[Calc Review] Help me analyze this deal

[Jim Peckey]

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*This link comes directly from our calculators, based on information input by the member who posted.

Hello folks,

My wife and I are new to real estate investing and are looking to buy a primary residence, as well as invest in our future by building a real estate investment portfolio.  We're quite fortunate in that we have zero debt, I work in IT and the wife works in Education.  We have approximately 20k in savings and trying to do our due diligence in analyzing good "buy and hold" properties.

We currently live in the Buffalo, NY area and recently came across a triplex for sale at $85k.  

While the triplex is currently fully rented out, grossing $1,725 per month in rent, we would be looking to occupy one of the units for at least 1 year, primarily as a way to reduce our down payment from 25% to the 10% range and keep more available capital on hand.  With us occupying one of the units, the total gross rent from the other 2 units would be $1,065 per month.

I've used the rental property calculator to plug in some numbers and trying to determine if this is a good buy, long term.  With us living in the property, we're looking at $62 monthly cash flow and a 7.10% cash on cash return.  We plan on moving out of the property in 1-2 years, and without us living in the property, we would be adding another ~$700 to the rent roll as well as property management fees.

We're thinking this looks like a good deal from where we currently stand, especially if we can purchase the property for less than the asking price, but we'd very much like to run this by our more experienced peers and make sure we're on the right track before we jump into our first investment property.

Feel free to ask us any questions, I'm sure we've missed a thing or two in our analysis.

Thank you very much and cheers!

[Jon Crosby]

Hi @Jim Peckey, just my quick 2 cents here (which might be all its worth).  :)  

If it were me I would probably ignore the fact that you are going to house hack it for a year (or more) and run the numbers as if it was fully rented out.  This will give you a better idea of how good of an investment property it actually is.  

I'm seeing a DSCR of 1.17 which is low with the house hack numbers and you look a little low on your expenses as well. Remember your CapEx and Repairs are based on your gross rental numbers on the BP calculator, just because you are not paying rent doesn't mean you won't have your share of CapEx/Repairs for your unit. Is there an HOA or CAMs for this building by chance? Make sure you are including those as they are cashflow killers if you miss them.

All that being said, I'm all for getting into multi-family property where you can and especially if you can house hack it for your first deal! So, maybe just do some more due-diligence on the numbers before you pull any triggers and get creative if you have to!  

Good luck!   

[Jim Peckey]

Hi @Jon Crosby, many thanks for the informative response!

Great point on the HOA/CAM fees - we're not seeing any mention such fees on the property listing, so we haven't figured those into our numbers (as of yet), but certainly need to be determined. We're working on scheduling a showing in the coming days and will definitely get answers/numbers to those fees.

We've re-run the report with bumping up the CapEx/Repair percentages to 7% respectively, as well as with the property fully rented out, including 8% allocated for property management. Do you think 7% for CapEx/Repairs is still too low for a triplex?

I'll try attaching the updated .pdf report to this reply (fingers crossed), and include a screenshot/.png just in case the .pdf doesn't make it:

I've also plugged the property address into rentometer.com, although I didn't see a way to specify a triplex vs a SFH, but it looks like the average rent in the property area is $1,366.00. I'm hoping that would imply there's room to increase the rents via improving the quality of the units.

Thanks again for the response and educating us on what DSCR & CAMs are about and how those figure into the numbers, we really appreciate your input.

Cheers!

Jim Peckey

[Jim Peckey]

Hi @Khaled Morad, many thanks for the helpful & local response!  It's awesome to meet another investor from the Buffalo area, by the way.

My wife and I were thinking the same thing with respect to just simply positive cash flow/all house expenses being covered while we're house hacking, which should make the property that much more profitable once we move & rent out the unit we were living in.

While we have a lot of family originally from the Buffalo area, we're relatively new to the area (approx 1 year now) and quickly finding out the areas that we should stay away from - we're certainly steering clear of the inner city areas.  The particular property we're looking at, thankfully has a driveway & a 1 car garage and is not on a major thoroughfare.

Thanks again for wishing us luck and we'd be glad to DM you the details should we decide to pass on the property! 

[Jon Crosby]

@Jim Peckey, I think you are fine where your CapEx percentages are...you just need to see it with the monthly income of all 3 units in there (not just the 2 you are renting out). 8% for PM seems right but for your first property I would just self manage it after you move out (definitely self-manage while you live there of course).

Good luck and let us know how the showing goes !

[Jim Peckey]

@Jon Crosby & @Khaled Morad, thanks again for the feedback gents!

After coordinating with our Real Estate Agent, we were able to visit the property earlier this evening to walk through each of the units.  The tenants were welcoming and quite talkative about what they liked & what they didn't like about their apartment, which was all great information.  1 of the tenants has been in the apartment for 10 years, another for 4 months and the other for 2 months - the last tenant took over the lease from her daughter in January and seems the most enthusiastic about her apartment.  FYI:  the main unit is listed as a 3/1, but we found that it is really a 2/1 - the 3rd "bedroom" is technically a den and is a walkthrough to the 2nd bedroom upstairs.

