BiggerPockets

My name is Andrew and I am a 23-year-old landlord to be. In the last few years I have managed to accumulate a sizable nest egg considering my modest income under 30k/year by living with my parents - sigh, sort of. Long before I started saving and investing I wanted to created long term wealth with real estate because of a distant uncle I had the chance of visiting in SF, CA who lives very comfortably and has enjoyed the freedom of an early retirement made possible by his rental properties.

Since I don't make much money and I'm not eager to go into serious debt for a degree, despite hearing "go back to school" on a weekly basis from people who would likely only have a fraction of my wealth by the time I'm of their age had I never invested another dime, my ongoing goal has been minimizing my outgoing expenses and maximizing my saving potential for future investments. With that in mind, I don't think there is a better option available to me than an owner occupied multi-unit property as my first home - please tell if there is a better one.

Once I have my first property and I'm familiar with that particular type of acquisition, hopefully I can buy and hold a few more investment properties over the next few years. What I'd really like to do is owner occupy a new duplex every year or so for five years and hold the previous one(s) indefinitely then buy a single family while my cash flow pays the mortgage then get back to buying rentals to fund the vacation house! Without too much speculation over future events, I don't have a clue what my threshold for maintaining and managing my property(s) will be (having no prior experience) as far as the number of units and tenants go but for the time being I am willing to do what I can to avoid outside resources such as a property management company and be my own business entity...with the help of an attorney, CPA, insurance agent, mortgage broker, real estate agent and contractor - hopefully all of which invest in real estate and if I am forgetting anybody or should drop anyone let me know... property inspector, appraiser, etc? What makes a good buy and hold team?

I haven't gotten far enough to know how much I should spend on a property or what I would be approved for from lenders but laying out where I am financially should help refine any advice those reading this might have for me. I may live with my parents at the moment but I don't at all come from a family with financial discipline and that has been my driving force for financial intelligence. I have about $17,000 in my Roth and it provides some security for if something colossally bad happened but I wont be using it to fund any real estate ventures; however, I am opened to being talked out of it as an investment vehicle but my plan has been to only invest in it into my early thirties (maxing it out) then stop all together and focus primarily on real estate. I only have about $20,000 for my first property for now - including my cash reserve/emergency fund - and I know I'd be better off once I have more cash on hand. My credit is flawless, not long ago I checked my fico score and it was a few points from 800. I don't have any long-term debt or make payments on anything except for a small sallie mae bill that I could get rid of at any moment but I've read lenders like to see me making payments so it's lingering - it doesn't effect the numbers I provided but I'm guessing I should get rid of it before getting preapproved for a loan?

I like the idea of the diversification with more units in a fourplex and having the ability to be approved for properties of a larger scale but I can't say I'd be able to handle the workload with confidence. I want to establish some guidelines or criteria to follow so I can identify a duplex deal worth making and I don't get off track or emotionally attached to a bad deal. Ideally, each unit of the duplex will have two bedrooms or more so I can have a friend as my roommate in the unit I occupy.

I'm somewhat familiar with the rules to FHA financing for an owner occupied multi-unit building but I'm not clear on the 85% of rents covering the mortgage, taxes and insurance. This is supposed to be how you determine what you will need for a down payment (anything under 85% will need to be added to the 3.5% minimum down in order to meet 85%) but I'm finding it difficult to meet this requirement with just one unit's rent from a duplex covering this. Does it mean 85% of rent if both units were rented?

I'd appreciate being told what is wrong or right with one of the properties in my area for starters because I hardly know what numbers to look for. I'm only going by what I've gathered online but hopefully I'll know what numbers to run in the future by getting feedback. This particular duplex is listed at $129,000, taxes for it seem high at 3.6% (maybe because it's 3800 sq ft?), and the units supposedly rent for $775 (which seems low because smaller two bedroom one bath apartments are going for $995 in the area). It also says the tenants pay for heat, water and electric (separate utilities) while the owner pays for trash and the water/sewer. I don't know how to conduct a cash flow analysis but I'd like to have that ability because I don't want something in the negative when I eventually move out and rent both units. In an attempt to see if this property with cash flow, I took this structure from someone else's post.
http://www.biggerpockets.com/forums/432/topics/68105-duplex-analysis

