1925 apt building, galvanized steel - Run or Quantify the risk?

Question

I'm very close to starting my first deal. Purchasing a multi-family property in the $200-350k range. I've identified a >10 unit property that has moved to the top of my list. Positives: $18.5k a unit, at least 12.5% under market rents, full, 4 floors solid brick, no basement, inside is clean and well-kept, conservatively (50% expenses) the financials are good. At current rents. Current owner has had it 20+ years, personally interacts with the tenants.

Cons: It was built in 1925, and is full top to bottom with galvanized steel pipes, including the main. Not sure about the wastewater. Pipes have been replaced here and there with copper as they leaked, but no renovations. Also, it's been on the MLS since December '12, is that saying something? Then again, so have 25 other properties.

My general contractor and apt owner friend says to run the other way. The pipes will be a constant maintenance expenditure, and the main is a ticking time bomb that will cost tens of thousands of dollars to replace and require emptying the entire building, and taking out the floor of several bottom floor apartments.

The math nerd in me wants to quantify the risk - what's the likelihood of the main going while I own it (I only plan to own 2-3 yrs), how many replaced pipes per year average at what cost per break, etc. I've also just learned about inserting a new plastic pipe inside the main and epoxy lining all the pipes. Expenditures for sure, but ones I could quantify ahead of time and perhaps plan on doing immediately, as insurance against disaster.

My friend says to avoid *everything* before 1970. He also tends to do all work himself, so I feel like the hassle biases his thoughts. I like getting it down to calculated risk and numbers. Thoughts?

Roy N. · Answer

Stephen:

If the waste line is original, then cast iron is your best case scenario ... and 90yr old cast iron is quite likely at end-of-life.   I've replaced two in the last year ... one was 85, the other just over 100.   Cast iron will rust from both sides when buried.  Inside the building look for the tell-tale weeping bubbles on the pipes.

If you are going to be digging to the curb and replacing supply, the incremental for replacing waste will be small compared to returning in 3-5 (maybe 10 if you fortunate) years to dig again.

Sometimes, if the pipe to the curb is not too bad, you can insert a sleeve through it ... basically put a synthetic pipe inside the cast iron.  That wasn't possible at my locations as the pipes were too deteriorated and rough on the inside.   When you have line locates performed on your supply and waste lines, and have them scoped as Joel suggested, the plumber / City water engineer will be able to tell you if your wast line can be sleeved {though, where you would be breaking ground already, I wouldn't bother}.

Also, when you get your estimates from the plumbers ... add a sufficient "what-the-*-is-this" buffer to the number (say 25-30%) ... then adjust your offer.

Roy N. · Answer

Stephen Anthony:

If the architect/builders were thinking serviceability, then there will be plumbing runs within the building - risers between the floors and horizontal runs between floors.  There may also be a service channel under the slab which may allow new pipes to be run without breaking the slab.  This would make replacing your supply side - and waste water - a little less painful.

As Joel Owens indicated, I would plan on the main being galvanized steel to the street (the City/Municipal water & sewer department may be able to confirm) and price accordingly.

I would also verify it the waste lines are cast iron (or something else like copper) within the building (or have they been replaced with PVC/ABS over the years) and whether the sewer main is cast iron, or clay, to the street.

If you are looking at breaking ground to the street and replacing the supply side, I would also budget/price to replace the waste side at the same time.

Roy N. · Answer

I too am attracted to the shunned, lonely, ugly properties on MLS (& ICX) ... at the moment asbestus asphalt shingles have this darling little triplex sitting ~150 DOM.

The word asbestus freaks people out ... I just price abatement into my offer and wait :)

Deborah Burian · Answer

I've made some very good deals with long-listed MLS properties.  Sometimes they have a real or perceived flaw that just scares folks away.  My top cash-flow property fits that bill... it had broken windows and consequently a spider problem plus it needed a roof.  The issues (there were rolling balls of spiders the day I saw it) freaked buyers out but didn't cost all that much to repair relative to the value of the property... and after a long time on the MLS, it was discounted accordingly.

