Author Topic: Considering opportunity to buy somewhat peculiar rental property....  (Read 6512 times)

darkelenchus

  • Bristles
  • ***
  • Posts: 290
  • Age: 42
  • Location: Akron, OH
  • True wealth comes from good health and wise ways.
A property a few doors down from us is selling at an asking price of $100,000. There's two houses on the property, which has a total of three 2 bedroom units. Each unit was rented out recently at $700 a month. I don't know what was included in the rent.

Assuming we'd purchase the property at asking price, we don't have enough cash available for 20% down payment. We can, however, use the cash we do have and borrow against our house to avoid PMI. Still, using the 50% rule and assuming 100% financing, it looks like we'd see about a 6-7% return.

HOWEVER, since there are two separate buildings on the same property, I'm wondering if the 50% rule would need adjustment, since repair and maintenance expenses could very well be higher than what the 50% rule assumes.

Also, the homes were built in 1908 and 1914, respectively. Eyeballing it from a sidewalk walk by, the homes both seem to be in decent shape on the exterior. But having previously owned and renovated 2 homes that were over 100 years old, I'm aware that there'll likely be "surprise" expenses.

Any ideas on how I might get more accurate in estimates for ROI? It's the 2 houses on one property thing that's throwing me off.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28428
  • Age: -999
  • Location: Seattle, WA
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #1 on: August 02, 2012, 11:30:41 AM »
Theoretically the two houses shouldn't affect the 50% rule, since you can treat them as separate units.

That is, pretend they are two separate units being sold for 50k each, gross rent 700 each. 

You will have twice the maintenance, but (in theory) you should have twice the income too.  So 50% rule should hold for number of units.

The thing it won't hold for is those initial repairs due to age of the property.  50% is long term.  (I.e. new roof every 30 years and such).  If the houses are 5 years old, they'll see maintenance over the next 30 years.. if they're 70 years old, they may see it much sooner (depending on how much the current owner has deferred maintenance).

The traditional way to calculate it is figure all the costs to make it in good long term shape and add that in to your initial costs.

I.e. say the roof needs replacing in 5 years.. pro rate that backwards.  Say the water heater needs replacing now.  Add that cost up front.

Add up all the maintenance it'll need now and soon, and add that to your purchase price.  Then you will see the 50% rule long term, and NOW run your numbers on that and check out the ROI.

Assuming they're both in good shape and rehab costs are minimal (say.. 3-5k or less on each - new paint, carpet, etc.) then it seems like a decent deal (1400 rent for 100k purchase price).  Not amazing, but I probably wouldn't pass on it, depending on what else I had going at the time.

LMK if that all made sense or if you need clarification.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5235
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #2 on: August 02, 2012, 12:53:37 PM »
Actually, the potential gross rental income is THREE times $700, or $2,100, because there are three units in two buildings.  However, I would be very curious why the units are vacant, if that is what you mean by "recently rented."  Are the rents in line with the market for the area?  Is there sufficient demand for rentals in the area?

I would check with the City and make sure the two houses and three units on one lot are a conforming use.  If there is a variance or the use is grandfathered but not a currently permitted use, the property may not be mortgageable.  You also need to know what expenses you will pay and what the tenants will pay.  Sometimes these older multiple units are not separately metered.  You want the tenants paying the utilities.  If they don't, utilities will be an operating expense, and a big one because tenants will not conserve if you are paying.

Don't assume you have to pay the asking price.  Look at comparable sales, including income information, before you decide what to offer.

Finally, you may need 25 percent down, as this is essentially a non-owner occupied multi-family property.  Check with several lenders for rates and terms and get a basic pre-approval before you make an offer.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28428
  • Age: -999
  • Location: Seattle, WA
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #3 on: August 02, 2012, 01:13:10 PM »
Ah, I misread that.  Three units is even better.  Good points on the comparable rents.. 700 for a two bedroom (shared house) sounds high, but it depends on your area.

And very good point on the zoning laws.  Would suck to purchase and have the city tell you that you need to tear down one of the two houses.

As for the investment property loan, can you rent out your current and move into one of those units (even if for a short time frame) to get an owner occupied loan?
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

darkelenchus

  • Bristles
  • ***
  • Posts: 290
  • Age: 42
  • Location: Akron, OH
  • True wealth comes from good health and wise ways.
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #4 on: August 02, 2012, 02:36:10 PM »
Theoretically the two houses shouldn't affect the 50% rule, since you can treat them as separate units.

Ah, this makes sense. I guess what threw me off a bit was that the revenue stream would be different for each house, since one has two rental units and the other has only one. But this clarifies matters.

The thing it won't hold for is those initial repairs due to age of the property.  50% is long term.  (I.e. new roof every 30 years and such).  If the houses are 5 years old, they'll see maintenance over the next 30 years.. if they're 70 years old, they may see it much sooner (depending on how much the current owner has deferred maintenance).

