Looking for advice on a buy and hold duplex in PA.

Real Estate Deal Analysis & Advice

Looking for advice on a buy and hold duplex in PA.

Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes

A long time friend is looking to cash out of his duplex rental property to get away from tenants and pay off his primary home. He has it on the market now for $95k. He said he'd sell to me for $60k. - Property grosses $15,400/yr - 2 units at $625 and $675/month - He has all receipts and is happy to share - Owner pays for heat, all other utilities paid for by tenants - Furnace is old and will soon need replaced - Electrical is older but he said "doesn't need attention immediately. - New warranty on roof transferable to me - Besides electric and furnace, he says it should be turn key - Could use some paint - I used the BP Rental Property Calculator and even figuring in $65k (instead of $60), lower rent, painting, lawn care, CapEx for furnace ($4k and redo electric at $8k) and a few other cushions, I still come up with about 13% ROI. What am I missing? Happy for any and all input! I had another friend who has 5 rental properties who looked at the website and said it'd be a good deal, even at $95. Then I told him I could get it for $60. He said if I don't buy it he will (although I know he wouldn't do that). I plan to go through the house whenever my friend is in town. What do you guys look for? I know nothing about electrical! Please go easy I'm a newbie, but this seems to have "deal" written all over it and I don't want to get stuck in analysis paralysis!

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Investor · Reading, PA · Member since 2014 · 196 posts · 118 votes

9y

I can certainly see you are excited, and it looks good on the surface. There are two things I will suggest for you. The first is to VERIFY everything. He is a friend, so I understand the desire to take his word on everything. If landlord pays heat, ask to see the bills from the precious year. Look for any signs of deferred maintenance, that can increase acquisition cost quickly. Things like appliances, condition windows, carpeting, painting, etc. Also, do you know his historic vacancy rate, and can that be verified? The second is to ask yourself what his motivation is and why it's so strong. If this deal is that amazing, why isn't he sitting on it and reaping the rewards? Are there issues with tenants rent payment history? He wants away from tenants, you said. Are you prepared to deal with the problems that an experienced landlord decided he no longer wants to deal with? Why do you think he is basically giving you a $30,000 gift? I have friends I will go through the fire with, but I don't think they would give me $30,000 just for the sake of getting out of a property. I'm not trying to discourage all the enthusiasm, but this is business, with real money at stake. You need to treat this as such. The friendship makes it more complicated, in my opinion than easier. What if you buy it, and then find structural and plumbing issues to the tune of $20-30,000 that he didn't disclose? Will you ask him if he knew about it? Accuse him? Are you prepared for how that can affect a friendship? Just remember to take all things into consideration and assume that things may turn into worst-case scenario. Then you will be prepared.