Purchase price - $129,000 (listing price for example)
Down payment- $10,000
Mortgage payments- $7,212/yr (PI $601/m @4.5% 30yr) (locked in low FHA rate)

Rental Income- $18,600/yr ($775/m)

Vacancy 8%- $1,488
Property tax- $4572/yr (possible deal killer-maybe it can be appealed)
Insurance- $900 (much lower at first because of primary residence)
Maintenance- $2,400/yr ($100/door/month)
Utilities- $400/yr water sewer/trash
Advertising- $200/yr

Total operating expenses- $9,960
Net operating income- $8,640
Less mortgage payments- $7,212

Total cash flow- $1,428

Cash on cash return- $1,428/$10,000 = 14.3%

w/ $995/m rent instead of $785 it'd be $6,286 total cash flow (vacancy adjusted)

What's wrong/right with this picture? I know it doesn't include closing costs, immediate repairs and other things of that nature. Hopefully in a case like this the seller would assist those costs (up to 6% FHA) or take it off the asking price. I also know it's a general rule of thumb that each unit should cash flow $100 but with 20% down and/or a bit of a lower rate it might be justified with this property.

I hope this first post of mine wasn't too loaded but I needed to sum up my whole situation for my own well being. Thanks for reading and replying in advance. If you have any book or article recommendations I'd appreciate them.

I'm in about the same situation as you. I currently live at home and I am looking to buy a multi-unit to live in and manage at the same time. My budget is under 150k and my ideal place would have 3 or 4 units. Reason being is that I want to live in a one bedroom or economy type apartment so that I will be losing the least amount of potential rent.

As far as financing I already got pre-approved for an FHA loan but I'm very confused about the PMI. It's my understanding that it is 1.15% of the purchase price paid EVERY YEAR. As in 30 years of payments. Are you finding the same thing? That would be 34500 dollars over the term of the loan. Eventually you could refinance but still I thought that I would go away when you reach 20% equity. Can anyone help clarify the details of an FHA loan?

I see no problem in your calculations but some other costs to consider are lawn and snow removal, accounting, and any additional supplies you may need to run the property such as tool you may not currently own.

Andrew,

I am doing what you're discussing. I'm moving into my second duplex soon. I never worried about age, I was 24 and it hasn't been a problem, just act mature and perform due diligence. My FHA loan was income based and not rent based, but I was buying with a 203k loan for a fixer-up and not buying a functional duplex with tenants, but I heard some lenders weigh rents if you have a lease.

Without going into it with too much detail, you're going to have a rough go of trying to squeeze money out of this deal.

First off, your rents are only 1.2% of the purchase price. To give yourself a fighting chance, this needs to be 1.75%+. The best deals are going to be 2%+.

What does that mean. It means you need to find a property for $129,000 that can get a combined $2,250/m in rent

OR

Have the same projected rents of $1,550/m and find a property that will only cost $88,500.

Secondly, if you're having to pay the PMI, this will eat up what little profit you have in this deal. In contrast to what someone said above me, the PMI isn't for the life of the loan, it is until you have an equity stake of 20%+. And even then, it isn't instantaneous, you'll have to go through some hoops to get it taken off. Your lender might say you have to pay the PMI for 3 years regardless, or you might have to pay for 6 months after your reach 20%, etc.

Another thing. Try using the 50% rule. It's much easier to work out than itemizing your costs out like you did.

If rents are $1,550/m

than $775 is your operating expense. This includes everything except principal and interest. So,

$775 - $601 = $174 profit - PMI = OUCH

Brenden, thanks for the reply. I've heard of the 50%/2% rule but I thought it was the 40%/1.6% rule if you didn't have a property management company on your payroll? The rule seems pretty conservative, is this the type of deals most buy and hold investors are making? Maybe I'm not looking in the right places but I'm afraid getting 2%+ might not be realistic in my home market - or at least in an area where I would consider occupying one of the units.

You might have missed what I think rent should be which is about $1,900/m - 830 (instead of 775 i think) - 601 = $469 - MIP (w/ FHA instead of PMI) of $50 (.5%/year) = $419/m profit. Instead of $69/m with $1,550 rent.