Here’s the deal: I’m considering purchasing two 4-plexes for $100,000 (side by side). I’m thinking of renting the units out for Section 8 to increase cashflow. Each unit would rent out for around $700/month. Because the sellers are extremely motivated to sell, I may be able to acquire the properties for less than the asking price. They were built in 1918 and show signs of possible structural damage. Should I go ahead and acquire the properties and spend a fortune remodeling the units to be up to code for Section 8 (central air installation, foundation, etc.), tear the units down completely and spend a fortune rebuilding from scratch, or…walk away from it all?
4-Plex (Two of them)
Located near a university
Extremely motivated seller
Not so nice neighborhood
Possible structural damage
Operating rental property is all about the numbers. You didn’t include the numbers, so it’s hard to evaluate this deal.
The big question here is how much will it cost to repair the property; fix the structural damage; and bring them up to rentable condition.
On the face of it, this could be a great deal. Getting $5,600 in monthly rent on a $100,000 property would be a good deal. However, if you truly need to spend a “fortune” to bring the property up to a safe rentable condition, that could change everything. You need to post the accurate numbers if you want an accurate answer to your post.
I apologize for leaving out the crucial information. It was my first post…please forgive me. The truth is, I’m not sure how much it would be to start from scratch. How do I go about obtaining that information? Do I just call various home builders to get an approximae quote for a multi-family unit? As for just taking care of the repairs, I have estimated around $60,000 for both properties. Here’s where I’m getting that number; I am considering using some of the incentives that the city gives for rehabbing in poorer neighborhoods. To utilize these incentives the rehab has to be at least 30% of the value of the property (in my case that would be just about $30,000). So it’s either $60,000 fixing up the units or whatever construction costs would be for rebuilding the whole thing (I’m assuming it wouldn’t be more than 90,000 to start over). Does that help?
I don’t think that there’s any possible way to tear down two apartment buildings and then build two new apartment buildings for $90,000 - NOT EVEN CLOSE!
That leaves repairing the existing buildings. If you could repair them for $60,000, then the numbers would look like this.
Gross Rents: $5,600
Operating Expenses: $2,800
Debt ($160K, 30 yr, 7%): $1,065
Cash flow: $1,735 or $216 per unit per month, which is EXCELLENT
However, all that assumes that your information is correct and that you can actually rent them to paying tenants. These numbers are EXCELLENT, which makes me suspicious. Is the purchase price $100K per building or $100K for both buildings? Are you sure about the rents? They seem very high for very low cost buildings. You need to be sure!
Thank you so much! This is why I came here. I have a few questions. First, do you know about how much it would cost to tear down and rebuild 1 4-unit building (assuming it’s 3,014 sq ft)?
Second, I wouldn’t factor in any debt because the plan is to pay cash for everything. ( You were right, the price is 100,000 for each building but since they don’t seem to be in that great of condition, I was hoping to get them both for $100,000 if I offer pay cash…and since they’re so motivated to sell). Does that make a difference? Also, I did some more research and found out that the current tenants are paying $500 a month for rent. So,
Gross rents: $4000
Operating expenses: $2000
Cash flow: $2000 or $250 per unit per month
Did I do that correctly?
Why do you have to tear them down and start over when they only need $30,00 each to repair? I’m more confused than I usually am!! :biggrin
Well, the $30,000 is just the minimum that we have to use in repairs to receive the incentives from the city. I guess I was just thinking that I didn’t want to have to wind up paying far more than that (because of unexpected costs) and then find out later that it would have been cheaper to just rebuild the units and possibly make a little more from the rent. I’m just not sure how much the rehab would cost. I do have an inspector scheduled to come so that I can have a better idea of how much it’s going to be but I’m just going off of my preliminary number of $60,000 because I know it would be at least that much.
You must get a contractor in there to give you a firm estimate. You can’t invest in real estate if all you are doing is crossing your fingers and hoping.
You can’t know how much to offer unless you know how much it is going to cost to do the repaors.
Add 15% to the contractor’s bid for cost over runs before you figure out what you can offer.
You’d be surprised what you can do with paint and new carpet. But if the units need to be re-wired, utilities separated, asbestos or lead removed, and/or heat replaced, those expenses can be substantial. If you know how much before you make the offer, you just write your offer to cover the expenses.
If something like de-leading or knob and tube wiring catches you by surprise, you are going to be hurt.
Well an inspector will objectively tell you what needs to get done. A contractor should give you the cost of the needed repairs. What if the inspector’s report scrares you away from the deal, the inspector’s fee still comes from your pocket. Maybe next time you can just bring a TRUSTED contractor with you for the preliminary inspection to spot some issues. A good contractor should be able to pick out the major costly defects.
Walk away because you are a LONG way from understanding anything about this business. One, if you buy to tear them down it will probably cost you 25K to haul it all away. And you would be LUCKY to be able to re-build for $75 per square ft which would mean it would cost 225K to do that for ONE 3000 sq st building. You asking them for a 100K haircut, which is not out of the question but you have NO idea what it is going to cost to make repairs. For 8 units you are talking $7500/unit which is doable IF there is no structural damage. Start with something more manageable if you have never done this before.
Ok ok so it’s painfully obvious that I’m new at this. But, I’d like to thank you all for bringing me to reality about my situation. From you advice, I gathered that spending about $300,000 to rebuild a new 4-unit building would not be worth it (especially in a neighborhood that’s not ideal). However, the renovation idea doesn’t seem to be a bad route, especially if I can get both buildings for $100,000. I have the funds available for the renovations so that’s not a problem. Has anyone here ever done something like this?
You can do buy/rehab/rent & hold. But keep in mind the area you’re in. If it’s in an undesirable area, what kind of tenents do you expect to live there. Certainly people with with good jobs will have options in better areas. Be realistic in the type of tenants you’ll likely to have. Also, the renovations should be in line with other rentals in the area. Rentals just need to be safe, clean & functional at a minimum. Don’t start putting high end stuff in an area where it may be stolen during the rehab. :beer
especially if I can get both buildings for $100,000. I have the funds available for the renovations so that's not a problem. Has anyone here ever done something like this?
I do that every day, but I know what I’m doing. As Brockovich point out, it is clear that you don’t have a basic understanding of the business. Buying an 8-unit building without understanding the business is an invitation to disaster. So, my suggestion is to learn the business; join your local REIA (real estate investors association); and study your market BEFORE you consider buying anything.
Ok, will do. You guys are a great help. I definitely do not want to spend the money to tear down the buildings and rebuild them because it wouldn’t be worth it in the end. For that area, I don’t think I would get the most ideal renters. I still have another question though…If I’m able to get both buildings for $100,000 (or less) and I have the money to do so, should I go ahead and purchase the properties despite them being in a less than ideal neighborhood? It’s not in the worst part of town and it is about two blocks from one of the local universities. If I can afford to hold on to the properties, should I? How do you guys make decisions like these and in an economy like this one? The way I see it, now and the near future would be great times to buy property if you can afford to do so and hold on to it. If you want to make money while you’re waiting, then renting is the way to go. Is that far too simple? I’m just afraid that I’m letting a good opportunity pass me by.
Well if you want an education the hard way, give it a shot. But it appears that you need to nail down the basics before you start investing your money. This may be a great deal, but it won’t be the only one. As you learn more, you’ll recognize deals quickly. As far this deal, get an exact # to get the property repaired. Negotiate that figure into the purchase price. Always use the 50/50 rule and the minimum $100/unit/mo. profit as a filter. Run the numbers through the filter to see if it works. Good luck.