Long Time Lurker, First Time Poster from Pittsburgh

[TJ Angelo]

Born and raised Black and Gold in the Steel City, still here and looking to diversity my portfolio and invest in Pittsburgh with some rental properties in the area.  My primary goal is to build additional income streams for income diversity and security while maintaining my full time job.  Looking to build wealth in real estate assets over time for a soon to be growing family.  I've been living in a long flip for about 6 years or so, remodeling and learning as as I go.  After listening to the podcasts, reading The Book on Rental Property Investing (and a few others =]) and lurking in the forums for a while, I started to get more serious about looking for properties in need of mild to moderate renovations in Pittsburgh (B properties in A neighborhoods).  I've looked at a few hundred, analyzed the numbers on many and visited a bunch.  

Just last week I just put my first investment property offer in, but now I have some questions for the community (probably should have asked most of these sooner).  Thanks in advance for any advice to help me out.

About the Deal:

I found what I think is a nice 100ish year old Top/Bottom Duplex in the Mt. Washington area, walking distance to shops and public transportation and 10 minutes or less from downtown.  Units have their own separate entrance, 2 bedroom, 1 bath, large eat in kitchens, living room & dining room.  They share a nice front porch and secluded pack patio and the upper unit has a private deck with a nice view. Utilities are separate and tenants pay all utilities except water and sewage.  Each unit has access to a stairwell to the basement where each has their own washer and dryer setup.

The average monthly rent for 2 bedrooms in the area is $1,032 with the same utility situation. Several remodeled 2/1 units are advertised for $1200-1250 / month.  The downstairs unit is already rented by what seem to be good tenants, young couple that keeps their place neat and clean who want to stay for the next 2 years and are asking to sign a lease.  Top unit is vacant and the carpeting was just replaced and walls were painted.  

The bottom unit is already paying $925 / month and I would offer them a lease for the same amount, which will cover mortgage, insurance and taxes.  I'm planning to put in about $5k in renovating the top unit before renting by remodeling the bathroom, updating the kitchen flooring, painting cabinets, removing 1/2 a wall, etc. doing most of the work myself.  Once I'm done, I'm aiming for the $1200/month tenant.  Once both units are occupied, I expect to rent to be bringing in $2,125 / month in rent for the first 2 years, after the tenants in the bottom unit move out, I estimate another $5-6k or renovations to increase the rent to $1200 / month in each unit, or $2400 total for the building. I expect 2-4% property value appreciation each year for the foreseeable future - seems Pittsburgh is averaging 5%.  

Here is how I am estimating the financials for the short term for the building - both units together:

Monthly Rent: + $2125 

Mortgage, Taxes & Insurance: - $907.17

Vacancy Rate: - $340 (this is likely inflated as there should be no vacancy for the bottom unit)

Repairs: -$106.25

Cap Ex: -$248.89 (everything looked to be in pretty good shape, at least 1/2 life left during the home inspection)

Water / Sewage: -$120

I'll be doing my own property management, lawn care, etc. at least in the short term.

Total Cash Flow: $402.69 

I believe the cash flow has a potential of reaching $619.94 / month once both units are renovated.

Here's the rub - Found old knob and tube living wiring during the home inspection, one spot in the basement and a bunch in the attic w/ open splices.  Everything coming out of the breakers was updated, but they must have left some in the walls to the second floor where it was hard to get to and patched into it.  There were several 3 prong outlets on the second floor that are not grounded.  No other significant issues were identified during the home inspection.

Questions - 

Here's where I throw myself at the mercy of the BP community for some guidance:

1. I am working with electricians to get some quotes for replacing all old knob and tube and fixing any other potential electrical issues.  Based on preliminary conversations, it seems that could cost between $10-18K.  I plan to present the quotes from 3 licensed electricians, select one and ask the seller to pay for this work to be completed prior to closing.  The knob and tube was not included in the sellers disclosure.  Is asking for the seller to pay for the replacement of these potentially dangerous electrical issues reasonable?  Any suggestions on negotiating this situation?
2. Am I budgeting enough for repairs and Cap on a 100 year old 2,800 sf duplex?  I can do the basic stuff myself (patch walls, replace doors, fix faucets, snake drains, etc.)  Other than the electric, the building seems to be will maintained and everything appears to be in good working order currently.
3. We turned on the sinks and tubs in the units and everything seemed to drain reasonably well, but I am considering springing for the sewage inspection for another $300-$400 dollars.  I know if there are major issues these reparis can cost $10-20k.  Should I buck up and go for it or skip it since everything seemed to drain well enough?  
4. Should I look into getting separate water meters and having the tenants pay the water and seage bill themselves?  Apparently it could cost 8-10K to get separate meters installed.  Some of the places in the area make tenants pay water, others do not.  I've just heard that water / sewage is leanable, so it's better to just pay it and bake the costs into your rent money?  Anyone have an opinion one way or the other?
5. Finally, does anyone know a good & reasonable CPA who focuses on and ideally invests in real estate in the Pittsburgh area?
6. Is this TLDR for a first post?? =]  

[Barry H.]

TJ - I actually read you entire post but cannot find anywhere stating what the acquisition price is for this duplex? I am going to presume it is in he range of $120K. If so, then this is probably worth it (in my humble opinion). It is an old building, so you have identified the up front fixer stuff which will probably make you flat or slightly negative in year 1 and I believe PA property taxes are pretty high also - right? Other than that, as you improve it, you can charge higher rent and your ROI will probably be 10%+ which is great for multi-fam.