Should I do it? First Rental in the new city

Question

I have won a bid (60K) on a Class C rental property (due to neighborhood and age of property) in Indianapolis. Neighborhood is a lower income working class and the property is a 2bed/1bath (~745sqf, and another 700sqf basement), all electric, built in early 1900 with average size backyard and very close to turnkey with some cosmetic repair. With current rent tenant (720$), 20% down with 3.875% rate I get ~150$ cash flow and COC of 8.2%.

Inspection is next week, but the current tenant mentioned that the last month electric bill was very large (300+, average is (50-120$), my concern is, could this be secondary to poor insulation, short or bad wiring, etc?

My other worry is finding the right tenant for this property.

I'm having second thoughts and I feel like I'm scaring myself out of this deal.

Please help out a newbie and give me your two cents. Also, if you have health with similar issues yourself and how you remedied it. Any help would be much appreciated.

Cole Simpson · Answer

If those numbers hit your goals I would do it. If the electricity is that big of a deal to you walk away. Either way make it about the numbers, take the emotion out of it. Why did you want to buy there in the first place? Has the information changed those facts? In my experience better to get started. Wish you the best DM if you have any specific questions, would love to help.

Sahand Banisadr · Answer

@Noah Chappell Thank you for reviewing this topic. As an update, I had the property inspected and there are some issues with it but not a deal breaker. First, there is some remnants of termite damage which requires some fix in foundation, in addition, I believe the reason behind the high electricity bill is very poor insulation (aka. No insulation) in the attic. Due to that I was able to negotiate the price down to 49k. That should cover the fixes that it requires to make it truly rent ready and not just rent ready by appearance. Lastly it is in the C neighborhood right now but the area is in the path of growth and I’m hoping to improve in the next 3-5 years. Overall, I have decided to go with it and make the jump. Again, thank you all for your support and advice. It is much appreciated.

Michael Noto · Answer

Lesson 1: do not take anything a tenant says seriously during a showing. Some tenants don’t want their building to be sold so they try and scare off potential buyers. Maybe their electrical bill is double because they forgot to pay it the month before 😉

Drew Sygit · Answer

WHY is the electricity bill that high? Is the heat electric or gas?Was the tenant using electric heaters during the winter?

Aj Parikh · Answer

Congratulations on the deal! Try to work with a realtor in the area who can assist you with finding tenants or cozy.com offers ways to market your property and also helps you do background checks of the tenants. But I would consult a realtor and property management who can help you out. Also, there will be a lot of tenants you will go through during the life of the property so try to create a system which you can go back to when the time comes for a turnover. Good luck!!

Noah Chappell · Answer

@Sahand Banisadr this property seems decently solid for a first purchase, exceeds the 1% rule and in good condition, etc. I'm not understanding why the electricity is an issue, given one of the major advantages of single family is that you can offload all of the utilities onto the tenant.. of course I'd look into this for ecologic reasons. Electricity isn't like gas or water in that it can't really spring a leak and run up your bill, it would have to be over use on the part of the tenant. I think it sounds like a solid deal overall if this is the type of property and market you're aiming for. A good bread and butter core of your portfolio.

Drew Sygit · Answer

How long has the tenant been there? If they were there for 2019-2020 winter, ask them to provide billing history for comparison. I beleive tThis winter was colder than previous years in the Midwest and houses built prior to WWII rarely had any insulation.

Sahand Banisadr · Answer

@Drew Sygit and @Michael Noto, thank you guys for your responses. @Drew Sygit unfortunately there's no gas in this apartment and all utility including the furnace is electric. The tenant mentioned that the bill during winter months got as high as 350$ which is about 2-3 times higher than average for this size property. Then again, I'm not sure of the usage. I'm digging deeper into it now and am having the inspection this week. @Michael Noto Thank you for the lesson. Much appreciated. I'll definitely keep it in mind and will look into the actual usage from the electric company.