My one financial goal this year is to expand our rental property holdings and acquire a 4 plex. This is a lot tougher than I thought. We started looking in February and I went to see 4-5 places and finally found a property I liked in March. This is property #1 in the 4 plex search update I wrote back then.
Here is the 4 plex recap
Asking price: reduced from $375,000 to $350,000
Rent roll: $2,800 per month
Location: Good location next to a major shopping area and freeway. There are other plexes and apartments on this street, but one street over, the neighborhood is much nicer with all single family homes.
We made an offer to the bank at $325k + $5k toward closing cost and signed a bunch of papers. This property is a short sale and the bank took their sweet time with it. They took about two and a half month to do all their analysis and paperwork and we finally heard back from them earlier this month. They accepted our offer! Yay! (Oh so I thought.)
Once the bank accepted our offer, we scheduled an inspection and found quite a few problems with property. Here are the major issues.
- Standing water in the crawl space! This is terrible news. There is some mold and the vapor barrier needs replacement. We got a quote to fix the crawl space by adding drainage and a sump pump for $5,000.
- Spots of dry rot on eaves, trim, exterior siding. These all need to be fixed and painted.
- Toilets loose in 2 units. Need to replace wax ring and resecure. There might be some dry rot damage to the floor board under one of these toilet. This sounds like an expensive fix as well.
- All the fireplaces need cleaning and new caps. Water is dripping into the inside of the fire place during rain… The chimney chases are in bad shape and need repair.
- The roof is in good condition, but it needs demossing and some flashing repair. Gutters and downspout needs repair and maintenance.
- Old style Federal Pacific Stab Lok circuit breakers. These breakers has a poor reputation and probably will need to be replaced at some point. $5,000+
- The appliances are old and will need to be budgeted for replacement, but that’s expected. We’ll probably get appliance insurance to cover this issue. It would have been great if we could qualify for free appliance from the government, but we don’t.
OK, this doesn’t sound like a good investment anymore… No wonder their maintenance cost was so low last year. After seeing all of these issues, I got a bit scared and we sat down to figure out if we should go forward with this. Eventually, we decided to make a counter offer because there are so many costly repairs. We made a new offer to the bank for $300k + $5k toward closing cost. Unfortunately, the bank will have to start the process all over. Does this mean it will take two more months to hear back from them? Hopefully, we’ll get a quicker response this time because they have all the documents already. We gave them 3 weeks to respond and we’ll see what they say.
By asking for a $25,000 reduction in price, we will save $6,250 in down payment. We’ll use that money to repair the crawl space and fix the other water issues before the next rainy season. There are other issues as well, but I think the rest can be fixed as the tenants turn over.
Here is my calculation with the new offer. I increased the operating cost from last year’s $7,000 to $9,000. I haven’t add the $5,000 crawl space repair in here yet though. I should probably lump it in with the 25% down payment.
|25% down payment||($75,000.00)|
|operating cost (repair, maintenance, lawn, etc..)||($9,000.00)|
|management 7% rent||($2,352.00)|
|yearly cost of operation||($16,420.00)|
|Yearly rental income||$31,920|
|debt service at 5%||($1,210.00)|
|monthly operating cost||($1,368.33)|
|estimate monthly depreciation||$530.00|
|depreciation value @ 28% tax||$148.40|
|money to principle||$300.00|
|Monthly net worth gain(cash flow + depreciation value + money to principle)||$530.07|
|Yearly net worth gain||$6,360.80|
Well, what do you think? I know we have at least one real estate expert reader – Krantcents owned quite a few rental properties before and he can probably give us some pointers here. The monthly cash flow doesn’t look very good in the first year, but I’m 90% sure the rent can go up once the place is spruced up. I checked the rents on the same street and I think a 4 plex in a better condition can bring in about $3,200 per month.
Anyway, if the bank declines our offer then we’ll keep looking. I think I’m done with short sales, though. The wait is just too long. Our real estate agent told us the market is actually pretty good recently. There are only a few properties for sale so inventory level is only around 4-5 months.