Triplex purchase.

[arkerr123]

My wife and I are in our mid-late 20s. We currently earn 110/year and have 108 saved either in cash or easily liquidated items. Together, we have about 60K in a 401k - that we are not touching.

We have been looking for a place to own for about a year. We just found a Triplex in a great part of town in a Midwestern city that we will be staying in for the foreseeable future..
Listed Price: 350,000 It listed for 353,000 in mid summer. They have only dropped it 3K.
1st floor: 1400 (2bed, 1 den, 1 ba, 2 car garage. 1400 sq ft)
2nd floor: 1250 (2 bed, 1 den, 1 ba. 1400 sq ft)
3rd floor: 600 (1 bed, 1 ba. 600 sq ft)

The previous owner purchased the property in 2006 and replaced the roof, air furnaces and air conditioners. The property could use some updates to the detached garage (walls are wet inside), kitchens, bathrooms, and windows, but everything is working fine.
Units 2 and 3 are rented to grad students. The owner is living on the 1st floor.

My wife and I could live on the 1st floor and the two upper tenants could pay the mortgage. While living there, I could make improvements to unit 1 while saving money - for investments, another miltifamily property, or a SF home.

My parents had a small apartment building when I was growing up. So, yes, I have heard some horror stories.

Do you have any recommendations or suggestions?
If my wife and I do go forward with the house, how much would you recommend we place down on the loan? 10, 15, 20%?

Kind regards,
Andrew

[G-Money]

Personally, I would not want to live with or under my tenants. This would be especially true if children were in the plans. Not clear from your post whether you lived in that small apartment when you were young, or if it was a separate property. I think there's a big difference.

Might be a good investment if you want to be a landlord. But I think you'd be extremely overweight commercial real estate in that instance, with leverage to boot. If you want to be a landlord, I would strongly consider starting smaller. But I know virtually nothing about commercial real estate, other than owning a small stake in REITs.

Good luck.

[bungalow10]

If you do buy it, do it under an LLC and don't let the renters above know you own it. Let them think you manage it for someone else.

[jimkinny]

I learned in my early 20s that I was not cut out to be a landlord. It made a lasting impression on me and I have never, in the last 40 years been tempted in that direction again: just a lot of stress for the money.

jim

[Beantown85]

1. Been listed at 353k since the summer, it's now almost christmas and it hasn't sold. If you buy it, don't pay 353k, or 350k.

2. If those first numbers listed (1400, 1250, 600) are rents, again, don't pay 350k for this house. If those aren't the feasible rents, then what are these tenants under lease for, in terms of monthly rent?

3. Buying owner occupied is nice because of attractive financing, but you still need to pay the right price. If you overpay, this will turn out to be a big mistake. Need need need to get it at the right price.

4. I would personally put down 20% to avoid PMI, which is a tremendous waste of money.

[bungalow10]

deleted, mostly what Beantown said

although if you can get 39k gross on the rents, 350k may not be a horrible price (but try for better!). Depends on the other costs (taxes, insurance, who pays utilities)

[Clearly_Irrational]

You seem well capitalized and the price isn't horrible if those are the current rents. You could get an FHA loan for 3.5% down pretty easily.

I do have to agree that I'm not sure I'd want my tenants living above me. I've lived in some side by side duplexes and that worked ok, but it seems like the noises from overhead units would be pretty annoying.

If this is your first place assume you'll make mistakes and lose some money till you figure out how things work.

[TRC]

Don't live on the 1st floor.

Ask for proof that the tenants have paid and are current with rent (ie. copies of cashed checks). I bought a 3 family once and the tenants seemed great, until I actually bought the building. If I were to do it over again, I would buy it free & clear of tenants..

Get copies of the leases and read them. Are you comfortable with the language or will you make them sign a new contract?

The last owner only bought this in 2006 (at the height of the market). Why is he or she selling? Is this building a "problem"?

I hate mult-familiy units. Too much stress & work, not enought rewards.

[bungalow10]

Also think about if/when you want kids. We bought before having our first, now we are expecting our third and don't have much extra time for our four-unit rental.

Also think about if you want to live there when you start a family.

[325e]

We have a two unit. There have been some annoyances, but overall it is easier than the money from the day job.

The biggest thing I've seen is when couples have children as mentioned. Then they don't feel like dealing with it and are stuck until it is sold. We don't have children yet.

We also have a place that came with a renter. It was nice because it was turn key, but I probably would also turn over the renters. You could sign a lease until May and then raise rent if they are not to your liking.

[Watty]

Personally, I would not want to live with or under my tenants.

Plan "B" could be to rent the first floor in a few years and move someplace out so that would not be a deal breaker for me.

Be sure to look at the parking. You probably have two cars, so with the tennants cars you may need 5 or 6 parking spaces. In some area apartments without parking can be very hard to rent.

The property could use some updates to the detached garage (walls are wet inside),

And the seller did not fix that before putting the house on the market even though they did a lot of other work on the house. !!!!!!!!!!!

That is a huge red flag that it is likely not a simple fix. Mold is a huge problem(google this) especially in a rental unit where you can be sued if one of your tennants gets sick.

While living there, I could make improvements to unit 1 while saving money - for investments,

Unless you are unemployed or retired and can work on it six days a week it is unlikely that doing any major work yourself will be cost effective by just doing it in the evenings and weekends. The problem is that if it takes two months to do then you will lose two months rent and if you hire someone to do it you may be able to take a tax deduction.

Listed Price: 350,000

Even allowing that you will be living in one unit you are still buying a small business that costs over a quarter of a million dollars. Treat it like a business and have firm a business plan including professional tax advice and several possible exit strategies. The way the taxes work out will likely make this work or not.


Generally speaking I like the general plan but it would be good to find ten good possible properties, run the detailed numbers on the best five, then if the numbers look good try to buy one of the top three depending on which house you can get the best deal on.

I have known people that would make a low offer letting the seller know that if the offer is not accepted that you would not make a counteroffer until you had also gone through the first offer process on the other two. You are basically setting up an auction in reverse to see which seller will sell for the lowest price.

[Clearly_Irrational]

While living there, I could make improvements to unit 1 while saving money - for investments,

Unless you are unemployed or retired and can work on it six days a week it is unlikely that doing any major work yourself will be cost effective by just doing it in the evenings and weekends. The problem is that if it takes two months to do then you will lose two months rent and if you hire someone to do it you may be able to take a tax deduction.

I have to agree with that one. I shot myself in the foot that way a couple of times. In one instance I did several months of work at night and on the weekend, yet if I'd paid someone to do it I would have been $1000 ahead due to the effect of lost rents.

[travellight]

Good advice above, especially the reverse auction idea.

I also would avoid PMI, put down 20%. The money is made in buying well.

I would do a thorough inspection; make sure things like sewer lines are in good shape.