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CJ Witmer
OP
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
No one??
0 Reply
Steve Sapowsky
Investor · Granby, MA · Member since 2015 · 70 posts · 15 votes
9y
I'd say if the numbers work go for it. I'm working on my first deal myself. After a year and a half of analysis paralysis I decided to take action and got myself a great deal right across from my parents. If you know a contractor maybe you could ask him to go through it with you first. Or even pay an inspector to look at it with you just to make sure this isn't too good to be true. I've let a couple good deals slip through my fingers just looking at them too hard. At the end of the day the numbers don't lie.
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Rosston Smith
Investor · Warner Robins, GA · Member since 2015 · 1k+ posts · 490 votes
9y
That sounds like a KILLER deal
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CJ Witmer
OP
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
Good stuff guys! Thanks! I hope this can be a great start to a great lifestyle change. Nice thing is, I'll start with this one (assuming inspection doesn't turn up any deal-breakers) and hope to build up.
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Jason Krick
Investor · Reading, PA · Member since 2014 · 196 posts · 118 votes
9y
I can certainly see you are excited, and it looks good on the surface. There are two things I will suggest for you. The first is to VERIFY everything. He is a friend, so I understand the desire to take his word on everything. If landlord pays heat, ask to see the bills from the precious year. Look for any signs of deferred maintenance, that can increase acquisition cost quickly. Things like appliances, condition windows, carpeting, painting, etc. Also, do you know his historic vacancy rate, and can that be verified? The second is to ask yourself what his motivation is and why it's so strong. If this deal is that amazing, why isn't he sitting on it and reaping the rewards? Are there issues with tenants rent payment history? He wants away from tenants, you said. Are you prepared to deal with the problems that an experienced landlord decided he no longer wants to deal with? Why do you think he is basically giving you a $30,000 gift? I have friends I will go through the fire with, but I don't think they would give me $30,000 just for the sake of getting out of a property. I'm not trying to discourage all the enthusiasm, but this is business, with real money at stake. You need to treat this as such. The friendship makes it more complicated, in my opinion than easier. What if you buy it, and then find structural and plumbing issues to the tune of $20-30,000 that he didn't disclose? Will you ask him if he knew about it? Accuse him? Are you prepared for how that can affect a friendship? Just remember to take all things into consideration and assume that things may turn into worst-case scenario. Then you will be prepared.
3 Reply
CJ Witmer
OP
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
Jason Krick all good stuff, and yes, I almost hated to mention the friendship cuz I knew folks would raise eyebrows on that. That's why I said "trust but verify". I told my wife that this is not our primary home, so it's more of a buy with your head instead of buy with the heart. I plan to take my Dad the first round who doesn't even know the guy and then also do a proper 3rd party home inspection as well to eliminate any friendship bias.
2 Reply
Eric R.
Washington, DC · Member since 2016 · 36 posts · 7 votes
9y
Do you know when it was built? I live in a house built in 1932 and one thing I always tell people is to scrutinize the electrical system in old houses. Eventually my home will need to be rewired and estimates I've received are between 25-30k. So look check out that electrical panel and make sure to have a good, experienced inspector confirm what your friend told you. Don't be caught unawares. Best, E
0 Reply
Deborah Moser
Rental Property Investor · Stewartsville, NJ · Member since 2016 · 24 posts · 12 votes
9y
Jason Krick is right right right. Trust, but verify. Personally I do not like inherited tenants. It's more like inheriting someone else's nightmares. I like to do my own tenant screening's so therefore I know that they're qualified to rent from me. There is nothing wrong with having high standards if you are providing a quality product in your rentals, (keep that in mind). Also be care in providing heat...it's very expensive, not to mention that tenants are wasteful. Most of all, don't be afraid to make mistakes, you end up laughing at them down the road. All the best of success to you and enjoy this journey, it's so much fun!
2 Reply
Jason Krick
Investor · Reading, PA · Member since 2014 · 196 posts · 118 votes
9y
@CJ Witmer
I'm glad you already thought through the part of the physical structure. Do you know his "why"? While not necessary for the deal, it could provide insight into difficulty with tenants, difficulty placing tenants, high maintenance, etc. He is apparently leaving a ton on the table if he has sufficient equity to sell to you for $60, when it's listed for $90. So, the numbers would work better for him today, than for you post-purchase. Whatever the reason, if you are prepared for everything and the numbers are legit, than the deal would pass most investors criteria, I think. The numbers are great.
Good luck to you and keep us posted!
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CJ Witmer
OP
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
Deborah Moser there are no tenants at this point, he knew he was planning to sell so he let them all trickle out. He's bringing me all the paperwork when we meet to go through the place (heat bills, insurance bills, tax statements, etc.) The electrical and furnace are the big items, so he says, but I want a home inspector to be certain that's all there is, again, my motto is "trust but verify". I know I seem excited, because, I am excited about the prospect of being more financially free, but buying a money pit will do the opposite. I do plan to do my due diligence and he's even told me there will be no hard feelings if I don't take it. This house was his house for about 10 years. He raised a family upstairs and rented the bottom. He has since moved to a very nice neighborhood and wants to cash out for kids college and a new truck and to pay off his existing house. With all that said, you guys have great advice and are obviously looking out for a fellow BP member and that's awesome! I thank you very much for the input and would love any more input.
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Patrick LiskaPro Member
Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
9y
CJ,
Did he let the leases run out or is he having trouble leasing the places? As you have said you will do, just check the house thoroughly. if the house is in great shape and the potential for renters is there, it seems like a good deal, did you figure in for property Management ? ( even if you are doing it ). the furnace and hot water heater should run you about $6000 - $8000, new service $2000 a rewire, depending on the house, 10,000 - 15,000 ( look for easy ways to run the wires, even if you have to pipe them up to the second floor and then just box them out). so if you have to do all that work, you are probably looking in the area of $20,000, but that may be over time and not have to be done right away.
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Jason Krick
Investor · Reading, PA · Member since 2014 · 196 posts · 118 votes
9y
@CJ Witmer
Sounds like you are on the right path. His reasoning for selling makes more sense now. He's in a better place financially, and isn't looking to continue the landlord lifestyle. Without that info, I was worried it was just a typical non-owner occupied that he was looking to fire sale, which sent up flags to myself and others.
