Expert: Russel Ray - 2/6/2008

Question
QUESTION: My name is Chris and I recently posted on here a few weeks ago looking for some help with some properties. After looking at the homes and finding the one that fits my goal, I have come across some more questions:

Here is the current Information: 3 bed; 2 bath; Duplex asking 23K; appraised at 43K; 1400sq. ft. Roof is 7 years old (still looks new); Duplex currently is rented-Upstairs (single bath & single room @ 375/month utilities payed by tenant who is occasionally late during the winter due to seasonal work but always catches up, who has been there 10 years. Downstairs-family that has been there 1.5 years, pays 400/month & never been late. Current lease is month to month. House has been on market for 6 months. Not under foreclosure. Ugly looking home in newer neighborhood (only 2 homes on block are in need of repair and one is in the process). Needs all new siding, flooring (carpet, vynal...etc) walls need paint and patching. Basement is dry and strong in terms of support beams & such. Furnace is from the 50's/60's) There is asbestos on the heat pipes and im not sure if I should get an inspection before or after I buy it, or use the inspection contigent on the offer.  I have comps of last 6 months sales in Antigo, WI. Taxes are 1.1K. I have no income or assets (besides my car which isnt payed off) I am a college student, and would manage the property myself.

My goal here is to bring monthly cash flow into my pocket and to let the equity build up in the home. I need help drawing up a deal so that I do not low ball the offer. I listed things that the house needs above. I would like to offer seller financing; if that falls through my grandma would co-sign. Any ideas? Thanks for your time and help!
Chris Jesse



ANSWER: Hey, Chris.

It sounds like you have found an ideal property to buy. Now you have to make sure it is what it is, and not worse. That requires a home inspection as a contingency of your purchase offer. Hire the best, most thorough, most nitpicky inspector you can find--I can help you find one if needed. Keep in mind that I am, indeed, biased, because I'm a home inspector. However, even when I was not a home inspector, and simply a property investor/renovator/flipper, I always hired a home inspector.

If the duplex is currently rented, then it does not necessarily need "all new siding, flooring ... paint and patching," at least not immediately. However, you would want to do all that stuff eventually to be a good landlord. Use the home inspection to document the conditions, and then get some quotes for repair/replacement, and then renegotiate your purchase offer, as necessary.

I am kind of curious about the asking price of $23,000 with an appraisal of $43,000. For income-producing property, that is very unusual. Why is the asking price so low? When was the appraisal done--if it was done more than three months ago, get a new appraisal.

If the property is as you described, and the appraisal was done within the last three months, and both tenants are good and willing to stay, and if the numbers for the mortgage/PMI/taxes pencils out (i.e., the rents pays all of that and puts another 10% or more in your pocket), then I would have no problem at all in making a full-purchase offer, contingent on the home inspection, and then renegotiate that full purchase offer as necessary based on quotes acquired for repairs/replacement documented by the home inspection.

---------- FOLLOW-UP ----------

QUESTION: Thank you so much for you help you advice is priceless!  I am so glad that you offer such a nice service!  I will take your advice and hire an inspector that is very nitpicky.  I would love to have you assist me in doing so as I have never done this before.  

What do you think about saving up the rental income, and once I have a safety net; use that money to invest back into the house for repairs and such?  

Thank you again I appreciate it!

ANSWER: Hey, Chris.

Usually investors like to get 30% or more return on their investment, but for a first-timer, 10% would be okay. Just try to increase it over the time you own the investment. The general reason why we like 30% is because we take 10% and put it into a repair fund, 10% goes into an investment account to buy more investment properties, and 10% goes into our pockets.

Since both units of the duplex are currently rented, do repairs/renovations slowly but consistently. That way your tenants will see that you're serious about upgrading the property and they'll want to stay, but by doing things slowly yet consistently, you won't put a significant dent into your cash flow for any one month.

I'll go find you a list of property inspectors who I have confidence in. Return here tomorrow at about this time and ask me for the list.

---------- FOLLOW-UP ----------

QUESTION: Thank you so much...Will do!
Chris Jesse

Answer
Hey, Chris.

This is showing as pending in my mailbox, but I sent you three names. I'm sending them again hoping that you already got them and that it's not now too late for you.

Russel

Ian Niquette
Square One Home Inspection
http://www.squareonehomeinspection.com
Mobile: 920-251-3504

Steven R. Rolling
HOME-n-SPECT
www.antigohomeinspections.com
(715) 623-3198

Timothy M. Reeder
Horizon Associates, Inc.
www.horizon-inspections.com
(866) 823-6441