To buy or not to buy?

Question

Hello,

My husband and I are newbies. We are interested in purchasing a 4plex. We found a deal for 125K that is completely rented for 1750/month. We live in St.Louis, Mo where rent/properties are fairly cheap. The numbers are good. Here's the problem. This place has been under contract 3 different times, but it fell through each time. There are foundation issues. It has been pierred and fixed by a professional company, but that makes me nervous. Also, the plumbing stacks need to be replaced. Those are the issues we know about before the inspection. Would you make an offer?

Brent Coombs · Answer

My guess is something got lost in translation with that Lender. I hope they weren't thinking up their own mortgage fraud idea! Afaik, FHA still requires (1 year+) owner-occupancy.

Shelly Shanks · Answer

We were using a calculator app for figuring out monthly cash flow and returns. Figuring out all the numbers is tricky, so we very well could be putting in the wrong numbers. We were originally thinking about house hacking, but the neighborhood is not a good one for our young kids. The lender said we could still get a FHA loan as long as the rents covered 75% of the mortgage. I questioned this because I had heard it had to be owner occupied, and they have been wrong about other things. With a 5% down, interest rate of 4.5% after expenses we were looking at $840 cash flow, so we thought that was good. Thank you all for your knowledge!

Brent Coombs · Answer

@Shelly Shanks, for many folk who "are interested in purchasing a 4plex", it's because they want to house hack, and, they need the low deposit access for an owner-occupier loan.

But is that not the case here? ie. Why focus on just 4plexes (rather than say, 5+plexes, or, SFR)?

The rental return looks to show plenty of leeway for a positive cash flow even at 75% leverage, providing there aren't too many nasty rehab surprises. How do those numbers compare with other similar sold properties? Any room for further discounts? ie. Are you trying for bargains?

Chances are, every property of similar age around there has had similar issues by now, so hopefully your building inspector will be right on top of giving you the right facts about this one (and, every other one you might consider). Good luck...

Ben Leybovich · Answer

Shelly, this could be an interesting and educational conversation. Allow me to tell you that while you see this deal and think the numbers are good, I see a deal that is terrible and would cost you money. And this has nothing to do with the foundation.

Thus, can you tell us what exactly about the numbers seems good to you?

Matthew Baltzell · Answer

@Shelly Shanks it all depends. You would have to play with the numbers and see how it works and what you're comfortable with.

First, it's a 4 unit property so you'll need to get a residential loan.

- 10% down ($12,500)

- 4.5 interest with 30 year amortization

- $876 Debt Service/mth x 12 months = $10,512.

I would then look at the rent roll.

- $1,750 Gross Monthly Rent. This is at full occupancy.

- $1,750 x 12 months = $21,000 a year.

But, this doesn't take into account any expenses. You'll have to allocate a certain amount to repairs and who will manage the property?

To play it safe let's say with a property manager and expenses you'll be looking at 40% of your gross rent. Now, this is a conservative estimate and could be lowered, but  for the sake of this example.

$21,000 x .6=  $12,000 after expenses.

**$21,000 x .7 = $14,700 (no mgmt)**

$12,000-$10,512= $1,488 Cash flow before taxes/12mth = $124 p/mth

$14,000-$10,512 =$3,488 Cash flow before taxes/12mth= $290.66 p/mth

- As stated above this is fully occupied. I would account at least 5%  gross rent for vacancy. After that the profit margins look really small.

However, with this said I haven't seen the property and don't know enough about it to make a proper assessment.

But, foundation issues are never a good sign and are usually a red flag. I think that you could find something without this issue.

Best of luck though. I hope that you find something that works well for you:)