1st rental property purchase

8 Replies

Hey everyone! So over the last year I've been educating myself hardcore on RE and I think I'm ready to finally jump. I found a decent deal on a 4-plex and wanted to get some thoughts. I am a Army veteran and I am going to be using my VA loan. I anticipate being able get into the deal for 0 out of pocket cash. All four units are rented out with leases on 3 and the 4th is month to month. Being that the va loan requires owner occupancy, I would be giving the month to month tenant a 30 day notice to vacate. The home was built in 1940 but I have checked it out and looks pretty decent. Roof was replaced 5 years ago and looks nice. 3 of the 4 water heaters are under 2 years old. It's definitely not the taj mahal but is very livable. After negotiations, the seller just submitted his final over. Heres the deal: $154,900 purchase price and seller agreed to cover all closing costs. Monthly expenses Mortgage: $840 Taxes: $50 Insurance: $225 Flood insurance: $60 Vacancy of 5%: $107 Cap Ex: $172 Total monthly expenses: $1454 All 4 units generate $2150 3 units rented out with me in the 4th generate $1625 1st year cashflow: $171/month After I move out and can rent out the 4th unit cashflow: $696/month What do you guys think? Have I missed anything?

@Jeremy Swanson congrats for getting started on a house hack. I think the current property sounds reasonably interesting, especially in today's overheated market. I will caution you though, that rents in the 500-600 range typically mean a rougher class of tenant. You didn't state where the property is located, so I don't have much info to go on. Depending on the class of tenant, you may need to up your vacancy percentage and you may have some "bad debt" (rent that is never paid). 

If the place makes sense, I think you should absolutely jump on it. Is there any upside to the deal? Can you raise rents? Do units need cosmetic face lifts? 

Hi @Jeremy Swanson , I agree with @John Warren about the type of renters due to not knowing the location. We have very tenant friendly laws in Portland and would have to pay a "relocation fee" to the tenant if we were moving them out so we could move in. If you any contacts with property managers or real estate attornies in your area it may be a good idea to check with them to see if there are any special you need to do. Another great way to find out is also searching here on BP. 

Other than that this deal sounds pretty good! I am curious though, does the VA cover the costs of inspections too or do you have to come out of pocket for those?

@John Warren The home is just outside of an Air Force Base in Alamogordo, New Mexico. Being that it's a military town, I should be able to get decent tenants if I focus my advertising on the local Airmen. The previous owner stated that vacancy wasn't much of an issue because the price of rent and it's location. The 4-plex is on a corner lot of a moderate traffic intersection. He said as long as I put up a sign, it rents very quickly. What do you mean deal "upsides" I was thinking of putting in some simple home automation to raise rent. Thoughts? Also, 3 of the 4 units have swamp coolers which the current tenants are fine with. However, refrigerated air is more desirable out in these parts so if I installed them, I could raise rent $100-150 a month. Got a quote from an AC guy of about $2200 a unit.

My concern is the lack of cash-flow. I believe we're seeing the peak of the market. If that's true, you may not see increases in rent or equity for quite some time.

I also wonder if you have a reserve? Generating $171 a month in cash-flow won't get you far if a furnace goes out or you're hit with a trashed unit and two month's vacancy. I can't tell you how many times an investor buys a property and then gets hit with a major expense within the first 3-6 months. Even if you set all the cash-flow aside, it would take a year just to build up a $2,000 reserve which isn't enough to replace the carpet in one unit and that doesn't cover cleaning, other repairs, vacancy, etc.

I don't know enough to make the decision for you but the margins seem really thin based on what you've shared.

@Jeremy Swanson I think you should definitely evaluate any potential upgrade to see how much you can raise rents and how long it would take to recoup your capital. For instance, if you upgrade the AC to the tune of $8800 and you can increase your cash flow $4800 per year ($400 per month) that may be worth it. Now... do you also need to repaint the units, install new flooring and do a bathroom or kitchen upgrade? You could easily be in the 8-12k per unit range just to get that $100 per month...

Congrats @Jeremy Swanson !! Awesome to see that you've found a property....I'd echo the same concerns that others have raised here. Cash flow is not substantial enough to cover any significant repairs that may occur within the first year or two of ownership. That said, ensuring that you have some capital in reserves is necessary.

Not likely to increase rents much in our market by installing home automation. You'd see better returns via refrigerated ac and clean units. Feel free to reach out if you have other specific questions to our market.