Potential first multi-family property... are these good numbers ?

Question

This is my first potential multi-family deal so I’m understandably a little nervous.

I currently have a townhouse with a mortgage of about 1700 and it would rent for about 1750. It’s in a desirable location (Happy Valley, OR) and I think it has good appreciation potential.

I’d like to house hack a 2-4 unit multi-family and I found a triplex in a more rural area that has the following numbers after all units would be rented (a year after purchase):

FHA 3.5% down loan

Cash flow 250-300

ROI 18%

Cap rate 6.2

I could rent out the other units and live for about 600/mo for the next year. It’s in a more rural area and I feel that the appreciation potential isn’t as good.

Bottom line:

I have enough saved for the down payment and a little more and I’m tying to decide if I...

A) buy the triplex and rent out my townhouse, taking a small loss on the townhouse to hold onto a good property/location.

B) buy the triplex and sell my townhouse, freeing up about 20000 after fees.

C) stay in my townhouse and just sit back and see what happens with the housing market (recession?)

D) sell my townhouse and just sit back and rent for a bit to see what happens.

Experienced real estate investors, what would you do?!?!

Lance Nelson · Answer

Thank you so much @Jaysen Medhurst. I really appreciate it

Jaysen Medhurst · Answer

Happy to help, @Lance Nelson. If the price is $500k and the monthly GSR is ~$3800, you're not even hitting the 1% rule. As an investment, that's a hard pass with traditional financing (25% down), let alone an FHA w/ only 3.5% down and a big monthly PMI that you can't ever get rid of.

I don't know if there is a standard PMI for FHA loans. I have PMI on my personal property and it's only ~$100/month on a $415k loan. Granted we put ~13% down and it wasn't a FHA.

Again, as purely an investment property, I think this is a loser. Keep looking for a better deal that you can turn into a profitable investment property once you eventually move out. You have your townhouse and are in no rush to make a bad decision.

Lance Nelson · Answer

@Jaysen Medhurst I can't tell you how nice it is to hear this type of advice from an experienced investor. I've been mainly talking with my real estate agent and mortgage broker and to them, every property is a good deal. My gut is telling me to step back and stick with conservative numbers. Unfortunately, in my market it seems very difficult to cash flow with those expense percentages and a low down payment FHA loan. The PMI is set at .85% and I was under the impression that this is standard for an FHA loan. No? The asking price on the property is $500K. This analysis was with all units rented out.

Again, I can't thank you enough for the thoughtful responses and time you've offered.

Jaysen Medhurst · Answer

@Lance Nelson, no. Those numbers aren't high enough.

• Repairs and CapEx will be ~7.5% each. For vacancy I use 8%, but this is very local. Vacancy in your area may be higher or lower.
• All utilities paid by tenants in a triplex? Not likely. Water and sewer are rarely sub-metered in a small MFR (not that they can't be). There is usually some common lights, like exterior or hallways, that the landlord must cover.
• You should include Management (10%) in your calculations, even if you plan to self-manage in the beginning. Eventually you'll want to spend your time more productively. 
• The PMI looks high to me. See if you can either negotiate that down or find another lender with better terms. What's the purchase price? Looks to be around $525k according to your CapRate.
• Finally, the GSR in our analysis, is that with you occupying 1 unit or with all units rented after you move out?

Lance Nelson · Answer

@Jaysen Medhurst Thanks for the thoughtful response. Here are the numbers posted above. I did 3% repairs, 3% vacancy and 5% cap ex. Is that enough in your opinion? Also, all utilities paid by tenant.

Jaysen Medhurst · Answer

@Lance Nelson, first off, your townhouse isn't a good rental, if you'll only be able to clear $50/month before expenses. You'll be losing hundreds each month, hoping for appreciation. That's a bad idea.

The triplex is interesting. Especially, if you can cash flow with such a small down payment. One thing to keep in mind about FHA loans is that you have to pay PMI for the entire term of the mortgage, even after you hit 20% equity.

I'd like to see your full financial analysis of the triplex, I'm worried you're not accounting for some expenses.

Without any more info, I say "B." Sell the townhouse and buy the triplex.