal.. BAD IDEA!! ASK ME HOW I KNOW!!!  Tenants crank the heat up in the winter, and open a window to cool down. It's Indiana, not Texas and we get cold in the winter...  If you do this, I would get 2 more meters installed, and separate the electric and put baseboard heaters in the units. Make the tenants responsible.. The most I want to be responsible for anymore is Water/Sewer... Any other utils are crazy talk as far as I am concerned. Ask me how I know...
• You need good management on the ground! I can't stress this enough.. you will need a very good manager to handle this remotely for you.. 
• There is going to be a lot of deferred maintenance on this property. Owner has already pretty much acknowledged this in her statements. Wiring is going to need to be replaced soon? That's a sure sign that there is already electrical issues..
• Get ready for the 3 tenants that are there to leave... When I take over a multifam, we tell tenants "Only things changing are where you send your checks, and who you call for maintenance!" and we still lose about 50+% of tenants.. They take the change in management as a chance to do the booty scoot! If a tenant leaves, you will have higher turnover rates I would assume.. Lots of little issues will need to be fixed.
• Are any of the 3 residents currently occupied by college kids or auto workers? That may be an indication of whether you will get that business down the road.. Not to mention you need to get 12 months of rent out of a college student in 8~ months.. College rentals are a different animal than a traditional yearly rental.

I am not trying to poopoo on multifams, or your deal... You just need to understand there is inherent concerns you need to be aware of on the front end.

David Faulkner · Answer

I was ready to offer some suggestions until I read this ... if you are not staying in, familiar with, or even moving to the market where the property is located, then it is a definite pass. Newbies always underestimate how difficult it is to acquire, repair, rent, and manage property from a distance. There are lots of good reasons why most experienced investors advise against it, but unfortunately many feel the need to discover for themselves what those reasons are the hard way. Familiarize yourself with your local market and buy there ... if you are not around in your local market long enough to do that, then there are likely better investment vehicles for you other than REI as long as you are in that situation, and this is from a guy who loves real estate and learned some of those lessons the hard way. Good luck to you whichever path you choose.

David Dachtera · Answer

@Langdon Root,

I know - it's a 3-unit, so it finances like residential.

You should still consider it's ability to produce income when doing your valuations.

From that perspective, you may be able to force some equity.

I didn't run the numbers, but at first glance, the operating expenses seem a bit high if the gross income is $1800 and the CADS is only $400. Are the tenants paying their own utilities? What's the property tax on it?

Just curious...

David J Dachtera

Lee Smith · Answer

@Langdon Root  Just put in baseboard heaters.. Then all you have to run is electricity.. The rents don't justify the expense of throwing in multiple furnaces, etc...As for expense, probably $800-1500 per meter.. You will also have to put in circuit breakers as well and separate out the wiring... When you are there look at the existing breaker box.. If the different units seem separated out already it may be a lot cheaper. Also, in Indiana, they can put the breakers on the exterior of the building. Have that at a couple of our multifams...A lot of your price depends on the mood of the electrician when you call him.. Seems like electricians are hit or miss on their prices.. I have one guy that a lot of times he is dirt cheap, and then all of a sudden he shows up and BOOM  crazy money comes out of his mouth...

Langdon Root · Answer

Good inputs, Steve.  Thank you.

Steve Babiak · Answer

More like thousands.

You will need three or four electric meters and breaker panels. Why four? You will need four if there is any common area electric such as hallway or public lighting.

Then you will need to have at least three heating systems, whatever fuel you chose to use.

And then there might need to be some re-wiring or re-plumbing to separate the units where circuits or piping are shared at this time.

So not that inexpensive to do this.

Langdon Root · Answer

Just spoke with a realtor in the town for the first time to see if my comps analysis is about right.  He told me a few things about the property that folks in this discussion thread may find interesting.  He had a friend that lived there a couple years ago.  He reported plumbing issues and some insect control problems (roaches...not uncommon for a house that rents to college students).  He also said he's aware the home does rent well and it has historically been a good money maker.  Factoring in the new roof/siding/windows the current owner already put in recently, he estimated this would be a "good deal" in the low-to-mid $60-65K range.  This is all taking place in Vincennes Indiana, BTW.  I have an appointment scheduled to walk through the house next week with a general contractor, HVAC specialist, and an electrician in tow.

What does my gut tell me?  The house will need some work and the low offer I make based on desired equity margins will be rejected.  Regardless, it gives me a good chance to meet a few key people in the area (also have appointments with a lender/realtor/and property manager) to continue building a network of people I can trust.  After all this, we may end up only purchasing a $35K turn-key duplex that is a lot less complex.  The education is phenomenal here!!  Trying to be patient and make my first "deal" a good one.

Langdon

Langdon Root · Answer

Greg,

I'm not afraid to negotiate and I'm starting to formulate a plan around $55-60K for the offer, depending on how the walk-through an electrical work looks.  The impetus to the original question, is does the cash flow make it a good enough deal to pay the $80K asking price if she refuses to negotiate?  The seller isn't super motivated (as far as I can tell) and she has 30 years experience as a landlord.  Step 1 for me is to make an offer that makes me money at the signing table.  Step 2 is: how high can I effectively go in the negotiation and still have it make sense?  At what point does negative equity outweigh positive cash-flow?  It's a rhetorical question to some extent, but it's one I've been trying to wrap my brain around.

If...If, I were to buy the place, the landlord said she'd ask the worst tenants (top floor) to move out as a condition of the sale.  Not sure if it's a month-month leaser or what, but that's what she said.  That would allow me a couple weeks to renovate the top floor before my son and a roommate move in (both attending college).  I wouldn't do any renovations to the middle or basement apartments until those tenants moved out at their leisure.  There are a lot of moving pieces to this thing.  I really want to dig into each one to make the numbers as accurate as possible before making an offer.  My gut tells me the offer will be too low and the owner will not take it.  In that case, I can chalk this up to a great first multi-family experience and carry the lessons moving forward.  Either way, I win!

Langdon

Langdon Root · Answer

Lee,

Great advice and valuable insight from a "pro."  Thank you.  I don't want to pay utilities either and am interested in putting in two more meters if I do purchase it.  I've never done that before, so I don't know how to estimate it until I meet with a contractor.   I will walk through the house for the first time on 6 July and meet the tenants when I do.  I will do the walk-through with a general contractor so he can point out the things that need to be fixed right away to meet code (assuming it doesn't already).  How much does it cost to install a meter?  Do I have to have a separate furnace for each meter?  I'm sure this is a rudimentary question, but my minimal experience to this point has been with single family homes.  I'm told none of the current tenants are students at this time (young couples), but I'm sure students are always looking to rent there.  I don't intend to purchase the property if the wiring needs done unless the owner fixes it themselves before the purchase.  That way, anything found in the walls after pulling the sheet rock back is her responsibility to fix....either that or she makes it a much sweeter deal with a bigger profit margin.

Great to see another Hoosier on BP!  I'm 40 and intend to retire North of Indy in the next 5 years.  I'll keep in touch and treat you to a chicken fried steak someday:)

Langdon

Thomas S. · Answer

Is there any particular reason you would not offer the $73 it is worth. Are you afraid to negotiate ?

As far as utilities are concerned just split the costs three ways and bill the tenants monthly in addition to rent. You will likely need to sign new leases or replace tenants to accomplish it.

Just rent the entire tri to students. Don't inter mix students with regular tenants. Nice thing about students is you can probably do repair work with them there and not do as much as they will likely destroy it over time anyway.

OK to buy a break-even deal if the cash flow is positive?

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