Need Advice re: Electricity - Posted by Eric
Posted by Eric on October 14, 1998 at 22:52:54:
I am currently negotiating to purchase a ten-unit apartment building, which is being listed for 295k. At a potential sales price of 270k, it would have an NOI of approx. 45k, even after factoring in a vacancy percentage of 5% (my town runs 2-3%) and approx 5k per year for maintenence. The best part of the deal is that my uncle has offered me 60k at 8% over thirty years to use as a second to the bank’s 70% LTV at 9.25%.
If the bank goes for this, which I hope they will, since I have close to a six-figure income, excellent credit, and could thoretically raise a 20% cash down if I sold all of my mutual funds (which would seem idiotic for them to create a tax nightmare for me, since nothing would stop me from placing a second mortage on the property the day after closing, so why not just allow it upfront), my cash down equity might be as low as $21,000. And with a predicted cash flow of 19k per year, this translates to a cash on cash return of 92% per year, not counting principle payments.
So the problem?–while the units are all in decent shape, the wiring for the two buildings is 60 amp fuses (yuck). The seller’s agent was upfront in pointing this out at the beginning, and noted that this has scared off some investors, although he added that the owner has had minimal calls about blown fuses. The fuse boxes are in a locked basement, so at least the tenants can’t jimmy with the boxes.
My insurance agent has already warned me that this may cause my potential yearly premiem to be as high as $3,800, rather than the $1,800 I could more easily get with updated wiring.
Given the predicted cash flow (corroborated by his last year’s Schedule E), I am willing to buy this property, even if I may need to rewire over the next few years. My question is, can anyone tell me approx. how much it would cost to rewire these apartments (two buildings with ten units total–approx. 7,000 sq ft altogether)? If an inspection uncovers nothing worse than this known wiring problem, should the wiring alone cause me to pass on this deal?
Sorry for the length of this letter; I just wanted to explain as much about the deal as possible.
P.S. The owner is selling this “cash cow” for only 4-5x gross rents given that he bought the building as a foreclosure for 145k just three years ago, rehabed it some, got it fully rented again, and apparently just wants his six figure profit so he can move on to his next project. Maybe I’ll need to learn how to do rehabs.