I am curious what the community here thinks of this deal, and if I made the right decision. My plan is to start off with some solid and reliable rental properties, and eventually scale out to multiple short-term rental properties when I have more cash. It is important to me that I take my first deal very seriously, because I want it to be a sound and also profitable decision that helps me grow, rather than deflates my investability.
The deal: Triplex in Newport, KY for $360,000. Using FHA loan, offered asking of 360,000. After inspection, requested repairs. No repairs were granted, but seller offered $4,000 in closing costs plus 1 year warranty. I decided to terminate, and before signing they offered $9,000 in closing costs (this was beyond the actual closing costs, and I would have had to find a way to work it into the deal, if possible) plus the warranty to keep the deal on the table. I decided to ultimately terminate. PITI was $2398 + utilities for all units. I estimated utilities to cost around 500/mo for the 3 units.
Pros: Great location. Ready for owner occupany, with the two 1/1 units rented out for 1100 per unit. One 2/1 unit left and owner estimated it to rent for 1500. Loved the set up with a nice courtyard and again, location. Property had some nice updates, including granite counter tops, some newer appliances, some hardwood flooring, fresh paint, and tiling in the bathrooms and backsplash in the kitchens. Recessed lighting was also there. Seller did replace (the reachable) knob and tube wiring. Newport boasts the highest rental rates in KY.
Cons: Built in 1879. Current owner has only owned 5 months. Bought for 215,000. It was difficult to justify the 67% increase for cosmetics. Utilities were not separated. Only 2 furnaces and one electric box. Inspection revealed improperly shimmied joists and structural sagging, furnaces were 31+ years old (seller would not replace), moisture behind some of the shower tiling, chimney need mason work done and looked structurally suspect. The two 1/1 units shared a single thermostat, located in the cellar. They had vastly different ceiling heights, and when I spoke with them they complained this was already an issue for them. The upstairs furnace did not turn on during the inspection. The stove upstairs was supposed to be stainless steel but was not, and had a questionable start up during the inspection (loud bang).
My main gripe was simply the potential pitfall of having to spend a lot of cash really fast on the property. The cash to close was going to be around 18,000 minus the closing costs the sellers agreed to pay. The owner occupany in year 1 would yield no profit, and cost an estimated 12,000 to live in. After that, assuming the furnaces didn't blow out and cost an additional 4-6k to install and replace each, I would not reach a cash on cash return of 100% until year 5, assuming everything held together fine and there were no major repairs. I felt terminating the contract was right because it was too risky as a first time investor.
