How much in cash reserves? (4plex, FHA, househack, Akron OH)

Question

Hi everyone.

I'm looking at a fourplex listed at 159,900 as a househack for my first deal.

I have limited cash and I need advice regarding how to come up with a sane/safe amount of cash to have left over after the deal is done for incidental things that will inevitably come up. This will help me determine what I will offer on the property.

Some details, if they help:

I will use the FHA loan for this.

(3) 1-bed 1-bath units rented at 425 a month, 1 is vacant (for me). Market rent for this type of unit seems to be around 600 so there is some room here.

The building is 100 years old. Which makes me nervous about unseen issues like asbestos, lead paint, etc etc.

I plan on asking the seller for all of the closing costs - I'm not comfortable with the amount of cash I'd have left over if I have to pay them.

I haven't seen the property in person yet so it's hard to say for sure, but from the pictures it looks to be in good condition other than needing some cosmetic work (paint) on the outside.

Do I need to have 15k sitting around just in case? Am I worrying too much?

James Galla · Answer

@Erik Azevedo ,

It's your first property, and you might not have a solid stream of income coming in, so, yes, you ought to keep $15k on standby until you can collect some rent. In the alternative, you would want some kind of standby credit. Since you're in Akron, be very careful of the area you are purchasing the 4-plex in. Off the top of my head, the best neighborhoods are Fairlawn Heights, Wallhaven, Northwest Akron, parts of Ellet and parts of Coventry Crossing. Be very careful of Highland Square to ensure you are not actually dipping into West Hill (your price may not be justified here). Some maps show that West Hill doesn't exist, but the characteristics of that neighborhood, whether it was combined with Highland Square or not, still remain.

So, if the property falls into one of those neighborhoods, you may have room for a rent increase; however, if it does not, You might be looking at 400-425. You ought to also consider the configuration of the quadruplex. I was just looking at a quadruplex in West Hill for $40k or so, and it was configured like two townhouses on the same parcel. Having a shared wall is much better than having a shared ceiling/floor.

As to the building's age, 100 years old is not immediately a bad sign because people update properties as they hold onto them throughout the years. You want to have a thorough inspection conducted so you can see what issues you will be facing in the long-term, but keep in mind that just because the property is old doesn't mean it needs to be upgraded.

I hope my thoughts assist you in your investment. Best of luck!

Michinori Kaneko · Answer

Like Adam mentioned, you need a thorough inspection. have handy man or a contractor attend the inspection with you to give you estimates on how much repairs would cost.  You should incorporate those into your initial fixup cost. make notes of remaining life of big ticket items (e.g. roofs) and see how much money you have to save every month to cover those capex (which you can save from your rents).

Adam Gollatz · Answer

Hi Erik,

There is a lot that goes into a calculation like this. The thumb rules are a good place to start, but they never tell the entire story. Id say your best bet in determining how much you need for reserves for emergency repairs would start with a good home inspection. Have them determine the useful life of the big ticket items like roof, furnace, ac, electrical and plumbing and use that to determine what you need in reserves and consequently what you can afford to offer on the house.

You'll also want to look at the cash flow in case of additional vacancies keeping in mind what the vacancy rate is in your area. Determine if the 2 units+ your income could service the debt until you find another renter. I also caution against assuming the rents could be higher, especially 450-600. Thats a 33% increase, its likely you might need some additional updates to get that high of a rent increase.