Should we buy this rental from MIL?

[Stachetastic]

My father in law passed away unexpectedly this spring, and MIL has listed their rental properties (2 duplexes and a SFR). The single family is the only one that has ever piqued our interest. It has been listed since June, with no bites. There have been a few showings, but the current tenants moved in right before she listed it, and have been very combative toward prospective buyers during showings. The house is located in a B-/C pocket of an otherwise B neighborhood. This particular street has its share of petty theft and some drug activity, but is safe. There may be one or two vacant properties within a few blocks. We would pursue owner financing, if MIL had interest in that. She is primarily looking to alleviate the headaches of rental properties now that FIL is gone. Here are the details:

2 story/2 Bedroom/1 Bath/2 car detached garage
Newer furnace, windows, and vinyl siding

Currently listed at 39k (valued at 29k on auditor's website, which is closer to what we'd offer)
Currently rents to Section 8 tenant for 650/mo. I'm unsure if any utilities are included.
Annual property tax is 400
Insurance would likely run ~1k

We own two other rentals within 6-8 blocks of this property. We have never mentioned to MIL we may be interested, but she has said this one is not in good shape. Possibly because FIL leaned heavily toward the "slum lord" end of the spectrum. It likely could use new flooring/paint and definitely some spruced up landscaping. Even in great condition, max rent would likely be around 700. We've been interested in adding to our rental portfolio for awhile now, but haven't found any great deals. This one is a little outside our target neighborhood, but not by much. And it's only a 2BR, which concerns me in regards to vacancy (esp since both bedrooms are on the second floor). 

[patchyfacialhair]

650 rent

83 insurance
33 taxes
65 ongoing maintenance? (2% of value)
54 vacancy (assuming 1 month vacant per year average)
100 management

Leaving 315 for financing, just to break even? seems a bit rough. Even getting 700 for rent and self management really stretches it for you. In a place like this, I wouldn't depend on appreciation either. You'd want to be cashflowing from the start and a place like this, where you're already looking at having to put money into the property would only make solid sense if you were likely to get closer to 800 or more.

[K-ice]

Where can you buy a 2 bdm home for $40K?

Many people easily spend more than that on clown cars.

Since you know the area &  already have landlord experience I’d strongly consider it.

I’d still check for major issues like foundation & roof but otherwise cosmetic upgrades can be done over time.

What are the current tenants like? You will be inheriting them & depending on local rules could be stuck with them until they want to leave. Who pays utilities?

My uncle had a rule of thumb. Take the annual income, $7,800, add a zero $78,000, don’t pay more than that per door. This comes in at under 1/2 that so it’s a great deal by his rule.

Unless there are some crazy HOA fees or something missing it is less risky than deals I’ve done.

[tralfamadorian]

Section 8 tenants are usually tougher on properties than the general tenant pool. I would be concerned about profit being eaten up by repairs and maintenance costs but since you have quite a few properties in the area, you know the going rate and how much you'll need to set aside.

Regarding 2 bed vs 3- what's the tenant pool for the neighborhood? Families? Single people/DINKS just starting out?

[waltworks]

At $650 a month, overhead is the determining factor. A $40k house isn't that much cheaper to maintain than a $400k house, so I'd assume maintenance/capex of something like $2-3k/year. Call it $250/mo. Add $110 for insurance and maybe another $50 for vacancy...

I dunno. If I had a dozen others and a manager in place already, sure. I wouldn't self manage that place for the tiny amount of money you'd make.

-W

[Stachetastic]

Thanks for your replies! I haven't responded because we are still gathering some more info. The neighborhood is mostly young families, with a few older folks who have lived there for decades. MIL has stated that if we are interested in purchasing, she will give us a "significant discount." We do not yet know what that means. DH has asked her for specific numbers. I also need to find out what (if any) utilities she is currently paying. Current tenant is not Section 8, I was mistaken. Previous tenants were, so we know it is Section 8 approved. DH has met current tenants and they intend to stay indefinitely; they are very happy with the property (but would like some updated flooring, which I do not fault them for as FIL put about 3 different kinds of laminate in the kitchen). Current rent is 650 plus 25/mo for pet ferrets. There is no HOA.

[theoverlook]

Using the 50% rule (on average, half of market rent will be spent on costs for a rental unit) you are doing very well with this at $29k. I would jump on it. Do you self manage or hire management? I would hire management for something like this, IMHO. My reasoning is that there's not much total return (in absolute dollars) and there's high risk of confrontation with tenants in areas like that.