As we looked at the property late(r) in the evening, we weren't able to view the exterior/roof of the property very well.  I'm planning on returning this weekend, during the day time, to put our drone up in the air and get some proper footage of the roof, gutters, etc. - assuming weather/snow has dissipated by then.  

Prior to the walk through, we put together a list of 20 questions for the seller and their agent.  Some of our questions were answered during the walk through, but the majority were emailed to our agent and we're hoping to get more verbose answers to the remainder of our questions.

Pardon the lengthy post, but I'd like to share our list of questions and the answers we've received thus far:

1. Are there any HOAs/CAMs?  None

2. What utilities does the owner pay, if any? If water/sewage, what is the typical monthly bill(s)?  Owner pays utilities  (we've requested copies of the recent utility bills)

3. What is the laundry facility situation?  (Laundry in 2/1 unit, no laundry in the two 1/1 units)

4. What do the comps look like for the surrounding area?  (Larger triplex in the area in nicer condition, sold for $107k.  Foreclosed property in the area, vacant and in rough shape, sold for $55k.  Duplexes in the area, similar square footage, sold in the range of $59-125k.)

6. What ‘class’ of neighborhood is the property located in?  'C' class neighborhood

7. Have there been any recent renovations/repairs done to the property?

8. How old is the roof?

9. How old is/are the furnace(s)?  (2/1 unit furnace looks to be older, with newer pressure system, located in the basement.  Both 1/1 units, no basement, have internal furnaces - big boxes bolted to the walls, which look to be electric)

10. How old is/are the water heater(s)?  (2/1 unit has a hot water heater in the basement, replaced in July 2017.  We didn't see hot water heaters in either of the 1/1 units - there is no basement under these units, so I would assume they are either in the closet/under the sink or perhaps somehow hooked into the hot water heater in the 2/1 unit)

11. Are there any lead paint/asbestos/environmental issues?  (House was built in 1920, I would assume there is lead based paint and my father seems to think the siding on the house is definitely asbestos-based)

12. Are there any problems passing inspection, such as work done without permits?

13. Would the seller consider owner financing?

14. Why is the owner selling the property?  (Husband died 8 years ago, owner is liquidating properties)

15. Are there any registered sex offenders nearby?  (Agent told us that we should check with the county on this one)

16. Do the current tenants have leases or month-to-month?  Can we get copies of tenant leases?  (Tenants are on month to month leases.  We've requested copies.)

17. Is there information available on the current tenants?

18. What repairs, if any, is the owner aware of that are currently needed for the property?

19. Have there been any deaths inside the property?

20. Can we get copies of the last 3-5 years of Schedule E tax documents, or tax returns, showing profits & expenses?

Issues identified during walkthrough on 4 March 2019:

3/1 unit - actually 2 bedroom, 1 bath - ‘3rd bedroom’ is actually a den. 2nd floor bedroom has sloped floor.

1/1 down unit - water damage in bathroom ceiling, no bathroom sink, no bathroom light fixture, pipes recently froze

1/1 up unit - low water pressure, possible water damage in living room ceiling, damage around entryway from living room into kitchen

As the property isn't of the quality we would like to live in ourselves, in addition to not wanting to ask the 10yr tenant to leave, we're looking at this as a full investment property that we would manage ourselves.  All that being said, given the widowed owner is not interested in being a real estate investor/landlord (and is liquidating properties) and there are no offers currently on the property, we decided to make a low offer of $75k with 3rd party inspection contingency.  We're hoping the inspection comes back without any major repairs needed and enough room to negotiate on the price even further.  We're also a bit worried about the owner-paid utilities, as this could definitely eat into cash flow.  Short term and even with a $300 per month utility expense, we would still be cash flowing ~$300 per month, so it's not a huge concern, but as this is a dynamic expense, we would be looking to transfer utility expenses back to the tenants.  I'm inclined to think this would best be done 1 unit at a time and should there be turnover due to the lease modification, we would only be turning over 1 unit at a time as opposed to 2 or all 3.

Any questions, thoughts/ideas are always appreciated and thank you once again for your time & feedback.

Cheers!

[Jon Crosby]

Nice job @Jim Peckey! Sounds like you are asking a lot of good questions and the fact you came in with an offer is awesome! You could think about utilizing RUBs (ratio utility billing) for your tenants or get a price to move tenants to their own meters (best case scenario). If you can do that, and figure out a way to incorporate some type of paid laundry for the guests that do not have it, you could probably get some nice bump in your NOI.

Either way, just make sure the numbers make sense and don't get 'infatuated' with deal if something doesn't seem right.  I don't know what properties are like to maintain or what expectations are for properties back East so that will be up to you figure out, but if you do end up with the property I'm sure you will learn a ton and hopefully get yourself a nice cash flowing asset!  

Oh, be sure to understand your landlord rights also...not sure if NY is tenant or landlord friendly but I would just make sure you understand what is involved should you need to evict.  Some states you can have them out in 30 days and some states (like mine) it could take up to a year!  So, just make sure you know the rules you have to play within there. 

Good luck!