The traditional way to calculate it is figure all the costs to make it in good long term shape and add that in to your initial costs.

Yes, good. This addresses my other concern about factoring in the age of the homes, and my experience with more frequent repairs in the old homes I've owned in the past. So, essentially roll all present and near future repairs into what you'd pay to get the property, and get it in working order.

Assuming they're both in good shape and rehab costs are minimal (say.. 3-5k or less on each - new paint, carpet, etc.) then it seems like a decent deal (1400 rent for 100k purchase price).  Not amazing, but I probably wouldn't pass on it, depending on what else I had going at the time.

Yes, as Another Reader pointed out, the rent will be $2,100. That extra $700 makes it really attractive.

LMK if that all made sense or if you need clarification.

Everything you said makes sense! I may have more questions later.

darkelenchus

  • Bristles
  • ***
  • Posts: 290
  • Age: 42
  • Location: Akron, OH
  • True wealth comes from good health and wise ways.
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #5 on: August 02, 2012, 02:36:46 PM »
However, I would be very curious why the units are vacant, if that is what you mean by "recently rented." 

Sorry if the past tense threw you for a loop. At least two of the three units are rented, from what I can tell.

Are the rents in line with the market for the area?  Is there sufficient demand for rentals in the area?

Yes, to both. It's near four colleges/universities, just outside of downtown Milwaukee, in a "desirable neighborhood."

I would check with the City and make sure the two houses and three units on one lot are a conforming use.  If there is a variance or the use is grandfathered but not a currently permitted use, the property may not be mortgageable. 

It is mortgageable.

You also need to know what expenses you will pay and what the tenants will pay.  Sometimes these older multiple units are not separately metered.  You want the tenants paying the utilities.  If they don't, utilities will be an operating expense, and a big one because tenants will not conserve if you are paying.

Yes, that's one of my biggest concerns, and had this problem in previous rental situations. I have a feeling that gas is not separately metered. Looks like electricity is, however.

Don't assume you have to pay the asking price.  Look at comparable sales, including income information, before you decide what to offer.

The assumption was for the purposes of keeping things straight for the example. We expect to get the home at lower than the asking price. My wife works for a title company, so she's got access to tools that will enable us to do our due diligence.

Finally, you may need 25 percent down, as this is essentially a non-owner occupied multi-family property.  Check with several lenders for rates and terms and get a basic pre-approval before you make an offer.

Thanks for this, Another Reader. Good to know. And thanks for your questions.

hardworkingpenguin

  • 5 O'Clock Shadow
  • *
  • Posts: 11
  • Location: Las Vegas
  • Real estate investor in Las Vegas
    • Hardworking Penguin
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #6 on: August 04, 2012, 10:55:59 AM »
I think it is a great opportunity to own this property especially with the cash flow in mind. However, without knowing all the specifics, just be careful to see what types of renters frequent the neighborhood and whether they are long term renters or not. Typically multiunit tenants tend to be a more transient, which is not always bad, but keep in mind that you could potentially have to spend more time to manage the property, deal with vacancies, and maintenance repair more so than a single family home.

I personally have a fourplex myself which I really love the cash flow but hate the management aspect of it. I did have several move outs and I haven't even owned the property for a year yet(okay, but then again one vacancy in a threeplex is not going to hurt you as much as if you own a single family)! With that being said, I personally prefer single family home rentals as it frees up a bit of my time more so than a multiunit.

Good luck though. I am sure it will be a great investment and you'll definitely learn a lot about landlording.

darkelenchus

  • Bristles
  • ***
  • Posts: 290
  • Age: 42
  • Location: Akron, OH
  • True wealth comes from good health and wise ways.
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #7 on: August 31, 2012, 01:58:57 PM »
It's been almost a month, but we've finally going to get to get a closer look at the houses (visiting family for 1 1/2 weeks, busyness of class prep and tthe first week of the semester). We've got an appt. with the realtor on Tuesday.

We did find out that gas and electric are separately metered. Don't know about water yet, though.

I'll have more on Tuesday night or Wednesday morning.

darkelenchus

  • Bristles
  • ***
  • Posts: 290
  • Age: 42
  • Location: Akron, OH
  • True wealth comes from good health and wise ways.
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #8 on: August 31, 2012, 02:04:23 PM »
Just be careful to see what types of renters frequent the neighborhood and whether they are long term renters or not.

We've lived in the neighborhood for about 1 1/2 years. I've observed a mixture of long term renters and short term college student renters. We like that it's basically within shouting distance from our primary residence. Makes it easier to keep an eye on things.

ShavinItForLater

  • Stubble
  • **
  • Posts: 149
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #9 on: August 31, 2012, 06:20:00 PM »
We like that it's basically within shouting distance from our primary residence. Makes it easier to keep an eye on things.

