NEED ADVICE ON POSSIBLE PURCHASE OF RENTAL PROPERTY

[meench]

I'm a new investor and would like some advice from the pros.  I looked at a property today that is currently a small duplex.  I got the lead by just cold calling the owner.  He is about 75 years old and owns the house outright (no mortgage).  The 2001 tax appraisal shows the house at $50k.  He currently rents out each side for $350 per month.  The taxes and insurance are about $110 per month.  It could be converted to a single family home, but the house is about 1100 square feet.  The house is not aesthetically in great shape but it is sound.  Roof is good and hvac works fine.  It is in a low income neighborhood but close to downtown Nashville and in a very convenient area (a lot of shopping, restaurants, e.t.c...).  The owner seems flexible with the financing and it seems would just like to get rid of the headaches of rental property.  Please feel free to correct any of my calculations:

Gross Rent (monthly)    $700
Vacancy Rate (10%)     ($70)

Net Rent                       $630

Maintenance Reserve   ($70)
Taxes & Insurance       ($110)
Utilities                         0
Miscellaneous               ($30)

Net Operating Income
(before mortgage)         $420


The buyer handed me a piece of paper that said he would take $48k for the house "as is".  I think that we can get him down to $44k.  We may have to spend a $1000 fixing up the property.  Assuming that no major repairs are needed, what offers should I make to the seller?  I can put down $5000.

Thanks in advance for any help.

[tedjr]

Howdy Meench:

Offer $40,000 with $2000 down and owner to finance the balance. Ask for 5% interest on the mortgage. He may not be interested in any of these and just want cash or he may jump on the offer. It is really hard to tell what will happen without making the offer. You may just meet with and and make a verbal offer to see what happens.  I like to take blank forms with me and just sit there and start filling them out until we have a deal or the sellers says go away. Either way I  either have a deal or I know there will be no deal.

Hope this helps

[kimdrake]

If the tenants are coming with the property, make sure you check them out as well. Are the rents approriate for the market? Will there be a big increase in taxes that would raise your monthly costs? Are you sure there are no utilities paid by landlord? Many duplexes share a water meter.

If there is a lease in place you'll probably have to honor that. If they are month to month you may want to sign them to a year lease. There are differing opinions on whether month to month or a longer lease is better.

When I buy a property with a tenant, and I want to keep them in place, I make the contract contingent upon reviewing the payment history, the current lease, transfer of security deposit from current owner, credit and criminal background check of tenants (since they already live there, I do this at my expense), and my lease signed by the tenants. If they have only lived there a few months I'd check with the previous landlord as well.

Make sure your contract says something about prorated rent if you are closing on a date other than the beginning or end of month. To avoid any "he said, she said" about the security deposit I include it as an item on the HUD at closing. Another reason to review the leases is to see what the security deposit is.  

Your taxes and insurance seem a bit low to me, but that could just be the difference in where we live. I would be paying about twice that for a similar property.

Lastly, the 2001 "tax appraisal" is pretty old to be working with. I'd want to find out the value today.  Is the "tax appraisal" what the house would sell for? Where I am the taxable value is about half what the property should actually sell for. 48k could be a good deal, especially if the rents are low, then again if it is a declining area, it might not be.

Sorry to be so long winded here. Buying a property with tenants can be great, if you do all your diligence ahead of time so there are no surprises.

Good luck and let us all know how it turns out!

[Dave T]

Assuming your numbers hold up, and you agree that $48K is a fair price, how will you make the purchase?  

If you use 100% financing, the debt service at 6% will be around $300 per month, maybe $350 at 7%.  You have to decide whether a $70 to $120 monthly cash flow is good enough for you.  

[meench]

Thanks everyone for the help.  I really appreciate it.  I'll let you know what happens.