Good deal or not?

Question

Hey BP investors,

I have decided to do a deal with my local city that includes HUD funding.  I will build a 4-plex modular unit, each 3 bed 2 bath.  I will live in one and rent out the other 3.  The city will reimburse me up to 50% for the other 3 units.  The city will also have a 20 year lean on this property that requires me to rent the 3 units to HUD qualified families for those 20 years.

Here are the numbers:

Total project cost:  $437,180.00

City's Reimbursement: $155,730.00 (equity in project)

VA Loan amount for 30 yr fixed: $281,450.00

Rent fixed by HUD for each unit: $876.00 x 3 =$2,628.00

I will save $1250.00 in rent a month

Mortgage, taxes and insurance: $2,444.15

Vacancy 7%= $272

Management 10%= $388

CapEX 5% = $194

Repairs 5% = 194

Cash flow= $386.79

What do you think?

Thanks in advance......

Scott R. · Answer

is there any update to this? I still don't know anyone who has successfully used this "program" for new builds, and dozens have tried..

Arick W. · Answer

The only thing that might make me shudder is the lien held by the City.  Otherwise its a slam dunk.  HUD pays on time every time, HUD rates for a 3 bed are on par with what you would make on a 3 bed home in that area anyways.  I am not sure how this deal is structured if you have to provide the 2 bath per unit or not or if you could make the other 3 units 2 bed etc; in a fantasy world I would make my unit a 3/2 and make the other units 2/1.  Amarillo HUD will pay 804$/mo for a 2 bed.  2 bed= less sq ft= cheaper per ft to acquire and maintain= higher profit margins.  Plus new construction should come with a 10 yr builder warranty which will ease cap ex expenses for the next 10 yrs.  Good luck, I am curious how this works for you.  Keep us updated!

Alberto Camacho · Answer

Can you provide the loan details and break out the mortgage from the taxes and insurance?

Without pulling out the calc I know PITI on 30 year on 300K is about 2K for a single family.

Are taxes and insurance that low in your area? I would have expected a bit higher on a quadplex.

What are the allowable yearly increases?

Jacob Sampson · Answer

Sounds like an interesting opportunity.  I think the strength of the deal is the equity play (though you have a pretty significant limitation placed on you by the lien) rather than cash flow.  I really don't see much of any long term cash flow.

If as you say those properties could go for $1250 a month and instead you rent them for $876, you are giving up  $374/month * 3 units = $1122/month * 12 = $13464/year * length of lien = $269,280 to get $155,000.  There are certainly a lot of other variables at play but on the face of it that doesn't seem very exciting.  It gets even worse if you move out and rent the 4th unit at below market value.

I think your long term maintenance expectation is low, as well.  Especially if you are paying for the labor.  To be safe I plan on 30% for vacancy and maintenance.  If a deal cash flows at that number then I feel pretty safe.

Also, I don't see principle payment listed anywhere so I assume you include that in your cash flow.  While principle CAN equal profit (if the property maintains it's value) it doesn't equal cash flow.  Cash flow is only the money you stick in your, literal, pocket.

While this deal may be profitable, it won't cash flow, long term.  You just need to decide if you are ok with that.

Scott R. · Answer

I'd advise talking to someone who has attempted to do this, because I don't know anyone who has successfully done this and been happy with the outcome.. Not sure if you know much about out power happy building department, or even worse.. city hud..

Hattie Dizmond · Answer

Got it.  DFW is an ultra-competitive market right now.

Jason L. · Answer

@Hattie Dizmond My goal is to relocate to your area within the next 3 years.

Jason L. · Answer

No, south of I-40 off of Grand.

Hattie Dizmond · Answer

Hey...I used to live in Amarillo and heard about some of these plans recently.  Is this on the North side, out by the loop?