Need Advice re: Electricity - Posted by Eric


#1

Posted by Eric on October 15, 1998 at 19:02:26:

To all who responded,

Thank you for your advice. Bud was right in predicting that the units are heated with gas, and I believe that most if not all of the stoves are gas. My purchase and sales offer sheet obviously has a contigency clause for an inspection, although I hoped to avoid paying for an inspection prior to even having a contract. Actually, I found out today from the agents that the sellers are in possesion of a formal inspection report that was done in the Spring, with that deal having fallen through allegedly due to the borrower’s inability to secure financing. They agreed to share this report with me.

An electrician who spoke to my wife today (and hasn’t seen the property) estimated possible repair costs as ranging from $2,800 “to patch things together” to a high of $12,000 for a total rewiring (“two men working for a couple of weeks”). The cost of approx. 1k per unit for a total rewiring seems in line with the quote from the post above pertaining to the row houses, although I would obviously gather multiple bids before even considering a major rewiring job.

I’ll keep you all posted

Eric


#2

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.

Eric

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.


#3

Re: Need Advice re: Electricity - Posted by Bud Branstetter

Posted by Bud Branstetter on October 15, 1998 at 12:54:41:

Two separate problems. 60 amp service may or may not be sufficient. Electric stoves, microwaves, window air, electric dryers- need to upgrade. Circuit breakers instead of fuses is not that expensive. If the place is not up to code and you have to bring it up to date it can get expensive. No more that 6 foot from an outlet in a room can cause some expensive wiring/sheetrock repair. No ground wire same problem. Older cloth covered or aluminum wire-good luck. In all likelyhood you have gas stoves and gas heat. Central air or not? It can be as simple as running separate circuits for a stove or air conditioner. Are they metered separately? A good inspection by someone qualified is needed before you commit.


#4

Re: Need Advice re: Electricity - Posted by DanM (OR)

Posted by DanM (OR) on October 15, 1998 at 10:52:14:

Listen to Rick below!

I am not an ELectrician, but I am a Mechanical Engineer that works with Electricians and Electrical Inspectors all the time. I would have an Electrical Inspector/ and or an Electrician check it out. It may cost you a whole $40-$100. However, it could save you multiple thousands of $$$$$.

Have it checked out. I would also look for a different insurance agent. One who doesn’t look for excuses to rape you.

Good luck!

Dan


#5

Re: Need Advice re: Electricity - Posted by Ray(OH)

Posted by Ray(OH) on October 14, 1998 at 23:46:37:

My brother and I are in the process of buying a 24 unit apartment building. It was built as 8 row houses in 1908, each house having 3 floors that were converted to 3 one bedroom units some time ago. The present owner hired an electrician to do the work as a side job for 25K.
Hope this helps


#6

Re: Need Advice re: Electricity - Posted by Rick from Ohio

Posted by Rick from Ohio on October 15, 1998 at 06:40:48:

I’m not sure what the cost would be, but $25k sounds pretty steep to me… I used to be an electrician.

First of all, there is nothing wrong with fuses and fuse boxes. Some will argue that they even prefer fuses over circuit breakers because fuses are not prone to mechanical dysfuntion. Second, I think your insurance agent is setting you up for higher rates. The issue is not 60 amp services which are fused–the real safety issue is the integrity of the fused disconnects, the connections, the wire, and whether the tenants are inclined to overload the circuits with excessive usage like window air conditioners. I would have it inspected by a local, licensed electrician before I spent that kind of money.

Just my two cents worth!

Rick from Ohio


#7

Re: Need Advice re: Electricity - Posted by Ray (OH)

Posted by Ray (OH) on October 15, 1998 at 22:53:37:

I don’t believe fuses would be up to code, at least not in Cleveland.
Also, the 25k includes wiring the 24 units and the common areas seperately, on independent meters so the tenants can now be responsible for their own electric bills. Also, by eliminating the electric bill from the building expenses, the NOI is increased, which in turn will increase the value of the building, possibly as much as 60K-70K.( according to several appraisers)
Actually, I don’t think 25K is all that steep.
btw, Rick, what part of Ohio are you in?