Help Evaluate 4-plex Deal- First Deal!

[Josh Nabors]

First time home buyer and long time lurker of these forums. Over the last few months I have been active in the local real estate market evaluating deals and trying to find my first purchase. I think I finally found a good opportunity but would like some assistance to help evaluate if my math/thinking is correct .

The area that I am in is over saturated with investors due to the Destination Medical Center plan proposed by Mayo Clinical Hospital. This long term expansion should double the current population of 120,000 and stimulate the economy with more businesses. Mayo Hospital employees nearly half of the city with new residents, docs, nurses, ect coming every day to work. The rental market here is insane! Vacancy are very rare.

I would like to purchase a multi-family property with an FHA loan so I can owner occupy. This will allow me to live free or close to it and then I can focus on getting out of my student debt as I live for free. I am a recent college grad.

I found this four plex through my works employee classifieds. This four plex is not listed with an agent or on the MLS.The listing price for the four plex is 210,000. Over the last few months , I have seen similar style four plexes sell from 200-250k. I have offered 199,000 and he has accepted but conceded that I might have to help with some closing cost. The seller states that with a full offer price, he will completely cover closing costs. He is also willing to make repairs so the house will go FHA ( just paint).

The four plex was built in 1980. It is located on a street with about 20 other similar four plexes . The location is good. Two of the units have been recently rehabbed, two others could use a rehab. However, the units that could use a rehab have had long term tenants of 5+ years. New roof and windows in 2014.  All four units rent for 600. Similar units in the area rent for 700-800. He has not change the rents on the unit in 10 years. The laundry also makes about 100/month

I am pre-approved and ready to make a purchase. To be generous, I am calculating my PITI as 1,500 a month.

I am starting to receive income/expense reports over the last few years. Here is what I have so far. 

2012- approximate numbers
Income-$29,247 (rent + laundry)
Expenses- $6,162 (utilities + services(snow removal))

2014-approximate numbers
Income- $29,612 (rent + laundry)
Expenses- $7,324 (utilities + services (snow removal))

These numbers are using the 600/ month rent. With a light rehab, I believe the units could easily get 700/month. The 1500 a month PITI is probably really generous on a 200,000 loan but I would rather shoot high. The plan would be to refinance once I get 80/20 with either earned equity or additional capital so I can get rid of my PMI and increase my cash flow by about 200.

Thoughts?

[Jeremy Pace]

You have to live there for at least a year (maybe two) to satisfy the FHA residency requirement. It will likely take you that long to rehab the units if they are occupied, so it's not a terrible thing. To be honest, the numbers aren't bad ... but you're probably not really going to make any money on this one in the long term once you account for maintenance and the rehabs. Truth be told, even a light rehab in an apartment could cost $5k, and that's more than an entire years worth of your rental income after PITI.

The price is a little high for what I would usually want to pay, but that could just be the market where you are.  Honestly, if the list price is $210k, and you countered with $200k, and he didn't even blink, you could have cut a LOT deeper.

My suggestion to you: buy it, live there as long as you can, plan carefully and improve the apartments as you can ... and cycle the tenants.  If there are people there now paying $600, it doesn't matter what you do to their apartment, they aren't going to want to pay the $700-$800 that they should.  Take any and all extra money that you can from the rental income and pay down your mortgage, so that you can leverage this property again in the future to buy another propery with a way better spread.