I'm not sure if this would be better to place in the journals section, but given the nature of the project and my desire for feedback and suggestions, I'm going to post it here in order to hopefully get the most visibility. I've made a couple vague posts about this, but now that the appraisal has gone through and I'm nearing a closing date I feel like things are finally "real" and "happening" enough to start posting about it here. So far everyone I have told about this deal has seemed quite eager to follow my progress, so I'll do my best to keep posting updates here as things develop. Settle in for what is sure to be a lengthy and riveting tale of my adventure acquiring a move-in ready Triplex for $55,000. (If you want to skip the backstory and get straight to the numbers, skip to the end)
Let me start by saying that this is my first real estate purchase. I am 25 years old living in central PA and have never owned a home before. I found this blog and the financial independence move a little over a year ago, and soon after decided that I wanted to execute a house hack to reduce my living expenses (and possibly even turn a little cash flow) and gain some experience as a landlord to decide if real estate is something I wish to pursue as a serious side hustle.
In early June of this year I reached out to a local friend who I know owns a couple rental properties, and asked if he could recommend any real estate agents in the area who work well with investors and could help me find a house hack. He referred me to an agent, and that agent referred me to a different agent who owns and manages about a dozen rental properties in my area. When I told this agent what I was looking for, they told me that they knew of a triplex that sounded like exactly what I was looking for. The property had not yet been listed on the market, but the agent knew the owner and knew that he was looking to sell and willing to sell cheap, as he's getting older/acquiring some health problems, and wants to get out of the real estate game. They gave me his number and the address of the property, and told me a bit about the seller. They told me that he at one point owned and managed many properties in the area, and evidently did an excellent job at it. He kept his properties well maintained and was well liked by his tenants. Evidently seller's only shortcoming is that he is often "too nice of a guy", and let his tenants get away with more than he should have (I mention this because it becomes very important to the story, more on that later.) I called up the seller and asked about the triplex, and he said that yes indeed he was looking to sell it, but unfortunately it was already pending sale to another buyer. He apologized and said that he would give me a call if things fell through.
I spent the next 2 months searching for good deals in the area, but wasn't finding anything solid. Everything was either far overpriced or required more rehabilitation than I was willing to take on (I want to learn to DIY but I'm staying away from big projects for the time being). Halfway through July I grew impatient and decided to expand my search to single family homes, since I wasn't finding any good deals on multi-unit properties and I really didn't want to spend another winter in my apartment. I did a couple showings on some unimpressive and overpriced homes, and was still coming up dry. I had almost given up hope, but then near the end of july, my phone rang. It was the seller from before! He said that the other buyer had backed out of the sale, and that if I was still interested he would like to talk business. I told him that I definitely was, and out of curiosity asked how much he was looking to sell for. He told me $55,000. At this point I already knew that he had acquired the property in 2005 for $75,000, so if the property was in as good of shape as he and the agent claimed, I knew I had to jump on this deal. This was on the same day that I left home to attend CampFI in Colorado (where I had the pleasure of meeting MMM). I told the seller that I was definitely interested, and asked if he would be willing to keep the property off the market until I returned home to go see it. He agreed and I went to inspect the property the morning after my flight home.
The building is a three story 1940s victorian style brick duplex converted into a triplex. One side is a 3br/1.5ba, and the other is a 1br/1ba on the 1st floor, and a 2br/1ba on the second floor. Both sides have finished attics and full basements with no signs of leakage. The total property size of 16,770sf includes 3,400sf of GBA, as well as a fair sized yard, wrap-around driveway/off street parking, and single car garage. From the exterior, it is apparent that the roof will need replaced within the next year or two, though as of now it shows no signs of leakage. Part of the stone foundation will need some simple patchwork (though the interior and exterior structure are solid and sound and the basement has no leakage).
The two smaller units are presently unoccupied and both in relatively good shape. Both could probably rent as is, though I plan to re-floor the upstairs kitchen as it has some serious damage from a previous tenant's dog. There's also some atrociously hideous green carpeting that I want to replace with laminate hardwood, as a general act of kindness towards my future tenants. Otherwise than that, everything is in proper shape for the C class neighborhood that the property resides in.
