Case Study: $99K Triplex @ $1750/mo

[zephyr911]

It's an older home rebuilt as 3 units. HVAC and appliances 6 years old; roof is older and needs replacement; no other known repairs. 2 long-term tenants plan to stay indefinitely, #3 just moved in on a new 1-yr lease. Owner has 20+ properties, is old and in ill health, and is cashing out everything to retire. Price is firm; she believes it's below market and she's not in a rush to sell.

List price: $99K
Total rent: $1750
Taxes ~$100/mo
Insurance ~$150/mo
Buyer: my LLC (I am 1 of 3 members); commercial financing 80% at 5.875% (payment ~$550).
Financials: 2 props clearing ~$1k/mo; partners adding $1k/mo total in new money; Cash on hand $11K; $15K line of credit at 11% is unused. My stake in this LLC is about $18K, or 7% of my Stash, but has grown fast over its first 18 months despite some mistakes... I tend to be less risk-averse inside the LLC, but I don't want to be reckless, especially since others are involved. Love to hear your feedback.

Property is 100 miles from our base and we have a nearby friend willing to manage; I think for 10% we can get basic management *and* some highly competent routine maintenance, plus a reliable referral network via his construction experience.

COA 1: use mix of cash and LOC for down payment, using post-buy profits to pay off LOC and fix roof in 6-9 mos total.

COA 2: use buy/renovate financing package, replacing roof and upgrading fixtures, possibly reducing cash outlay, as the final LTV is based on post-reno value and debt service is unlikely to be a limiting factor.

$1750 on $99K is 1.77%; hard to find here, especially in a reasonably safe neighborhood with stable tenants. Between some maintenance being included in the management, and long-term tenants, our costs could easily be 40% or less and not 50%, but I think the return is high enough regardless.  Any thoughts?

[zephyr911]

Tenants pay all utils, BTW

[thedayisbrave]

Make sure you're setting aside CapEx.

Other than that, looks like a slam dunk to me!

[Bobberth]

Make sure you check out the brick. I see some darker lines. Could be moss or something not serious. Tuckpointing is something that has to be done, is expensive and adds zero value to a property. Needing tuckpointing is a negative to a property but having it done adds no real value (kinda like redoing the roof). Here in St. Louis we have a ton of brick houses and that is definitely one of the things I look out for.

Seems like a good deal. How much will the roof cost? Is the commercial financing a balloon?

You may not have much of a choice with financing at this time, but definitely try to push the purchase to mid January at the earliest. This will give you 2 more months of rent coming in and partner contributions to not pay 11% on and it helps the owner to delay paying tax on her gains and recaptured depreciation longer.

[zephyr911]

Make sure you check out the brick. I see some darker lines. Could be moss or something not serious. Tuckpointing is something that has to be done, is expensive and adds zero value to a property. Needing tuckpointing is a negative to a property but having it done adds no real value (kinda like redoing the roof). Here in St. Louis we have a ton of brick houses and that is definitely one of the things I look out for.

This is another new subject for me. I'll have to read up a bit.

Seems like a good deal. How much will the roof cost? Is the commercial financing a balloon?

I get good pricing from a solid company here because I'm a real estate agent, but it's hard to SWAG this. $6-8K maybe? I don't even know the size of the roof... the building is 2800sf but it's 2 stories.
Our loans are on a 30-year amortization schedule with a balloon at 5 years.

You may not have much of a choice with financing at this time, but definitely try to push the purchase to mid January at the earliest. This will give you 2 more months of rent coming in and partner contributions to not pay 11% on and it helps the owner to delay paying tax on her gains and recaptured depreciation longer.

For sure. We aren't even going to look at it in person for at least another 10 days, so mid-Jan would be best case even if we offered right away. This one will probably take longer because it's out of town, FSBO, and would have unique administrative and logistical details to sort out.

[Bearded Man]

Three rentals for the price of 99K? With that kind of gross rents and such little expenses? SLAM DUNK. How is the neighborhood? Declining? Growing?

[zephyr911]

Three rentals for the price of 99K? With that kind of gross rents and such little expenses? SLAM DUNK. How is the neighborhood? Declining? Growing?

It's a suburb of Birmingham that probably suffered some post-industrial decline and then rebounded. My point man lives 2 miles away and his neighborhood, which I visit often, is transitional with many positive signs. He says this area is OK. He wandered by and ended up talking to one tenant, and put me on the phone with the guy when I happened to call right then. Guy sounded mostly upbeat about the setting.
I'll get a better read when we go look, hopefully next weekend when our silent (long-distance) partner makes a rare visit.