All Forum Posts by: Wes Brand

Cap rate: 8-11% (you'll see in a minute)

All cash deal. Price is firm. Duplex, currently 100% occupied. To leave out the boring parts, I have run through the numbers and I come up with a NOI of 10k/year. With a mixture of real numbers and high estimates I get an expense ratio of just over 50% of rents, building is ~80 years old (I gave it 200/mo for maintenance + capex)

Now the bad parts (and what kills the cap rate):

1. Water damage on the concrete in the basement. Some mold. Dirt + concrete floors.
2. Roof needs to be replaced. Dry rot in one rafter, clear signs of leaking, water damage on ceiling of a unit. Estimate for repair is 10-15k.
3. Damage to the siding, potential pest infiltration, they did not inspect for pests (If I think about moving forward with this I'll get someone to look for this)
4. Furnace+water heaters are on their way out -- 15+ years old for furnace, 10+ years old for water heater.
5. Sagging floors in basement, inspector said that was common in buildings of this age.
6. Loose toilets (makes me worry about water damage in the bathrooms -- those bolts don't loosen up on their own normally...)

I'm leaning towards passing on this, but I'm not sure...I'm worried about the potential for major problems in the coming years. I'm a buy-and-hold-forever kind of person. If I bought it now and immediately put 25k into it I'm looking at ~8% cap rate, if I did nothing to it I'd end up with ~11% cap rate (but I'm basically going to have to replace the roof). I suspect I could get that kind of return in a much nicer neighborhood for a similar buy-in price. Basically no chance of appreciation, but rental market should stay strong. 

Does this seem like a decent investment, or not?

My question is which option makes more sense for me to take? 

(Either have the deed transferred to me, or leave it with the original party) there's (basically) no cost to me for either option -- the only potential cost is figuring out a way to avoid having to pay income tax on it if the deed is effectively gifted to me. 

Don't make the mistake of thinking you have to do something with the land. If you wouldn't buy the lot on the market at 150-200k and put a building on it, you shouldn't do it. 

The alternative is your friend puts the lot on the market now, sells for 150-200k, then takes that money and uses it as a down payment/capital to invest in a more profitable location. 

I have a property that is currently owned by someone I trust 100% not to screw me. Seriously, they won't. 

The title to the property is currently in their name, and they are willing to either 

1: Sign the title over to me.

2: Leave it in their name. 

In either case I would take over everything to do with renting+maintaining the property, and, if it remains in their name, they would add me to their will so it goes through probate easily. Neither option will cost me any money, aside from (minor) attorney fees (and possibly a small tax bill for income tax). The property is 100% owned by them (no mortgage or financing on it).

I'm currently outside the income level bracket where I can take losses on property (I could only use it to offset other passive income). 

A mortgage broker I talked to recommended I leave it with the other party, since it's one less headache I need to deal with when submitting mortgage paperwork. 

I realize this is probably a bit outside the normal question around here, and it might be better if I talk to an attorney or CPA about my options and which would ultimately be better, but I figured I'd get some preliminary thoughts / figure out what questions I should ask them...

Not sure how appropriate this is where you're buying, but both my real estate agent and mortgage broker were comfortable with me submitting a cash offer and concurrently starting a mortgage application, with the understanding that I'd pay cash if the mortgage failed to close in time (closing for the cash offer was set for 30 days)

That's is what I have a problem with as I am not familiar with all the laws, and it simply isn't worth my time because I am not getting any more rent.

Why not ask for more rent in exchange for going through the extra work of figuring out how to set this up?

My thoughts: painted cabinets, white especially, almost always look cheap, but that's probably ok for the place you're trying to rent. (Personally I prefer stained) 

The duct work has to go. The fridge and stove should match, the stovetop should match the stove.

I'm unsure how much space there is between the stove and first cabinet, but if it's possible a little more countertop space can't hurt. The transition between the kitchen and hall is clunky. Something to smooth that or the same floor in both would be good. (I've had luck with pergo in kitchens...follow their instructions) 

Is the trim on either side of the door the same style? I can't quite make it out. If not it should match. 

If I were doing this, for me, I'd do light countertops like you have, a darker stained cabinet, extended over a bit towards the stove, and a pergo/quality fake hardwood floor (darker, but not dark, to go with the cabinets) in the kitchen and hallway, tile in the bathroom. I can't quite envision it, but I'd also go with either stainless or black appliances. If you're replacing the countertops, granite or marble. But...who are you renting to? That's overkill for a student or bad neighborhood rental. 

Good idea to set one. There are tons of places that will cashflow $100 / unit but are terrible investments. You want to analyze the investment by cap rate and coc returns, not how much money is coming to you at the end of the month, assuming it passes whatever minimum you want to be involved in (500/mo rent -> bigger % of rents are going to repairs, more units you'll have to manage to hit a certain cashflow number, for example) 

Not saying that cap rate and coc returns are everything, but you need to think about where you want to be. High end rentals? Low end? Something in the middle? Neighborhoods? Risk you want to take on? There are too many variables to just wing it and hope everything will work out if you have $100+ left over per unit per month. (Plus, if you have a specific niche you go after it's much easier to explain it to realtors / other people you're working with: I want SFHs in D neighborhoods that return 30% minimum coc...great, that gives someone a lot of info to help find what you're familiar with)

>And how exactly would I be able to "buy" her unit afterwards? Add in an additional clause that I buy it for $xx,xxx upon her death?

Yes, but this is where you involve your attorney to get the legal wording correct and make sure it easily passes probate etc.

You're trying very hard to justify the deal. If you have to search for a way to make the deal work out, it likely doesn't. You can offer her a 30k interest free loan(30k rent credit) in exchange for reducing the price of the building by 60k, but remember that makes your building less attractive to other people if you need out (there's an outstanding 30k loan of sorts they'd have to respect, assuming you did everything properly)

The answer is above, work out a fractional ownership system, where she retains ownership of her unit and you retain ownership of the rest. TIC or otherwise. Throw a contract in there where you get her unit in the event she dies if you like and she'll agree to it. Reduce the price by whatever metric makes sense for the part of the building she's keeping ownership of.

Do the work to separate the meters if you have to, and if that kills the profit on the deal, it wasn't a good deal to begin with.