Quadplex Analysis- FHA, 3.5% down, will manage myself

12 Replies

Hi everyone- long time reader, first time poster. I started reading all the books, blogs, and podcasts about 2 years ago, and am ready to get into the REI game here with a quadplex!

I’ve done my best to catch all expenses and am looking at about $400/mnth cashflow, or about -300/mnth cashflow when I live in the building. The building is not in great shape, but the rents seem solid. Mostly low income section 8.  The units also not great, but they have rented for the last 4 years with an eviction, and 2 mnths vacany.  The seller has owned the building for 10 years and says he wants to invest in some other opportunities.

I will be the onsite property manager so will be living basically rent free. Is this worth the hassle? Am I overpaying? It was listed at 335K, I negotiated to 310 with all buyer costs covered by seller. FHA 3.5% down, about 11K

Thoughts? I am excited by the opportunity but need your expert opinions here--  thanks in advance!

Alex

Rental Income 2015 41316.00
Subtract Vacancy 5% 39250.20
RENTS 2015.00
910.00
873.00
860.00
800.00

Expenses

Property Insurance 1834.00
Taxes 3350.00
Total Insurance/Taxes 5184.00
Legal
Legal Fees 120.96
Evictions 177.19
Permits 344.00
Total Legal 642.15
Maintenance
Labor 1650.00
Appliances 250.00
Lawn & Snow 307.50
Materials 1570.00
Pest Control 400.00
Total Maintenance 4177.50
Utilities
Gas/Electric 1860.00
Trash Disposal 1184.00
Water & Sewer 2006.03
Total Utilities 5050.03
Total Expenses 15053.68
Principal 1410
PMI 212
Mortgage Payment 1622
Cash Flow $394.38
FHA Loan Details
310,000k
10k seller assist (covers closing costs)
3.5% down (10,850)
3.75 interest

Details in readable format:

Rental Income 2015

41316.00 

Subtract Vacancy 5% 

39250.20 

RENTS 2015

910.00 

873.00 

860.00 

800.00

Expenses

Property Insurance 1834.00 

Taxes 3350.00 

Total Insurance/Taxes 5184.00 

Legal Legal Fees 120.96 

Evictions 177.19 

Permits 344.00 

Total Legal 642.15

Maintenance 

Labor 1650.00 

Appliances 250.00 

Lawn & Snow 307.50 

Materials 1570.00 

Pest Control 400.00 

Total Maintenance  4177.50 

Utilities Gas/Electric 1860.00 

Trash Disposal 1184.00 

Water & Sewer 2006.03 

Total Utilities  5050.03

Total Expenses  15053.68 

Principal 1410 

PMI 212

Mortgage Payment1622

Cash Flow $394.38

FHA Loan Details 310,000k

10k seller assist (covers closing costs) 

3.5% down (10,850) 

3.75% interest

@Alex Ballas , I know you have to live somewhere, but your figures do NOT show you "living basically rent free", but rather, you also said you would be out of pocket ~$300/m. And that will only get worse if your vacancy rate proves to be 10% rather than your assumed 5%.

If you don't mind living in a fourplex, surely you can find a deal that DOES give you cash flow AND free rent?

Another thing, if you check with your Lender, I think you will find that of the $1622/m mortgage, over $1000 of it will be interest-only. After 10 years, you would still owe more than $200k.

If your Lender will really lend you $310k at 3.75% interest, I believe your usage of that facility could be better served by looking for a better deal (or a much lower purchase price regarding this one). Cheers...

@Brent Coombs Very tough to find good deals in major metro like Philly, demand and cash competitors drive prices up so a 10% cap rate is tough- 

as for interest, not much I can do about that except use as a deduction, this is an FHA loan so for 10K i can realize significant deprecation and expenses- however I do agree that price for rent roll is high, seller has had building for 10 years so he isnt very motivated to sell as his price point is much much lower (220K).

Thank you for your input!!

