My first deal - looking for feedback

[Brent Neuenschwander]

Hi all, first time poster that has just gotten into real estate investing. I took the plunge and am in the process of completing a short sale purchase. Waiting (for over a month now) on the bank to sign the contract, the owner has already signed. Here are the specifics:

Property is one building, 5 units, approx. 2,800 sqft. Three 1 bedroom units, two 2 bedroom units, all 1 bath. Range in size from 448-770 sqft with an average of about 550. Only one unit is currently occupied, although seller provided rental history for the last 3+ years showing steady history. She was getting $2,400/month when all units were rented (about $480/unit on average). Located in a small rural town about 30 minutes away from larger cities. One larger apartment complex in town that looks to cater towards section 8 tenants and currently has no vacancies. Other than that, a few houses for rent but not much else.

Asking Price $50,000

Sales Price: $50,000 (all cash)

Initial repairs needed (will be paid in cash): $35,000

1. New roof & gutters: $12,000

2. Paint portions of units/common areas: $3,500

3. Replace carpeting in one unit and clean floors: $2,000

4. Appliance replacement: $1,500

5. Misc electrical updates: $1,500

6. Misc plumbing updates: $1,500

7. Replace baseboard heaters (most are bad): $2,000

8. Patch a few cracks in foundation per inspection: $1,500

9. New 5 water heaters (30 gallon): $2,500

10. New vanities/toilets/tubs in all units: $5,000

11. Misc: $2,000 

Total upfront cost for purchase + repairs: ~ $85,000

Expenses:

1. Estimated yearly property tax: $1,000/year

2. Insurance: $1,100/year

3. Annual maintenance (lawn/snow/common area cleaning/etc): $4,500/year

4. Set aside for future capex: $3,600/year

5. Property management: $0 (will manage myself, at least to start)

6. Vacancies: $2,600/year (assuming one month vacant/unit/year).

7. Utilities: $1,800/year (owner pays W/S/T and averages $150/month).

Total yearly expenses: $14,600

Income: $2,600/month - $31,200/year (plan on increasing average rent from $480/unit to $520 - pretty comparable with other complex in town but might be optimistic)

Summary:

Initial investment: $85,000

Yearly income: $31,200

Yearly expenses: $14,600

Yearly profit: $16,600

So what is your feedback? Did I get a good deal? Am I missing something or are my estimates/assumptions way off? I have a few concerns. First, the fact that only one unit is currently rented. Also, I believe my initial repairs estimate is pretty close but might be low on appliances. Most of them are old and we are planning on replacing some with discontinued/scratch and dent. Will probably be replaced over time but not sure. Thanks everyone for your feedback! Let me know if I missed anything.

[Andrew Fidler]

Hi Brent- I love your list, it looks like you have a very good summary on the property!

I'd recommend you boot-strap the list though, if the water heaters for example are working and are in basic working condition then leave them alone...if the foundation isn't leaking then I wouldn't worry about it any further than a quick inspection to ensure there isn't movement or anything that will result in long-term damage.

Appliance updates and carpeting I'd recommend you do when the units are vacant, if the unit is occupied and paying and happy (and the carpet is OK) then leave it. I own in a $11k/unit neighborhood in Toledo and I started out making upgrades to my places that were on par with upgrades I wanted to live in instead of conditions my tenants were happy to live in.

I always tell my buddies that my places are money makers, not new construction Class A properties with granite and stainless steel.

Hope this helps :)