Stephen Anthony · Answer

Haha, thanks for the buffer advice. Got my first estimate in the $9-10k range, plus another $1.5k if the sleeve and valve at the main have to be replaced. I'm going to offer low, then let the inspection of the main be reason to bring it down again with the corresponding estimate. I don't see a reason to replace the whole interior plumbing, just do it piece by piece if there's leaks. The main is the key expenditure I want to have covered.

Brook W. reiterated a great question and something I'm still wondering - is a long time on the MLS a bad sign? I know that the best deals are found off the MLS, but when you're starting out, your network isn't very big...

Brook W. · Answer

I am curious about Stephen Anthony's other question: do you tend to stay away from properties that have been on the MLS for quite a while?

I can't figure out whether that is good or bad. You could negotiate the seller down because they're ready to sell after it's been listed so long, or maybe they're just problem properties and no one wants to touch them. My assumption with multi-families is that most owners aren't super motivated to sell if they're able to continue bringing in some money each month (and aren't in dire straits), so it's harder to negotiate the price down anyway.

Joel Owens · Answer

You need a plumber to scope the lines as apart of due diligence even if sewer is cast iron all the way to the street.

Usually they will charge xx number of dollars per toilet per unit.

Galvanized rusts from the inside out so even if you replace all plumbing in the building you can have low water pressure from the galvanized main and also leakage into the ground running up the water bills.

Engineer for the city water department should tell you for the area what the average usage of water is per number of tenants that typically occupy that square footage of space.

Stephen Anthony · Answer

Thanks for the input guys. I called the city and the main is galvanized steel, the wastewater they have no idea but probably cast iron. Both are still original from the 1920s. The property is cheap (and I'm pushing the offer lower) and rented out under market. I've always heard from someone else to just do the wastewater at the same time so I'll definitely look at that route.

I've put in for estimates from several plumbing companies so I'll go in prepared. I guess basically I'm looking at it as if the highest estimate is $10k and I can get $10k off the price, then I'm basically covered. The next big choice after I buy it would then be to just have it done, or wait and get as much life out of the current pipes as possible. Just wanting to have my worst case scenarios covered.

Joel Owens · Answer

Hi Stephen,

Yes back in 2009 one of my friends had multiple projects going on across the country for value add apartment buildings.

One of his smallest projects a 20 unit in Atlanta he had calculated for certain rehab costs.

The property was smaller in nature and controlling contractors from afar on that project the rehab was costing more and taking longer than anticipated.

Adding to that a cost he did not account for was the water main coming from the street was galvanized. He ended up having to cut up the parking lot and do a new run from the street to the building. The cost added about 2,000 per door than he was expecting (40,000 total).

The key with replacement is the length of the run and if you have to cut up the parking lot and how deep you have to trench the line according to the local area. Listen to what your friend is saying as it is a huge issue. My friend eventually sold the property for a small loss with about 65% of the rehab complete so he could focus his efforts on his larger properties throughout the country.

Unless I was getting this property REALLY CHEAP and not just slightly below market I wouldn't touch it unless this is sitting on a big piece of land where I can sell off vacant land parcel for a profit or sell off all the land and let a developer buy me out.

If the only merit is the building itself I have to get it cheap. You need to THINK about the time and energy involved for the expected return. Example I like 11% return that is easy and takes a little bit of time versus a 14% return that takes up almost all of my time.

Stephen Anthony · Answer

I'm going to follow this up by getting an high-level estimate from several places for a worst case scenario - the water main goes bad and they have to replace the whole thing, all the way to inside the building. As I understand it, if they have to cut straight through slab, that's what will make the cost skyrocket. I feel like if I get enough off the purchase price to cover this worst case expense, I've covered myself.

Anyone dealt with anything similar?

1925 apt building, galvanized steel - Run or Quantify the risk?

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