A Deal In My Lap, Or A Sword Overhead?

I have one, single family, rental house: the little brick box next door. Four bedrooms, 1 1/2 bath, backyard and a small deck. I bought it at a courthouse auction about two years ago strictly as a defensive move. It had been foreclosed twice in the previous four years and scammers had flipped it into the ground. Now that the tenant is gone, we’ve begun to rehab. It’s a hassle, but one we can afford for now. ( We paid 42K, on a 80K mortgage default, and our bank has appraised it at $110 and given us a $72K line of credit against it. )

So far, so good. When the plumbing and electric upgrades are finished, along with the floors, doors, and windows, we’ll rent it out again. The location is on a main street, with bus service, across from a large park, two miles from a large hospital and medical school complex.

Now the plot thickens. There’s an identical rental house on the block two doors down from our rehab job. It probably needs about the same level of rehab ( $20K ). The owner wants to sell it. In fact, she wants to sell me Five buildings! There’s the little single family, a two-flat and a four-flat on another main street on the South side of the same park, another four-flat on a side street 1/2 block from the park, and a final four-flat a few miles away. ( Her husband passed away last year, and she and the two college age kids can’t handle the properties since Dad had done all the handyman chores. )

I’d like to do well, by doing good, but can’t afford to upgrade the neighborhood just for grins. They are asking $490K for the lot, and it’s a decent price, below retail comps, but only two of the fours have rehab potential when the Sec-8 leases run out. The third four is destined to stay that way for the forseable future … ( light industrial accross the street, crackheads down the block ).

The mortgage brokers have given us some numbers, and we’ve crunched the taxes and utilities, the current rents, insurance, and reserves. They’d have positive cash-flow, but not by much.
Rehabing the two four’s, the duplex, and the single would cost about $120- 140K, ( through a second mortgage. I guess ).

But, vacant rental signs have been sprouting in the neighborhood for the past year, and I know the market is very soft. With so few units, just a couple of vancancies, or trouble filling them in the first place, could put us in the red.

Enter the “dealmaker”. Took some snapshots of the properties to a guy I’ve known for decades to ask for advice. He’s been very successful in RE with over 200 properties developed, owned, or managed. Well … he looks at the pictures, knows the area, and offers a partnership. Whoops! Hey, I like the guy, but we’ve never done business, and he has quite a rep as an “operator”, ( deserved or not ). I have some legal training, and know that 50/50 deals are easy to get into, but hard to get out from under.

What should I look for in such a rental property deal? What should I look out for? I know this is all complicated, but any suggestions would certainly be appreciated.

Thanks for your time and attention

Sounds like the partnership may be the way to go. That would help spread out some of the risk and work. I too would be concerned about the market. I only buy where the rent is twice the PITI. If you think that the area is rebounding and you can get in at the bottom of the upswing then go for it. If they are bringing in bulldosers and tearing down crack houses then stay away. What city are you located in. How is the overall picture there too. Our National Economic picture is looking up in my opinion but anything can heppen there with more bomb threats etc or heavier war efforts. I can not control that or predict it but only hope for the best and roll the dice. I am trying to buy all the property I can get my hands on in any location and under whatever form of ownership I can. i am very optimistic and from the aches rise the giants or something like that.

Good luck and thank you,
Ted P. Stokely Jr
11505 Sw Oaks
Austin, Texas 78737
512-301-9171 home
512-587-6177 mobile

Based on your mention of Section 8, an abundance of for rent signs, light industrial area and crack heads, I’m going to risk the cardinal sin and ASSUME these are low income areas. There are varying strategies for landlording, depending on the type of property you own. In other words, you might have a different investment strategy for low income, middle class (bread-and-butter), and higher priced homes. Typically, low income homes have the greatest rent-to-value ratio and also a higher maintenance expense and vacancy rate. In my experience, they tend to have inflated appraisal values as well.

My point: If you are buying low income rentals, you had better have alot more reason than just “They’d have positive cash-flow, but not by much.” Low income rentals demand a high positive cash-flow to justify the higher maintenance and hassle of less than perfect and tenants.

As for the partnership, I personally don’t like the idea, however, if you don’t have the savvy to do the deal, a little bit of something is better than a whole lot of nothing. Just use common sense in your partnership agreement. Obviously, get it in writing what each party is going to be responsible for and what each party will receive. Never hurts to have an attorney review any legal agreement. HTH

Thanks for the feedback, folks.

Only one of the properties is in a distressed neighborhood, it’s one of the four-flats. Very nice brick building, with a half-hex front, but there’s no way to justify any upgrades since only Sec-8 clients would live there. We won’t touch it.

Three are within two blocks of our home, and were built in 1920 or a little later. The last one, the single on our block, is decades older, around 1906. They look solid, across from a 500+ acre park, a block from a public H.S. and a Walgreen store, with a large grocery another block down the street. The location is good, but … I do wonder where the upscale clients are going to come from if we rehab.

How much should we hold back, per unit, for repairs and contingencies? One person told me to keep $2K per unit back, which soulds like a lot … but a new plumbing system, or a new roof, could be a monster headache.

I should be talking to my potential partner later today, having faxed some figures to him along with a couple of pages of memos & questions. We’ll see what he thinks of my amatuer analysis.

Have a great weekend!


Welcome to the board.

A couple things stand out. Forget the partnership. Why not get the whole package under contract for less than their asking and flip the whole thing to your investor buddy? If he’s got 200 properties he should be able to do this by himself.

Also, unless I missed something, you said they don’t have much cashflow. So, why would either of you want this package? Do you just need a tax break?

It doesn’t add up for me. Time is on your side not the sellers. I say, wait a few months and then approach them again. They’ll probably be more willing to deal. Doesn’t sound to me like those properties are going anywhere fast.

Hope this helps.