First Rental Property - Should We Take the Leap?

Question

Greetings BP World! Excited to be making my first post and looking forward to the wisdom of this community! My husband and I are considering our very first rental property investment and would like to know if a seasoned investor would act on the following deal (or what additional questions/concerns they would have) if they were in our shoes:

Property List Price: $175,000
Tax Assessed Price: $134,700
Property has been on the market for close to 1 year and has been on the market two other times in the past 5 years at $179,900 with no budging on price until now. Real estate agent indicates there may still be some wiggle room with the current $175,000 list price. Current building owners do not have an outstanding mortgage. They purchased the property in 1997 for $115,000. We would want to get an appraisal ~$500, inspection ~$500, certified survey map ~$650 and there would of course be some closing costs.

The property is a well-maintained building near downtown in our rural Wisconsin community, split into two spaces with one commercial tenant (beauty salon) and one residential tenant (un-related to the commercial tenant), each on month-to-month leases. Our goal is to purchase the building and keep the existing tenants in place. The commercial tenant pays $750/month and residential tenant pays $680/month for a 2-bedroom, 1-bathroom apartment. Commercial tenant has been in the space since Jan 2015 and residential tenant has been in the space since Aug 2017. Annual property taxes are $1,961 ($163/month) and the building owner pays the following average utilities: water/sewer $55/month, electric $90/month, natural gas $90/month, insurance $135/month. The tenants are responsible for garbage service, snow removal and lawn maintenance at their own expense.

We have access to loan funds for up to the full purchase price: 80% of appraised value from a local bank at 4.75% for 25 years and the remaining from a private source at 5.5%. We have not contacted the sellers to gauge their interest in seller financing any portion of it, but that could also be an option. In 25 years, I'll be 60 and my husband will be 67.

Pros: We would love to have these tenants purchase a building for us and start our passive real estate income portfolio. We currently own & operate two other businesses in the area and could potentially start another business in the commercial space if it were to go un-rented. There is high demand in our area for reasonably-priced apartments like this one.

Cons: We would like to see slightly higher rents from both tenants to build more of an expense cushion and believe the current rents are slightly under-market, but see risk if either space goes un-rented. There is currently only one furnace/AC unit servicing the property, which seems to work for the current tenants, but could present an expense if we were required to upgrade to separate furnace/AC units for each tenant.

How much would you pay for this building? What other items should we be considering?

Scott Schultz · Answer

In my opinion this is not even close to a deal, unless you have a specific reason you want this property for long term strategic planning. curren rents put you well below the 1% rule, personally I wont do a deal below 1.5% plus 50% value upside after a rehab. If you are going to take the leap, you need to find a value add, and buy well below market. you need to decide if you want just cashflow, or want cashflow and appreciation. I want Cashflow and appreciation, my rule is to be able to finance 60% of ARV an get all my purchase and rehab cost back, and get 1.5-2% of cost in rent. Regarding your costs, if you are financing the bank will need an appraisal, so thats part of your closing costs, is their a specific reason you want a survey? is there a CSM on file? usually between the GIS and the legal description you should be able to figure out what it is, the only time I have ever gotten surveys is new construction, because you have to to get a permit, otherwise unless there is something in question, I see little value in a survey. I hold most of my rentals in tiny towns in Northern and east central WI, so when you say Rural I play in Rural areas, I even have a rental on 7 ac. that 35 min drive to a town. I think you should buy something, and take the leap, but the deal you described is not a good deal, unless you can buy it at or below assessed value. my single families I like to be all in after rehab at $50-60K with rents around $800+/mo and have an appraisal after repairs of $100K Duplexes have a bit more cashflow, but often not as high equity return. just my opinion, PM me if you would like to chat more.

Marcus Auerbach · Answer

@Amanda Wilson the fact that nobody bought the building for 2 years is a red flag. I don't know which part of Wisconsin you are in, but the Milwaukee market has been running on 22 DOM (days on market) this summer on average and now trending into the mid 30's in fall - just for perspective: 180 days used to be normal. New investors tend to underestimate the number of active investors out there, because real estate is NEW TO THEM. In Milwaukee we have at least 1,200 active small residential investors, plus commercial and instituationals - they are all looking at deals every day on MLS. Even in a rural market, if nobody was interested in a particular deal for a year, you know there was some reason why - most likly it's just not a good deal.A $5,000 price reduction does not move the needle, you would have to see 10% or 20% to make a difference in the valuation.I have and do find most of my personal deals on MLS: either in the first 24 hours or after several months, when a listing goes stale and the price starts to come down. But if the property is currently rented, the owner may have very little motivation to sell it before a certain date, so he can have it listed until forever. Once the building goes vacant, the motivation will increase.

Rebecca Knox · Answer

"The fact that nobody bought the building for 2 years is a red flag".....cannot agree more.......and the $5k is not a substantial reduction...make your offer a lot lower in my humble opinion.

Amanda Wilson · Answer

Sending a (very belated) thank you to each of you! Your comments were all spot on. Almost one year later, the salon/apartment property is still on the market and still listed at $175,000.... We ended up purchasing two properties on Hayward's Main Street last winter, renting one out to an Antiques Shop and operating a Food Truck on the adjacent lot this summer. Still working on getting both properties to cash flow during the winter (off-season for our tourism community) and seriously considering dipping our toe into the local residential rental market.

Ian Walsh · Answer

If you know your market well enough, you will know. People on BP likely won't be able to tell you.