Analyzing a 4plex-needs repair

[Tyler Ansell]

I'm having a difficult time doing an analysis on this property I'm looking at purchasing. It's 2 duplexes on a single lot, 4 units total. All 4 are rented currently at surprisingly high rates considering the condition of the property. The property financials the seller provided show big cashflow but I noticed he has no debt on it.

I would have to mortgage the property which could end up reducing cashflow down to around $100/door. It has huge upside and after renovation could easily fetch $175-250 more per door...possibly $1000 more per month!

This property would be gorgeous with some love and renovation, corner lot, could transform the neighborhood. I'm completing renovation on a duplex on the same street now and will cashflow over $650/door.

I have a few questions on how to think through this deal:

-Do you feel it is too risky to purchase a low cashflowing asset and maintain while slowly renovating the units upon lease expiration to turn the property around over the next 10-12 months?

-2 of the 4 leases expire in the next 45 days, how would you factor that in?

-The property has a ton of deferred maintenance including needing major HVAC and Roof work as well as big time reno inside. What kind of language would you use to bring these big, expensive issues up in my letter to seller and explain that because of them my offer will be lower?

-I want to offer 60% of his list price because of condition but I was shocked when I saw how high his rents were. On 4 units, how does the income of the property factor into the sale price and valuation?

Thanks for any tips!

[John Leavelle]

Howdy @Tyler Ansell

What is asking price? Do you have a good idea what the Market Value/ARV should be? That is the first thing to establish. Once you have your ARV estimate what the Rehab would be. Subtract the Rehab costs from the ARV. I would use that number as a target price. But, the initial offer should be lower than the target price to give you room for negotiation.

How do you know about the deferred maintenance needs?  Pictures and information provided in the listing?  Is so state that as justification in your offer.  Of course have conditions for inspections to allow for further negotiation on the price.  The good thing is they own it free and clear which allows for more negotiating room.

You may be able to get the Seller to do some of the Reno (i.e. Roof and HVAC) as part of the deal.

You might also try to find out why they are selling.  What is the motivation?

Hope this helps.