Hello! I'm pretty new to REI. I own two SFR but I'm currently looking into my first multi unit (four unit). I want to make sure I understand all my options when buying my first 4 unit rental property.
Some background information:
Property listed for $140k. I'd like to pick it up for no more than 130k if possible.
All units are currently being rented. Two 2/1 ($675 each). Two 1/1 ($575 each). ($2500 Gross income)
One of the units has been completely renovated. Other three are livable (being lived in now).
What I currently have:
- 20k saved
- Two properties (60k equity in one) (15k equity in the other).
- I am a veteran and have access to only 109k (remaining) of va loan benefit. I'm pretty sure you have to buy a primary residence to use the va loan though? Am I wrong? Would be cool to do 0% down and no PMI..
I feel like it's a fairly simple purchase but wanted to get the advice of some experts. Using as little of my own money as possible (if possible), what are the best ways to go about purchasing this property? Overall, it's in a good location and has good rental history.
**Also to note**
I'm living in Honolulu at the moment. It'll be a long distance (home state) purchase. I will not be able to live in it for the year to be approved for an FHA..
My calculation (using the BP calc)
I used 0% down (to give me a higher monthly mortgage payment), just for calculation.. If I need to come up with the 20%, so be it.
10% for PM.
5% for CapEx.
5% for repairs
$90/month for insurance
Total monthly income: $2600
Total expenses: $1657
Total cash flow: $943
It seems like a home run to me, but I want to make sure I don't jump into it without knowing as much information as possible. Different ways to go about this purchase. I'm really looking forward to buying my first quad. Please advise!
Thank you in advance!
@Nick Monge - looking at your deal I don't see property taxes. Am I missing it? Also, you stated 5% repairs but one unit had been recently renovated. Leads me to believed it's an older property and you might want to increase you repairs and capEx %s.
@Jay Helms - You're absolutely right. I spoke with the owner and the taxes are just about $1000/yr. I would also agree that I should increase the CapEx. I'll factor that in. Thanks for the advice! Now I'm just trying to figure out the best financial decisions.
I notice you're down in Gulf Breeze area, I lived down there for some time. Really enjoyed it.
By boosting the CapEx up to 10% and adding in the taxes, cash flow is sitting at about $723.
@Nick Monge What are the LTVs of the properties you currently own with equity? If you were to do a cash out refi on the one with $60K, how much cash could you unlock and what would that do to the cash flow on that property?
I would recommend pulling your down payment out from that property if you can, getting conventional lending on this next property, and save your money to give you a cushion while the cash flow from the other properties builds to create a reserve for repairs/Cap Ex. Once you can create the reserve within the properties, you can use your money or other equity to do it all over again.
If a cash out refi doesn't make sense, are there opportunities for a shorter term HELOC arrangement? Could you secure an alternative LOC using those properties and/or other assets? I am happy to discuss further if that would be helpful.
@Harrison Smith Great ideas. So I owe 100k. It's valued at 160k. LTV = 62.5%. So i should be able to pull out 20k no issues.
@Nick Monge I think you are right that you would have no issue pulling $20K out of that property.
Depending on the bank you use, some will let you secure a LOC over multiple assets to create a larger facility you could use. I have a LOC secured by my investment portfolio (IRAs and personal brokerage accounts) that I can use to get into a project and then pay down either once I refi or with the early cash flows over the near term. A lot of your local/regional banks are willing to discuss arrangements like that. Just some food for thought.
"I'm pretty sure you have to buy a primary residence to use the va loan though? Am I wrong?"
You are not wrong. VA backed loan must be purchased for primary residence. Deal looks solid though. Multi families are the way to go. Good luck!
@Nick Monge - congrats on moving up! At quick glance 3 things I don't see in your expense calculations: taxes, utilities and lawn care. Here's how I calculate cash flow:
Cash Flow, as I calculate it, is the Monthly Revenue minus ERMVITC.Monthly Revenue – ERMVITC = Cash Flow
Expenses (General): these include utilities, garbage, mortgage, property management fees, etc. You should be able to obtain exact #s for these variables.
Repairs & Maintenance: I typically estimate these between 5-10%. The range is based on the amount of repair work done prior to placing a tenant. The work performed up front, the lower the percentage and vice versa.
Vacancy: Also estimated between 5-10% based on the property, current tenant situation, and neighborhood.
Insurance: Insurance carriers always vary, so I encourage you to shop around. While underwriting a potential acquisition I stay conservative an estimate $100-125/unit.
Taxes: usually a known quantity by visiting the Escambia County’s or Santa Rosa County’s Property Appraisers site.
Capital Expenses: I typically estimate these between 5-10% also. The range is based on the amount of repair work done prior to placing a tenant in the property and covers such things as a new roof, bath room remodel, appliances, etc. And just like RM, the more work performed up front, the lower the percentage I use in my underwriting and vice versa.
Hey @Jay Helms .
Thanks! Great acronym for me to add to my toolbox for analyzing properties. I appreciate the help. I'll actually be visiting home here in about two weeks and will be looking at a couple properties. Very excited to get started, I think it's about time to pull the trigger.
This information you shared is great and I appreciate your input!
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