Havelock, NC 4-plex - First Investment

[Brad E.]

A couple of firsts for me here on BP.  This is my first post, so I am excited to get involved in the community.  And I am posting about my first investment deal.  Truth be told, this is not our first rental property, but this will hopefully be the first property we have purchased for the purpose of being an investment (our other rentals were our residences that we ended up renting out).

So here is what has happened so far:

We have been searching for an investment in either our hometown of Indianapolis or near where are living now.  We found a four-plex for sale here in eastern NC listed at $149,000, but after going to look at it, it was in really bad shape.  The parking lot needed complete replacement, the units were very outdated and not in very good shape, and there was a water leak in an upstairs bathroom causing water damage and mold in the downstairs unit.  I started researching how much their repairs may cost when an identical unit came back on the market after a buyer backed out.

So we put in an offer of their asking price of $115,000 plus $1,000 toward closing costs.  It was accepted last week and now we are in our due diligence period of 30 days with a goal of closing in 45 day.  Here are some details about the property and costs:

Each unit is about 830 sqft, 2 bed, 1 bath.

The building has been vacant for 3 years and we are asking why, but I am not worried about them renting once they are updated.  The owners were in the process of updating the building but decided to put it on the market as is, so there are rolls of carpet and padding, some sinks, tile, and countertops in the units ready for installation.  This is actually my biggest worry about the deal.  My lender said that the units need to be habitable before the loan will close.  She also said that flooring and cabinets in need of updating are considered cosmetic so it will come down to how the appraiser presents what it found.  If it is appraised "as is," then we should be good, but if it is appraised "condition to," then those items noted will have to be corrected prior to closing.  The owner is not interested in putting any more money into it and I don't want to put money into a house that I don't own yet, so I am a little bit worried about this.

I am confident that each unit can rent for $550 based on comps but the owner claims he was renting them for $625 three years ago.  I am a bit skeptical about that number, so I am running my analysis based on $500/mo and if we can get $600, it'll be a bonus.

Estimated Purchase Price: $115,000

Down payment 25%: $28,750

Estimated closing costs: $5,000

Estimated mortgage: 4.5% for 30 years = $437/mo

Estimated renovations: $15,000

Monthly Revenue: $2,200

Management (10%): $220/mo

Property Taxes: $165/mo

Insurance: $160/mo

Maintenance (10%): $220/mo

Lawn care: $150/mo

Vacancy rate 10%: $220/mo (estimated high)

Income - Expenses = $628/mo

So that is $7,536 cash flow annually with an estimated $48,750 cash outlay means 15.4% cash ROI

Here are some pictures of the building as it is right now:

I know these aren't the best pictures, but I will post some better ones once the power is back on and we can get some good shots.

I am also looking for an attorney who can help with LLC formation and advice as well as an accountant for help with bookkeeping and tax prep (not just for our rentals, but for a salon & spa my wife owns), so if anyone have recommendations, please let me know. I would appreciate it.

Stay tuned for updates after our inspections this Friday.