First Property Purchase?

[pstu24]

Our realtor for our personal home buying/selling has learned of my interest to get into properties and has kept on the lookout for potential properties within my appetite. Here is one he just sent to me 24 hours ago, and I wanted to know more than anything should I find out more, jump on it, or run!

Basic Info:

Home is 2,800 square foot duplex in the city I am located in. Area is not "bad," but is below average on crime-desirability scale. Home is listed at $40k, which is what is prompting me to look deeper. Our realtor was contacted by their party, and the story is the owner was living upstairs and was collecting rent from the tenants living below. Downstairs tenants have been there a decade with no plans to leave, and their rent would cover the mortgage. The children who just inherited the place after the owners death have no desire to become landlords, and as most live farther away out of town, just want to unload the place (it was at 50k when it was listed on June 1st, and after 6 weeks dropped to 40k).

Currently, I think I want to do the following:

1) Schedule a walk through to assess condition. However, I was told by our realtor that it would pass inspection (he's also the listing agent).

2) Price out cost to renovate upstairs apartment. I was told the owner lived there for years and really didn't update anything. BUT the renovation upstairs could be paid by the additional rent I would receive for renting out the upstairs

3) Verify what rights / obligations I would have with the existing tenants downstairs

4) Verify funding. How much would I actually need to have either in cash or to be approved for a loan that would essentially only be 40k total?

My wife and I just bought our own house in the fall, so while we aren't broke we are still a little low on funds due to the down-payment we put down. Would the other party want cash only? Should I try to finance this with a home equity loan on my current home? Could I do a traditional mortgage for the property?

Thanks for the help! I am just worried about seeing another possible deal AND the chance to get started pass through my fingers because I am too worried to actually do something and step forward!

[CareCPA]

One additional step I would do: check with a local property manager or two for information on market rate, turnover frequency, and average vacancy period for a house in this area/condition. A two month vacancy every year will kill your returns. Just because the current tenants have been there so long doesn't mean that is common in your market.

People settling estates usually want cash to make the process faster. I have used a home equity on my primary residence to purchase a rental, and the process is much faster (you can close in a week or two if you're really motivated). I would check with the agent before going this route to see if they have a rough timeline.
For traditional, some banks won't finance a property that small (some have $50k minimums).

Also, be skeptical since the agent is working both sides of the deal. I'm not saying they don't honestly have your best interest in mind, but make sure you do your due diligence.

[Jon Bon]

Our realtor for our personal home buying/selling has learned of my interest to get into properties and has kept on the lookout for potential properties within my appetite. Here is one he just sent to me 24 hours ago, and I wanted to know more than anything should I find out more, jump on it, or run!

Basic Info:

Home is 2,800 square foot duplex in the city I am located in. Area is not "bad," but is below average on crime-desirability scale. Home is listed at $40k, which is what is prompting me to look deeper. Our realtor was contacted by their party, and the story is the owner was living upstairs and was collecting rent from the tenants living below. Downstairs tenants have been there a decade with no plans to leave, and their rent would cover the mortgage. The children who just inherited the place after the owners death have no desire to become landlords, and as most live farther away out of town, just want to unload the place (it was at 50k when it was listed on June 1st, and after 6 weeks dropped to 40k).

Currently, I think I want to do the following:

1) Schedule a walk through to assess condition. However, I was told by our realtor that it would pass inspection (he's also the listing agent). LOLZ

2) Price out cost to renovate upstairs apartment. I was told the owner lived there for years and really didn't update anything. BUT the renovation upstairs could be paid by the additional rent I would receive for renting out the upstairs

3) Verify what rights / obligations I would have with the existing tenants downstairs

4) Verify funding. How much would I actually need to have either in cash or to be approved for a loan that would essentially only be 40k total?

My wife and I just bought our own house in the fall, so while we aren't broke we are still a little low on funds due to the down-payment we put down. Would the other party want cash only? Should I try to finance this with a home equity loan on my current home? Could I do a traditional mortgage for the property?

Thanks for the help! I am just worried about seeing another possible deal AND the chance to get started pass through my fingers because I am too worried to actually do something and step forward!

You list is fine, but it feels pretty dang complicated for a first time buyer. You do seem to be trying to do your do diligence. Your attitude and approach feel correct based on the plan above. However lots of issues here.

1. Multifamily homes are treated differently then SFR by lenders. You could always do a HFA loan, but those appraisals are kind of a PITA.
2. An agent trying to handle both sides is a big red flag. This is like conflict of interest 101.
3. There is also no way the realtor can know it will "pass inspection" Because the inspection is completely up to YOU if it passes or fails.

My guess is you could not do a traditional mortgage on a house this cheap, but I could be wrong. I would keep looking around, houses that cost 40k are usually not flying off the shelves if you will.

Keep looking and good luck out there!

[SwordGuy]

You need to run the numbers.  Real estate is a numbers game.