The third and largest of the units is where things get interesting. The good news is that it is in excellent shape, easily the nicest of the three units. It needs absolutely no work of any kind; in fact it is actually in better shape than the apartment I'm currently renting. Natural hardwood floors that look like new, fresh paint, and an overall great layout (there's a closed porch that wraps around most of the unit, creating an excellent temperature barrier that I can only imagine is great for heating and cooling efficiency.) This is the unit I intend to move into, with my girlfriend and a friend of mine who currently shares my apartment and wants to rent a single room out of this new place. This arrangement is ideal, as it allows me to pull rent out of all three units, even as I live in one of them.
Now on to the bad news. Great as the third unit is, it is also currently occupied by an existing "tenant". I put that word in quotations because this individual has not paid a single cent of rent in over a year (remember earlier when I said about how Seller's fatal flaw is that he's too nice of a guy? This is where that comes into play.) Apparently at some point this guy missed a rent payment, and the seller let it slide. So he missed another, and another, and another, and you get the idea. When I asked the seller about this, he said that he let it slide because A) he didn't want the hassle of evicting the guy, B) he didn't want the hassle of keeping up with the yard work, and C) he was already planning to sell the property and the "tenant" said that he would leave once the building was sold. So basically, the best of the three units, which is the one I plan to move into, is occupied by a squatter who is still protected by tenant rights because the seller never made a move to evict him this entire time, which my attorney tells me constitutes a verbal month to month lease, the terms of which are "You can live here and pay $0 in rent". What's more is that because of COVID, evictions are very difficult to get. I later found out that this tenant/squatter is the reason that the last buyer backed out of the deal. I can't say I blame him, but I'm not about to give up so easily.
My agent has been in contact with the "tenant", and seems to be successfully bluffing him into leaving. She has told him that we'll be changing the locks after closing, so if he doesn't want locked out he has to be out before then. Legally we absolutely *can not* do that, but he seems to be buying it. If he doesn't leave, my plan B is to offer cash for keys. Seller has admitted that he can't really trust the guy's word that he'll leave by closing, and has offered me an extra $1,000 as an incentive for me to handle it. I figure I'll take that money and offer cash for keys. If that doesn't work, I guess I'll have to press for eviction, though I'm not sure how successful that will be. Mostly though I just want this guy to leave peacefully and not trash the place on his way out. As I said, it is the nicest of the three units. If he punches holes in every wall on his way out, that's going to really alter my expense budget.
The financing process with the bank has been gruellingly slow. I've been under contract since early August, and the appraisal *just* came back a few days ago. I'll be speaking to my representative at the bank in the morning, and hopefully getting a closing date.
So that's the story up to present. We aren't out of the woods yet, but I'm very hopeful that everything will fall together and I will be able to say that I successfully acquired a move in ready triplex for $55,000. Below are the juicy numbers. I accounted for 10% vacancy, and set aside 10% for routine maintenance costs and 10% for large capital expenditures, as well as $40/mo per unit for trash pickup. I'm also allowing a $15,000 renovation budget, which includes $10k for a new roof, $2k for a new furnace (switching the largest unit from oil to natural gas), $2k for replacement flooring, and an extra $1k for anything minor.
Purchase Price: $55,000
Down Payment: $5,500 (10%)
Interest Rate: 4% (30 years)
Estimated mortgage payment (PMI, taxes, insurance included): $470
Closing Costs: ~$2,000
Renovation Budget: $15,000
Total (Purchase Price + Renovation): $72,000
Estimated After Repair Value: $80,000 (this is the low end among comparable properties that I've seen in the area, but many go for excess of $100k)
Expected Rental Income: $1,600/mo
2% rule: 2.27%
ROI: 27.02%
Pro Forma Cap Rate: 10.70%
Year 1 Cash Flow: $490/mo
I guess that about sums it up. Sorry if this is poorly formatted, there's a lot of information and I'm still pretty new to all of this. Anyway, I'd appreciate any feedback or suggestions you guys have. I really value the experience and knowledge that so many of you have, and I'd love to hear your thoughts on this. I'd also be happy to answer any questions, or edit this with any missing information.