May 4, 2010

Tri-plex for $50k? Too good to be True

I have an email notice setup on the site to send me email anytime that a new rental property comes up for sale in their listings.   A while back I got an email about a rental for $50,000.   I followed the link in the email over to the listing on Realtor and found out that it was a 3 unit rental.   That price for a tri-plex would qualify as a "steal" in my book.  Lower price rentals in that relatively low cost of living city usually sell for minimum of  $30,000 to 40,000 per unit.

The listing on Realtor site didn't have much useful detail.   All it really had was the city location and address.  It did list the rent income which was a healthy $1,650 per month or $550 per unit.  The listing had the name of the realtor offering the property to I did some digging and found the realtors website to look there for more information.  This is where I found out the major 'catch'.   The property is actually a lot with 3 mobile homes on it.   So they weren't selling  a normal tri-plex but instead its land and 3 trailers. 

Still the rental income seems pretty good at $1,650 a month.  Thats $19,800 income a year for a $60,000 purchase.   Your expenses could eat up 30-50% of the rent so you'll be taking a profit in the ballpark of $10,000 to $14,000.   Still not bad income for a $50,000 investment.   That is a 20% to 27% return on equity.

But then I looked closer details.  While the realtors for sale listing says the rent is $550 a month they also say that the rent "has potential to hit those numbers again with some repairs" or words to that effect.   That tells me that they aren't actually getting $550 a month but just expecting or projecting that rent.   The fact that some repairs are required means theres more costs involved in the property.

Older single wide mobile home trailers are not worth much.  I did a search in Realtor and found about a dozen for sale for $10,000 to $20,000 range.  I also found some similar sized empty lots for sale for around $20,000.  So while $50,000 seems cheap for 3 units it seems that market cost for 3 trailers + 1 lot is in the $50,000 to $80,000 range.

Trailers can depreciate in value.   Contrary to what mobile home sales men have often claimed mobile homes often decline in value over time.   I would also expect that repair and maintenance costs for an older trailer may start to get high.   However, I'm not sure how expenses for trailers really compare so this is just assumption on my part.  I honestly wouldn't be surprised if the trailers are a total loss after 10 or 20 years. 

When I first saw the ad I thought it was a tri-plex for about 1/2 market value with likely potential of 20% annual return on equity.   After a little digging I find out its just 3 run down trailers with some rent figures made up by on optimistic Realtor.

Whenever you find a potential real estate investment that looks like a "steal" you need to be careful use some scrutiny about the details.    One of the keys to being successful with real estate is buying properties for good prices, but sorting out the real good deals from the lemons can take some work.

Things to look for if you're evaluating a potential rental investment to tell if a good price is really a good investment:

* Is the rent quoted a real value based on current lease rate or is it a projection or estimated figure based on rent potential?
* What utilities does the landlord pay?   Paying heat in a colder climate can make a big difference on your profitability.
* Are the units vacant?
* What is the neighborhood like?   Is the unit 10 feet from the railroad tracks or in the 'ghetto'?
* Is the unit in need of major repair or maintenance?
* Are there any major bills due on the property like a lien for a new sewer line or road improvements?

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