Good Deal or Bad Deal: Triplex Deal with Cashflow, no Equity

[Andrew Adamany]

Hello Everyone, I need some help in analyzing a current Rental Property Deal and wondering what you would do with this sort of deal.  It's a triplex with built in tenants that want to stay.  It needs updating, but repairs may not need to happen until units become vacant.  It'll bring monthly cashflow and acceptable Cash on Cash return, especially if repairs aren't up front, but the wholesaler's asking price, as-is, is higher than my projected fair market value after repairs.  There's a lot of tradeoffs to consider:

Triplex in Murfreesboro, TN through a wholesaler.  Built in 1915, Currently unknown how long ago since it's last renovation

Each unit is 1 bed/ 1 bath. 2,440 sq. ft.

Asking Price: $160,000

Repairs: $25,000

Gross Rents: $1,950 (23,400 annual)

Estimated Monthly Cashflow : $580

20% Downpayment: $32,000

Cash on Cash ROI with upfront repairs: 11.5%

with few/ no upfront repairs: 15+%

built in 1915, must have been renovated but I don't know when at this time.

Gross Rent cut in half divided by 10% puts the Fair Market Value estimate at $117,000

The Comps are kind of sporadic:

Triplex (built 1900)- Under Contract- 3,100 sq ft- 1 unit is 2bed/1 bath - $128,000 as is 

Quadriplex (built 1900)- Under Contract- 3,863 sq ft- "?" beds/1 bath per unit- $310,000  renovated

Duplex (built 1996)- Sold- 1,728 sq ft- 2 bed/1 bath per unit- $170,000 renovated

My Realtor's opinion:  The $160,000 is high but thinks it's still a good deal given the cash on cash return and circumstances.

My Dad's opinion:  The purchase price should be $100,000 or below, given the repairs needed to update the property, and the lack of equity is crucial

Me:  I like this deal based on the cashflow, built in tenants, not needing to conduct repairs upfront, which allows me to set those costs aside through my Cap X fund.  But the price under contract mixed with the sporadic comps has me bothered.  I don't know what the realistic value of the property is based off these comps, if the comps really even matter if I plan to hold this property long term, or if I can get this wholesaler to renegotiate the price before I bring in an inspector.  That's what holding me back.

What are your thoughts? Is the cashflow, Cash on Cash ROI, and built in tenants enough for you to give up the equity? Or do you need the equity, and if so, what would you determine the ARV as, and how much built in equity would you find acceptable to do this deal?

I appreciate all the insight!

analysis pdf: https://www.biggerpockets.com/calculators/shared/6...

#askbp

[Josh Braun]

I would never buy something solely based on just the cash flow and current tenants in place.  Ask yourself if you had to offload it, what could you realistically sell it for at market price? That needs to be one of your backup strategies.  Always have 2-3 strategies.

I know what property this is and I would say your $25k repair estimate is low. Also, this one isn't setup like a normal triplex, its more of a SFR that was converted to rent by the room. Think about that when you consider what type of future tenants you are going to market to.

For houses >50 years old in the Murfreesboro market, I'd go with the market price of the property times 70% and then minus repairs to arrive at your maximum allowable offer (MAO). That is my formula, so do whatever you are comfortable with.

Couple items of feedback on your proforma:

• I don't know any property managers in Murfreesboro doing 4%.  10-12% is the norm
• I'd assume a 10-15% vacancy for rent by the room, versus 5%
• 5% repairs for a 100 year old home? I'd bump that to 15-20%
• Your monthly allocation for property taxes are incorrect. Go back and check the tax record and make sure you account for city and county

Feedback above is solely my opinion and you asked "what you would do with this sort of deal". I would say count it as a good exercise in running your numbers and be thankful you didn't get into a situation with only one exit strategy.