If you don't know how to run the numbers, then get this book and (drum roll please!) run the numbers:

https://www.amazon.com/Estate-Investor-Financial-Measures-Updated/dp/1259586189/ref=sr_1_1?ie=UTF8&qid=1500394719&sr=8-1&keywords=frank+gallinelli

Gross rent per unit? 
# of units.
Property tax
Utilities.
Insurance.
Set aside for Repairs
Property Management
Emergency fund for big repairs early on
Other assessments and fees
Vacancy rate
Property values trending up or down in your area.

Too many unknowns for us to say yes or no.

[pstu24]

Appreciate the help!

Like I said, I have been going through these things for a while and have been wanting to dip my foot into the rental and real estate market for a while now. However, you have to actually go forward at some point! These all help!

[waltworks]

At the very low end, you are fighting a serious battle with (typically) property taxes and maintenance. Especially maintenance, since renters in a lower end property are going to tend to trash things (as well as not tell you when there's a minor issue until it turns into a major one). Replacing a roof or a furnace isn't any cheaper on a $40k property than a $200k one, either. If you assume maintaining a $200k single family house costs $2-3k/year, the $40k duplex will probably cost about the same (or more) - which is a HUGE hit if you're only getting a gross $800 in rent or something.

This is one big reason multifamily investors typically look for 2% rule (property rents for 2% of it's purchase price, per month) places at minimum.

-W

[pstu24]

Thanks for the heads up! I know there are many, many points to consider for property and I don't pretend to be an expert. However, there is a very advantageous factor going on in that the city I am in has actually shrunk (just slightly) in the last decade, and real estate prices have actually remained stagnant (as in not come down). Which is very curious, because using things like Sperling's cost of living calculator, you can see the region I am in is cheaper to live in than the average American city, BUT the house is typically as much as 20% higher.

All of this means even though people could get better deals by buying than they do renting, the rental market is always pretty crazy.

With simple numbers, the purchase including reno itself should *hopefully* be less than 45k (including closing costs). The current downstairs tenants are in their late 50's with no intent to move (have been there for almost two decades). They are currently locked in at $500 / month. Finding a tenant in the upstairs unit is obviously crucial, but the downstairs tenant alone essentially covers the costs of the place.

By the way, the interesting thing about the area I am currently in: Average Household income - 45k annually ... average home price (from a few different sources) between 75k-90k.

[Jon Bon]

Thanks for the heads up! I know there are many, many points to consider for property and I don't pretend to be an expert. However, there is a very advantageous factor going on in that the city I am in has actually shrunk (just slightly) in the last decade, and real estate prices have actually remained stagnant (as in not come down). Which is very curious, because using things like Sperling's cost of living calculator, you can see the region I am in is cheaper to live in than the average American city, BUT the house is typically as much as 20% higher.

All of this means even though people could get better deals by buying than they do renting, the rental market is always pretty crazy.

With simple numbers, the purchase including reno itself should *hopefully* be less than 45k (including closing costs). The current downstairs tenants are in their late 50's with no intent to move (have been there for almost two decades). They are currently locked in at $500 / month. Finding a tenant in the upstairs unit is obviously crucial, but the downstairs tenant alone essentially covers the costs of the place.

By the way, the interesting thing about the area I am currently in: Average Household income - 45k annually ... average home price (from a few different sources) between 75k-90k.

I would recommend something a little more turn key for you. I def agree with Walt on the price to maintenance ratio. a 300k house might have 3k a year, but a 30k house is probably still going to have close to 3k a year in maintenance.

find something along those lines and post it on the forums, the MMM hivemind will sort it out for you.

[waltworks]

Seriously, you need to sit down and break it all down:
-Property taxes (should be able to look up)
-Expected maintenance of existing stuff that needs it
-Ongoing maintenance/CapEx (new paint every 5-10 years, new carpet every 5 years, new roof every 25 years, new HVAC, appliances, etc)
-Vacancy (I'd assume 1 month a year, ~8%)
-Management costs (if you want to do it yourself, expected time commitment and what you want to pay yourself). Assume 10% of gross rents here if you don't want to guess.
-Expected legal/insurance fees - probably no tenant will ever sue you, but they can and do.

My back of the envelope on this say you're spending $500 a month on maintenance, vacancy, and management. You still need to pay property taxes, mortgage (if you finance the entire $45k, that's $230/mo at 4.5%/30 year), and some sort of shit-happens number. If we say $150/mo for the taxes and shit-happens, you're at a net of $120/mo.

I would *bet* that if you're grossing $1000/mo on this property you will end up about breaking even (assuming you financed the $45k investment at some reasonable interest rate) or maybe making a tiny bit of money. But it probably compares pretty poorly with just sticking the money in an index fund.

If finding all these numbers and doing the homework seems like PITA, you should not be in the rental business.

-W