[Stachetastic]

Using the 50% rule (on average, half of market rent will be spent on costs for a rental unit) you are doing very well with this at $29k. I would jump on it. Do you self manage or hire management? I would hire management for something like this, IMHO. My reasoning is that there's not much total return (in absolute dollars) and there's high risk of confrontation with tenants in areas like that.

We self manage. We already own two other properties within a few blocks of this one, so it would not be difficult to add this to the mix. I also forgot to mention that if it does not sell, DH will be taking responsibility for all maintenance on the property anyway, in an effort to help his mother.

[waltworks]

Using the 50% rule (on average, half of market rent will be spent on costs for a rental unit) you are doing very well with this at $29k. I would jump on it. Do you self manage or hire management? I would hire management for something like this, IMHO. My reasoning is that there's not much total return (in absolute dollars) and there's high risk of confrontation with tenants in areas like that.

Just to nitpick a bit, the 50% and 1% rules are meant to *eliminate* bad properties, not necessarily to identify good ones. Let's say, for example, that I will *give you* a property that rents for $500 a month. Sounds great, right? 50% rule says you'll make $250 a month for nothing!

But:
-Property taxes $100/mo (this is NOT uncommon even for very low value places, and varies wildly from place to place - there are houses in New England that literally can't be given away because nobody wants to pay the property taxes).
-Vacancy $50/mo
-Management $100/mo - no manager is going to take 10% to manage a single cheap place.
-Maintenance/capex $200/mo (for a SFR, this is about the minimum it will take to maintain a freestanding structure and not have it all fall apart/become unrentable).
-Insurance $50/mo

Boom, you are making zero. Even though the property was *free*.

There is a reason that people who do the low-end or multifamily thing aim for 2% rather than 1%. Many of your overhead costs don't decrease at the low end (and in fact they can go *up*) and the 50% rule does NOT guarantee you any profits.

The 50% rule is a tool to find properties that are worth further analysis. That's it.

-W

[theoverlook]

@waltworks : Sure, I don't disagree on any particular point. But this property also meets the 2% rule at $29k buy-in, and already has a tenant and is in an area the potential owner is familiar with and comfortable finding tenants for. So I don't think your points really make a difference as to whether this property seems like a good buy.

[waltworks]

@waltworks : Sure, I don't disagree on any particular point. But this property also meets the 2% rule at $29k buy-in, and already has a tenant and is in an area the potential owner is familiar with and comfortable finding tenants for. So I don't think your points really make a difference as to whether this property seems like a good buy.

I'm pointing out that depending on overhead costs, you could actually make very little/lose money even if a property like this was *free*. Maintenance and capex will KILL you if you are only getting $650 a month for a SFR - even small houses require quite a bit of upkeep. One shitty tenant and your limited profits are wiped out for a decade, too.

The only thing that would tip me toward doing it is that they already have other rentals in the same area.

-W

[Stachetastic]

MIL finally came back to us with "I don't want to have to come up with a number. Make me an offer." Ugh. Don't want to offend her, but also would like to get a great deal on this. Thankfully she's very practical and not easily offended, but still...might just sit on this awhile. She's been very busy with prepping her primary residence for sale and renovating her new condo, so she does not have the mental bandwidth to deal with this property at the moment.

[waltworks]

Run away. Family strife is not worth a crappy house.

-W

[brian.ellwood]

You've been given some good advice by these guys already.

The one thing I'd add is...

In my market (middle Tennessee) I buy houses all day for 50K that rent for $850-900/month...

Which leaves 200-300/month in NET income for me.

I simply don't settle for any less than that.

You don't want to be breaking even (or writing checks) to keep a rental property.

Find a better market/area where the #'s work better. Don't get sucked into this opportunity just because the family proposed it.

Best of luck!

[Dicey]

What's the worst that would happen if you didnt buy it?

In CA, there are huge tax advantages to keeping a property within the family. Absent something like that, I'd probably pass.

[Stachetastic]

@brian.ellwood Family did not propose the purchase; we did. There is no pressure.

@Dicey If the property does not sell, DH will be taking care of all maintenance issues. MIL will likely handle all communication with tenants, but it getting skittish about showing properties alone, so will likely need assistance renting it out the next time it’s vacant.