Deal or No Deal? Triplex plus Garage Apt

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Deal or No Deal? Triplex plus Garage Apt

Daniel J.
Conroe, TX · Member since 2016 · 237 posts · 43 votes

I am currently looking at a triplex with a detached garage apt. It is in the Spring, TX area just north of Houston. It is currently owner occupied, with 2 units rented long term, and 1 unit used for AirBNB, I would not continue doing AirBNB. I would NOT owner occupy it. My agent believes that it could easily all told rent for $4,300 a month, possibly more. It is currently set up for owner paid utilities. Shared laundry between all 4 units. I would be purchasing this with a partner who is fronting the down payment. Long term plan would be to refi out in 6-9 years in one manner or another and repay my partner plus 5%. It fell out of contract previously because of appraisal issues. Contract for $336, but appraised for $300. The owner who is an agent felt the comps were poor comps as the property is somewhat unique. We have seen the appraisal and my agent overall agrees that they are not the best comps. It was for a VA loan.

Purchase Price: $315,000

Loan: 30 Fixed at 4.875, 25% down

Rents: $4,300 (conservative but reasonable)

Utilities: $7,000 (Based off their actuals plus some fluff)

Repairs: $2,000

CapEx: $3,600

Vacancy: 10% (Somewhat a shot in the dark, I can't find any good data for the area)

Taxes: $7,000 (Current tax rate times the purchase price)

Management: 11%

Cash flow with PM: $347.50 per month

Cash flow no PM: $773.20 per month

It is on a well and septic. From a previous contract they had the septic inspected and the inspector said they needed a larger system. The current owner said they have had no issues, and have only had the tank pumped once while owning it in 3 years. Both my agent and I feel she is trustworthy. Granted everyone is biased towards themselves. It also has about 3-4 years left in the roof. 

It is on 3 lots, part of the negotiations with the previous contract was to lose the 3rd lot, and have the septic replaced, they had a negotiated price of $336, which the owner said she didn't want to go lower on. The other option if you didn't replace the septic would be to buy all 3 lots. No current use for the 3rd other than nice lawn. If you don't replace the septic you need all 3 lots as the current drain lines for the septic run onto it.

Am I missing anything? What do y'all think? It seems like a pretty good deal, though not perfect. 

Thanks!

Daniel

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Jack P.
Columbus, GA · Member since 2017 · 88 posts · 115 votes
8y

I would say it may be worth the risk if you are self-managing, have a talent for finding good tenants, and are handy with repairs.  Otherwise, your margins are very small, and don't leave you any room for significant repairs.  If I read that right, you will have to replace the roof in a few years, which is another added expense in the 5-figure range, and will wipe out 10 years worth of profits.  

I don't really know anything about septic, but you probably want to get a quote on replacing the system just so you know what you're getting into.  Also, the utilities kill your profit.  I can see collective water in a multi-plex, but paying for tenants electricity is just nuts, especially in TX, where they'll run the A/C 24/7 because they aren't paying for it.  

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  • Daniel J.
    OP
    Conroe, TX · Member since 2016 · 237 posts · 43 votes
    8y

    @Ben Leybovich

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  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    8y

    Septic is a challenge I can't see past unless there's huge upside, which there is not...

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  • Daniel J.
    OP
    Conroe, TX · Member since 2016 · 237 posts · 43 votes
    8y

    @Ben Leybovich Not having it replaced or septic at all? I have septic at home so I’m familiar with it, and my taxes are far less because of it.

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  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    I will order my own septic report or get another opinion.  The 11% PM fee seems to be quite high.

    Do tenants pay their own gas & electricity? $600/mo/

    Can you make $ add a coin laundry room?

    Frankly if I get $347 a month I will not consider it unless you expect steep appreciation.  One major repair will wipe out your $2K budget.

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  • Jack P.
    Columbus, GA · Member since 2017 · 88 posts · 115 votes
    8y

    I would say it may be worth the risk if you are self-managing, have a talent for finding good tenants, and are handy with repairs.  Otherwise, your margins are very small, and don't leave you any room for significant repairs.  If I read that right, you will have to replace the roof in a few years, which is another added expense in the 5-figure range, and will wipe out 10 years worth of profits.  

    I don't really know anything about septic, but you probably want to get a quote on replacing the system just so you know what you're getting into.  Also, the utilities kill your profit.  I can see collective water in a multi-plex, but paying for tenants electricity is just nuts, especially in TX, where they'll run the A/C 24/7 because they aren't paying for it.  

    1Reply
  • Daniel J.
    OP
    Conroe, TX · Member since 2016 · 237 posts · 43 votes
    8y

    @Sam Shueh I was planning on doing that. They do have their grey water set up to run out separately so I think that’s part of the difference for them. I use 11% because that seemed fairly standard from what people have said. I will be self managing though.

    They do not, there is only a master meter, and one propane tank. My plan in future for new tenets would be to rent for 1200 and 1100 for the other units with either a spilt bill back or a flat $100 or something to help recover that.

    What do you think my CapEx and repairs should be at?

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  • Daniel J.
    OP
    Conroe, TX · Member since 2016 · 237 posts · 43 votes
    8y

    @Jack P. 20k if the septic is replaced on only 2 lots, should be around half that with all 3. I’m contemplating getting the roof replaced up front.

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  • Sam Shueh
    Real Estate Agent · Cupertino, CA · Member since 2016 · 4k+ posts · 1k+ votes
    8y

    Property management for multi is often discounted. I think except NYC most places are under 9%. As for expense estimate, you need to show photos of the property, interior, age before we give correct estimate. As for $7K propane I hesitant to commit. What is the life expectancy of gastank and how do you know it is safe not leaking?

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  • Daniel J.
    OP
    Conroe, TX · Member since 2016 · 237 posts · 43 votes
    8y

    @Sam Shueh I will try and post some photos. It has overall been updated, except for a bit of facia replacement needed and exterior paint. It was built in 65, but as I said recently remodeled in the last couple years.

    Sorry if I was not clear. The 7k includes propane, lawn care, internet and cable, and electric. It is on a well, so no cost for water other than a bit of electric. The tank is a rental, so all maintenance on that is done by Amerigas. 

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  • Jack P.
    Columbus, GA · Member since 2017 · 88 posts · 115 votes
    8y

    Dan, I still think there are a lot of variables to throw in it.  If you consider the roof and the septic as part of the initial investment, you're probably still well under the 1% rule.  

    Thinking again about the well, that opens up a whole new can of worms.  It may be good that you don't have to pay for water, but anytime you have a problem with the well, it's a huge expense.  You have to worry about a changing water table, seismic shifts, water quality, etc.  I've known several people who's wells eventually produced water that did not meet FDA standards for quality (high arsenic or uranium content), which isn't fixed by the filtering process.  Long story short, you probably need to have a professional take a look at the well and have a water inspection.  The well might scare me away from this deal, but it may be much more worry-free than I suspect.

    As for capex, I use a conservative planning factor of 10% for my multi-family properties (built in 1984), but that's probably on the high side since I'm in the process of upgrading each unit as tenants turnover.  You're going to be the best estimator of that since you know immeasurably more about the property than any of us.  

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