That being said, you did an excellent job receiving everyone's concerns and answering them. Many tend to get defensive. Your head certainly seems to be in the right place and you are taking the appropriate steps. Best of luck!
Do you mind me asking where this is located? We are relatively close. I live in Berks County, so I'm curious if this is in Chambersburg, or a surrounding town.
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CJ Witmer
OP
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
Patrick Liska I planned in a purchase price of $65, but he's verbally confirmed $60. I did figure in 3% management fee as he said that's what he pays now. I planned $4k for furnace as my mom just had hers replaced for $4k and $10k for the rewrite but, neither seem to be immediate needs, but a home inspector should be able to verify. The plan was to figure in all that, but start renting the house immediately and let the income put money in the "new furnace" account and "rewire" account. If that makes sense. Jason Krick it's in Chambersburg.
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Patrick LiskaPro Member
Investor · Verona, NJ · Member since 2014 · 1k+ posts · 832 votes
9y
CJ,
3 % ? i don't know who he found at that,you would never find a PM to do the work for that, make sure there are no other fees involved - average is 10%, figure that even if you are managing it.
1 Reply
CJ Witmer
OP
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
Patrick Liska I think maybe I actually did figure 10% in the calculator, I don't recall to be honest. I've confirmed several time that he said 3%. He said they're not stellar, but they dealt with the nastier stuff like when he had to have people evicted. Again, I figured in a lot of cushion for "first timer" mistakes.
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CJ Witmer
OP
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
I don't know how to edit a post so I'll just add this here. Our plan was to use a PM for the first 6 months to see their value. If they are valuable, keep going. If no value, since my wife is a stay-at-home Mom, she could handle some of the duties. Her aunt does the exact same thing for about 10-15 of their properties and they have said before they'd be happy to show us the ropes.
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John Kesner
Investor · Reno, NV · Member since 2015 · 167 posts · 90 votes
9y
@CJ Witmer
If you pay the heat, you should control the thermostat. Put a lock box on it and run it at the department of energy suggested settings (78 summer, 68 winter). I wouldn't allow them to pick what they want if you are flipping the bill, that way you won't get a big surprise.
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CJ Witmer
OP
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
John Kesner I had thought of switching things around. Currently he pays heat and tenants cover trash/water/sewer. I was going to swap as those are, usually, more of a fixed cost (it would seem). A tenant could leave all the windows open in the middle of winter and have the heat at 84 degrees. What do they care if I'm footing the bill!? Gotta make them care what the heat is set at.
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John Kesner
Investor · Reno, NV · Member since 2015 · 167 posts · 90 votes
9y
@CJ Witmer
That may be tough to do. I guessing he was paying the heat because there are 2 units and only 1 heat system. Could cause a problem between tenants if you just split the bill between them because it always the guys fault for running up the bill, and you have no way to sort it out. Also potentially expensive to change. You said the furnace needs replaced fairly soon. You maybe able to split the system some how when that takes place.
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CJ Witmer
OP
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
John Kesner I had also considered leaving the furnace go and when she goes, put in electric baseboards since elec. is already split. I see your point about the single heating bill split between them.
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John Kesner
Investor · Reno, NV · Member since 2015 · 167 posts · 90 votes
9y
@CJ Witmer
Baseboard heaters are an option, they can be an expensive way to heat if your in a cold climate (not sure how cold it gets or how long it stays cold in Pennsylvania). High utility bills could make your rental less attractive and you might have to lower the rent to compensate so you could end up with a net zero.
Whats the layout of the place? Is the furnace in an unfinished basement? If so, splitting the system and running a second furnace might not be that big of an expense. If not, could you put the furnaces in the attic and have to run minimal duct work (duct work is usually easy to run in an attic)? Could you install separate wall heaters? Could you do the A/C mini splits that also work as a heat pump? The nice thing about a forced air furnace is adding A/C is usually pretty easy and affordable if you don't have it. Do some research, there are a few heat/AC options out there, your not stuck with a furnace or baseboard heaters
Some of your decision should be based on weather you can get a return on your investment. Would the building be more desirable/worth more as a duplex with fully sorted utilities? Could you do this as part of a bigger remodel and add value?
Just some things to think about
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Milan Mehta
Developer · Cary, NC · Member since 2016 · 98 posts · 53 votes
9y
@CJ Witmer great post and good analysis. Be sure to check out the property taxes and school taxes in Chambersburg. In my experience, they are higher than the national average combined.
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TImothy Talarico
Investor · Fleetwood, PA · Member since 2014 · 35 posts · 5 votes
9y
One other thing to think about is why they are only paying the heating. I would have the tenant pay for most everything....water, sewer, electric, not just the heat. It sounds like a sweet deal for the renter. I would also check out the current rental policies and see what is covered and not for your sake. You need to get new contracts in front of them. Everyone has already given you great advice on the house and it seems like you are hearing and following instruction but you also need to think of your time as property manager (look for outside help.....I know some people in Lancaster/York/Harrisburg) that do this and it's worth the money 10% rent. Just looking at things from a different angle. House is nothing unless you have good renters.
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CJ Witmer
OP
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
TImothy Talarico Great input. There are currently no tenants. He let them trickle out as he knew he was selling. I need to sit down and look at all of his receipts when we meet and asses that. Appreciate it!
0 Reply
CJ Witmer
OP
Investor · Chambersburg, PA · Member since 2016 · 97 posts · 18 votes
9y
I actually called the PM company and they charge 8%. Also, I get emails that people are sending me PMs but I'm not seeing them. I guess I won't be able to see if someone sends me info on what's wrong if I'm not seeing them...duh. My wife and I went through the place and it's not bad. Im meeting with the lawyer tomorrow to setup an LLC and the Home inspector comes in tomorrow after that. So the ball is rolling... I've also started a conversation with a local bank for financing through an LLC and with someone from the property management company. Steady as she goes!
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