Hi. I'm 23, recent college grad (engineering) and am looking into buying a 4 unit home(each 2 br, 1 ba). I would live in one unit with my husband and rent out the other 3. Building is 140k. My gus says we can get it down, and I always go with my gut. We expect to be able rent the other units at about 725 each. We assume a 1200 mortgage+pmi+taxes+insurance.
We don't currently have much of a savings so we are working on coming up with 10% now. We plan to put down the minimum 3.5% (FHA) and are allotting 2.5% for closing costs and the 3% for fixing a few things in our personal unit to make it a bit nicer for us.
In 2 years we plan to do it all again and grow by adding a duplex and 2 years later adding another duplex and in year 5 finally get to a total of 10 units.
I'm looking for feedback. We are very new to this, but we are serious and are committed. What questions should I be asking myself in relation to the 4 unit building? Also, we are thinking about using a management company and basically pretending to be just one of the tenants. What are the thoughts there?
@Andrew Babcock :
let's look at it:
Expenses: Mortgage:$1200 Ins: $175 Tax: $175 Utils: $150 (your unit) Lawn: $50 PM: $0 (self managed) Repairs @8%: $174 Vac: $174 Cap Ex: $174
looks a little tight, but free rent is cool and you could add value over time, sure you can't raise rents?
The 1200 includes the more than just the mortagage sorry. I didnt write the clearer.
Expenses: Mortgage+PMI:$810 Ins: $150 Tax: $233 Utils: $150 (your unit) Lawn: $50 PM: $0 (self managed) Repairs @8%: $174 Vac: $174 Cap Ex: $174
I also plan to pay rent as well. (transfer the rent cost from one account into the 'business' account each month. The 700 in rent I will be paying is way less than what i currently pay)
Checking the average rents in the area(I only see 10 listing on craigslist in a 1 mile radius for this zip code), it looks like most 2 br, 1 ba rents hover between 695 and 750. That is my basis for the 725 rent.
I worry that setting my rent too high will hurt our chances of getting tenants. Also, most recent rent prices have been at $500 each which is way low in my opinion.
Do you all know a better way of getting rent price estimates for an area?
If you can purchase a 4-unit for $140k that has $700/mo rents per door, then grab it! That's a great return!
However, a $140k property that brings in $2800/mo isn't likely to be on the market very long...or there are some other variables that keep buyers away. Most likely the property has one of the following:
A. significant need of major repairs (roof, HVAC, electrical...)
B. is in a bad neighborhood (high vacancy, turnover, and/or crime)
C. tax lein, or other financial problems
D. a combination of the above.
Remember that you're going to have to live there. If you and your husband don't feel safe, then it might not be worth the trouble.
As for your long-term plan, just remember that you can't use the FHA loan more than once, unless you meet a couple exceptions (forced to move due to job relocation, growing family...).
Remember that you can factor in closing costs as part of the price negotiation. For example, offer $138k with the seller providing $4k in closing costs. That would reduce your cash requirement for closing.
Don't worry about paying rent yourself. That's just handing over 10% more to your Property Manager that you could keep in your pocket, and doesn't give you anything extra. I guess you could call them to fix stuff when it breaks, but then they're just going to charge you even more to coordinate the contractors.
As far as the price of the rent, I've read several times on here, and it makes complete sense. You don't set the rent, the market sets the rent. You have to be competitive in regards to your neighborhood, amenities, location, and other owners. See if you can get a peek of the financials from the selling agent. Sometimes they won't provide them until after the unit is under contract, but sometimes you can also access the rent history through websites like zillow (I'm assuming that's fed through MLS, but not sure).
Hope that helps.
Congrats on getting started! I recently graduated too In engineering and am also 23. Your plan is very doable, just make sure all the expenses are covered. Your cash flow may be a little light if you’re living in one of the units.
I decided to invest out of state mainly because I wasn’t sure where I’d be living long term (moved twice this year alone) and like the idea of being able to invest wherever I am. So far I’ve stuck with single family and will probably continue that for now. Eventually I’d want to do apartments and commercial. Goal is 10 properties by 27, so I gotta reach that first and then look at the next step.
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