Hey Alex,

The area is definitely a significant factor. Both for appreciation and demand. Additionally, you mentioned the property is not in great condition so investing some additional capital into the property could help you realize higher rents, decreased turnover, and better tenants. Since you are doing an FHA loan already, an FHA 203k loan might be worth considering to add value. In an appreciating area you may even be able to pull some money out of the property down the road to finance other investments. I live/work in the city, always down to chat REI.

Good luck!

-James

Originally posted by @Alex Ballas :

@Brent Coombs Very tough to find good deals in major metro like Philly, demand and cash competitors drive prices up so a 10% cap rate is tough- 

as for interest, not much I can do about that except use as a deduction, this is an FHA loan so for 10K i can realize significant deprecation and expenses- however I do agree that price for rent roll is high, seller has had building for 10 years so he isnt very motivated to sell as his price point is much much lower (220K).

Thank you for your input!!

 I'm doing exactly what you're proposing and I can tell you I'd never live with Sec 8/low income tenants. Roaches, noise, smoking, drama, small children, etc. You'll be hating life. I've owned Sec 8 rentals and the mentality there (in general, there are some great people in that program) isn't one I'd want to live with.

I have all young professionals in my building and that's the only way I'd do it. You haven't said where this is but I'd also want appreciation on the back end, at least the possibility of it. As a comparison, I bought my quad for $335k (plus $15k seller assist) and at the time rents were $3400/month. They've gone up a fair amount in the two years I've owned it and I'd guesstimate between repairs/upgrades/appreciation my building is worth $450k-$475k today. Make sure you've got an exit if you need it. If you buy at top dollar and there's no appreciation, whether forced (through repairs/upgrades) or market-driven through gentrification, I'd pass. My building was very livable/serviceable as-is too. My building also had/has all separate utilities besides water and newer roofs, HVAC, plumbing, electric, etc. Keep looking! 

Last, if the area you settle on qualifies, there are low income area loans (you don't have to be low income, just buying in one) that are 3% down, no PMI. One I know if is through TD Bank, PM me and I'll send you the mortgage guys email.

wow thanks everyone for your input- definitely seeing some varying perspectives- the building is in poor condition, but the area does have some serious potential- however @Troy S. is making me think the hassle factor is going to be very high, and the property would need serious capex to get it to an average renter's condition

I guess you are not living free but you don't have to.    Your break down is too much work for me to have to figure out.   You re a little below the 1% rule (with your paying the going  rent for your apartment).  

You are not living free but you have to live somewhere anyway and approx $800. is not  much rent anyway.

I would think that section 8 people stay put a little longer then a regular renters so I think 5% is all right for vacancy since you are not going to move either.  

Depending on your tax bracket the tax savings would be what? and how much are you paying off on Principal?  

How old is this building?  What do you think your cappex should be?  Do you have major improvements and replacements acoutned for like  new roof?     Will there be any appreciation.  I

ts not too bad for a first try and it will get you started and in the game.  It's much cheaper then a Real estate "course" and you will learn alot.  It will sharpen your landlord skills, your book keeping skills.  your Property Managment skills, your handi man skills,  and yor real estate knowledge.    

@Troy S. your quad has appreciated 100K in 2 years!  thats amazing, i definitely do not expect those results.  Can you tell me the makeup of your units?  All 1br?  The one i am looking at has 3 decent sized 1BR, but honestly with a to of renovations I do not believe it will be up to standards of young pros, i am thinking of keeping it section 8 and increasing rents as the area improves- this area in Philly suburbs is in year 1 of major investor influx, but will a low income house appreciate in a great area?

Originally posted by @Alex Ballas :

@Troy S. your quad has appreciated 100K in 2 years!  thats amazing, i definitely do not expect those results.  Can you tell me the makeup of your units?  All 1br?  The one i am looking at has 3 decent sized 1BR, but honestly with a to of renovations I do not believe it will be up to standards of young pros, i am thinking of keeping it section 8 and increasing rents as the area improves- this area in Philly suburbs is in year 1 of major investor influx, but will a low income house appreciate in a great area?

As a guess, yes, its appreciated that much. Keep in mind I've also made repairs and upgrades to make that happen as well as buying well up front. (1) Studio, (1) 1 br with an office, (2) 2 br units.