I would look at that as a double-edged sword.  Your rental is just down the street, positive.  Your tenants are JUST DOWN THE STREET, negative.  I would think the ideal distance would be greater than a few doors down...

darkelenchus

  • Bristles
  • ***
  • Posts: 290
  • Age: 42
  • Location: Akron, OH
  • True wealth comes from good health and wise ways.
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #10 on: August 31, 2012, 08:55:22 PM »
I would look at that as a double-edged sword.  Your rental is just down the street, positive.  Your tenants are JUST DOWN THE STREET, negative.  I would think the ideal distance would be greater than a few doors down...

Possibly. If the tenants are a bunch of nagging assholes, then, yes.

Plus, my past experience with renting property has been with renting rooms in the same house in which I lived. Only had a couple nagging assholes, but I'd imagine that them being a few doors down the road is better than them being a few doors down the hall...

ShavinItForLater

  • Stubble
  • **
  • Posts: 149
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #11 on: September 02, 2012, 10:30:09 PM »
Possibly. If the tenants are a bunch of nagging assholes, then, yes.

Plus, my past experience with renting property has been with renting rooms in the same house in which I lived. Only had a couple nagging assholes, but I'd imagine that them being a few doors down the road is better than them being a few doors down the hall...

I would just tend to think that having your landlord just a few doors down would tend to raise the nagging asshole quotient.  The same person who might leave you a voice mail or maybe even not call at all, might instead walk over and knock on your door whenever they please, specifically because it is so easy for them--they can see your light or TV on, etc.  Your tenants could be at your block party (if you have them), at your church, running into you at the grocery store, etc.  If you get along with your tenants really well, then great, but I tend to think of landlording as a business, and wouldn't count on being friends with all of my tenants.  In fact I wouldn't really want to be too friendly, if someday I have to put the hammer down on late rent, maybe even eviction.  I just think I'd want a little more distance, if it were me.

darkelenchus

  • Bristles
  • ***
  • Posts: 290
  • Age: 42
  • Location: Akron, OH
  • True wealth comes from good health and wise ways.
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #12 on: September 03, 2012, 07:30:40 AM »
I would just tend to think that having your landlord just a few doors down would tend to raise the nagging asshole quotient.

Sure, it very well may.  I've had to deal with late payments and an "eviction" in the rooms I rented out. And I ran into these people in my kitchen, not my grocery store. In other words, I'd imagine it won't be much different, except that they're not occupying much of the same living area as me. Whatever the annoyance in this regard, it doesn't seem it'd be problematic enough to turn down the opportunity.

darkelenchus

  • Bristles
  • ***
  • Posts: 290
  • Age: 42
  • Location: Akron, OH
  • True wealth comes from good health and wise ways.
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #13 on: September 11, 2012, 07:54:21 AM »
We checked the property out late last week. Two of the three units were recently renovated and had tenants of 2+ years. The third unit needed renovations that would run approx. $20,000 DIY (my preference, otherwise the renovation cost will be double or more). Both houses need a new roof (approx. $6,000, and I won't DIY). Basically, we'd be taking a small loss without the third unit. We decided against pursuing it any further at this point due to the fact that we don't have the time to renovate the third unit any time soon (too many other projects and obligations going on). If the property is still on the market in 9 -12 months, we'll revisit the opportunity.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28428
  • Age: -999
  • Location: Seattle, WA
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #14 on: September 11, 2012, 08:04:08 AM »
That may still be worth an offer of 60-70k or so, and then paying for the renovations.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.

darkelenchus

  • Bristles
  • ***
  • Posts: 290
  • Age: 42
  • Location: Akron, OH
  • True wealth comes from good health and wise ways.
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #15 on: September 11, 2012, 08:35:26 AM »
That may still be worth an offer of 60-70k or so, and then paying for the renovations.

True. Won't hurt to try.

darkelenchus

  • Bristles
  • ***
  • Posts: 290
  • Age: 42
  • Location: Akron, OH
  • True wealth comes from good health and wise ways.
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #16 on: October 01, 2012, 07:59:06 AM »
We put an offer in for 62k. The owner rejected it outright and said he won't go any lower than the mid 90k range. We're currently looking at another duplex with potentially better ROI.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28428
  • Age: -999
  • Location: Seattle, WA
Re: Considering opportunity to buy somewhat peculiar rental property....
« Reply #17 on: October 01, 2012, 03:01:25 PM »
Cool.  Maybe if it sits a few months more you can present your offer again with a list of repairs that you'll have to do that will show the owner your offer is reasonable.
I am a former teacher who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and am now settled with three kids.
If you want to know more about me, this Business Insider profile tells the story pretty well.
I (rarely) blog at AdventuringAlong.com. Check out the Now page to see what I'm up to currently.