I am a new investor but have had a rental property (SFH) for about 10 years.
I’m currently working on my first deal which is a set of sixplexes. The owner is asking $390K for both. He will not split them up and he has owned them for about 3 years.
After some research I see that he paid $366K when he purchased them and the only improvements that he has really done is a new carport in one of the units, a new furnace (boiler) in the other unit and various minor repairs as tenants moved out.
Currently all units are being rented. I see a lot of room for improvement as far as increasing the value of the units. For instance I called around to similar apts. and found that he is charging a lot less than the median. $440/mo max and $400/mo to some tenants, where as the other buildings are charging $460/mo up to $480 for multiple tenants. He also has all tenants on month to month leases after their leases expire he doesn’t renew them. This is my first question. What should I do about this. Is it in my best interest to put everyone on a lease once I obtain the property?
I thought about a questionare being given to all the tenants. Asking if they smoke, how many people live there and if they have pets. Then readjusting their rent accordingly and providing a no smoking policy throughout the building(s). My only fear is that everyone will move out and I will immediately be scrambling for tenants, which would be a bad thing. Some of the tenants have been there for 7+ years and are paying the same as when they moved in. I don’t want to scare them away but I think that a rent increase is fair.
Ok now the numbers.
Total current rents= $59,760
Total current expenses= $26,274 - this includes previous years utilities, Taxes and insurance, a vacancy rate of 3% (is this right?) and repair costs of $850 per building (too low?).
Debt service for ($390K) 30y @ 7.5%=$2181/mo or $26172/yr
With the above numbers I come up with $33486-$26274=$7314/yr or $609/mo cash flow.
My plan is to offer $370K which would be about $2083/mo $24996/yr for a cash flow of $8490 or $707/mo.
The cap rate that I figured is between 8.6% and 9.05% with cash on cash of 9.38% and 11.5% depending on my final price.
Seller has agreed to do owner financing for 40k 8%/3yr balloon.
Am I missing something? What else should I consider before moving foward? I have not inspected the properties yet, should I make an offer price before I have inspected or make an offer that is contigent on inspection?
Thanks for your time and replies in advance, I hope to be on these board for a long time.