Should I flip or hold my first multi-family property?馃
Investor 路 Salem, NH 路 Member since 2020 路 9 posts 路 3 votes
I am 19 looking to buy my first investment property and I found a good deal in New Hampshire. I am not sure whether I should flip it or hold it as a rental property? The house is listed for $350,000 3000sqft 8bed ($115/sqft) comps are selling between $150-200/sqft. Not sure how I will fund the deal...I could possibly come up with the 3.5% if I get a FHA loan. If I flip I know I will need some sort of private money loan. Any advice?
Hey Devin,
Based on your description, I'm going to go ahead and guess you're looking at 4 Lenox St in Derry. I want to preface my comments by saying that I am not well versed in the specific prices in central NH (I'm on the seacoast).
That said, it looks like it might make a decent house hack. I don't see anything in the pictures that raised any flags that would cause the home not to go FHA. So, if you wanted to own a home, and have the tenants pay most of your mortgage, that could potentially be a good deal.
However, as a straight investment you won't be able to use FHA anyway, and based on the 2 bedrooms currently available for rent in Derry, I don't see those apartments making enough money to even cover the mortgage, cap ex, etc., let alone making you any money.
At 19 though, house hacking anything will give you a big leg up on future investment; if you can come up with 18k+ for an FHA mortgage (3.5% + closing costs), and it's a place you want to live, why not go for it. I don't see a ton of opportunity to value add to the property as it looks like it's in good shape, but again at 19, could still be good. That said, you could wait 6 months and see what happens with this market and all the foreclosures that may be coming, and there's probably no need to rush. But of course no one knows what the market will do.
Hi @Devin Miles,
Respectfully, if you don't have the financing lined up, you don't really know if you have a good deal or not yet. Financing costs and/or terms could kill your deal. It happens all the time. Once you know that, you can look at market rents and see what kind of cashflow you'll be looking at if you hold. If you flip it, what will repairs cost? Do you know why it's selling so far below market? Also, if you need to go hard money or conventional investment loan, you'll need a lot more skin in the game than 3.5%. You'll also want to think about how far away this is from your current home if you're going to manage a flip from out of town. There's a lot more, but these are good places to start.
Do you have anyone local, near you who is experienced and can guide you through or partner with you on your first deal?
I do not yet have a connection with someone. I need to network and find someone that could help me through this deal...I live in southern NH
Hey Devin,
Based on your description, I'm going to go ahead and guess you're looking at 4 Lenox St in Derry. I want to preface my comments by saying that I am not well versed in the specific prices in central NH (I'm on the seacoast).
That said, it looks like it might make a decent house hack. I don't see anything in the pictures that raised any flags that would cause the home not to go FHA. So, if you wanted to own a home, and have the tenants pay most of your mortgage, that could potentially be a good deal.
However, as a straight investment you won't be able to use FHA anyway, and based on the 2 bedrooms currently available for rent in Derry, I don't see those apartments making enough money to even cover the mortgage, cap ex, etc., let alone making you any money.
At 19 though, house hacking anything will give you a big leg up on future investment; if you can come up with 18k+ for an FHA mortgage (3.5% + closing costs), and it's a place you want to live, why not go for it. I don't see a ton of opportunity to value add to the property as it looks like it's in good shape, but again at 19, could still be good. That said, you could wait 6 months and see what happens with this market and all the foreclosures that may be coming, and there's probably no need to rush. But of course no one knows what the market will do.
Hi Devin
Congrats on wanting to get into rentals. I wish I had started at 19!
I have rentals in southern NH, and several in Derry specifically.
Looking at the listing, I'd say you've found a deal that could work as a rental, but you'll also find others in Derry on the MLS that compare. If you don't have financing in place, I wouldn't rush into anything. As far as hard money and a flip, that won't pencil out.
If you do pursue this as a rental, here are a few things to consider. It鈥檚 117 years old, so you鈥檇 want to be very aware of what the condition is. The pictures don鈥檛 look bad, but not having a cap ex fund is not wise. Also, it has a lot of bedrooms, but it鈥檚 not a 4/4 split. At 6 and 2, you probably won鈥檛 get much more for the 6 bedroom than you would for 4, so in this case 8 bedrooms may not prove a plus. Also I couldn鈥檛 find the number of bathrooms per unit, but know that a unit with many bedrooms and only one bath won鈥檛 command the rent that multiple bathrooms will.
Good luck! Start looking into financing options and don鈥檛 rush into anything!
@James Smith you are a genius! Yup that鈥檚 the property lol. Im gonna take a look at the property on Wednesday. I really appreciate your input and wouldn鈥檛 mind talking to you more if you were able to. But if I were to live in it I would live in the small unit and rent out the bigger one or possibly convert the 6 bedroom unit to 2, 3 bedroom units.
@Daniel C. Thank you! I would love to talk to you for further advice for my future and maybe we could partner up for some deals so you could show me the ropes?
Hey Devin,
No problem, hit me up if you got questions or whatever. I would like to echo what Daniel said about the 6 bedroom, it's not gonna net you much more than a 2 or 3 bed. If the layout makes sense to convert, just remember a couple of things. Most importantly, is it an allowable use with the city. If it needs a special exception or what not. If it's in the "general commercial District," then according to Derry, there's no way to add a unit to that building legally. There is no addition of residential units allowed in that district according to a quick scan of the zoning ordinance, so that's probably a no go for you. If it's another commercial district that allows this (I am not familiar with Derry's code specifically) there's probably also an impact fee you'll need to pay as well to add a unit, and it's often 10k+. Just keep this stuff in mind when you analyze the deal.
If I was you I'd still shoot for a house hack first, though I'll defer to people who know more about the Central NH market on if that's a good long term deal even if no owner-occupied, but I'd be surprised if you had enough cash at 19 to do that deal without living in it anyway.
Hi @Devin Miles, great to see other young guys looking to get started in real estate and analyzing deals! Sometimes its a good thing when you post about random properties on the internet because smart NH investors like @James S. and @Daniel C. chime in to give you advice about how to approach (or not approach) a deal. I would echo a lot of what has already been said and add some additional thoughts as follows:
1) This is a nice house with a little bit of income potential. This is not a great rental property. Think about it this way... if you owner-occupy this property and you live in the 2BR and rent out the 6BR, no matter what type of tenant that you find, that's a LOT of people beating on your unit. In a 2BR apartment you usually have 2 - 4 people living in the same space, using the same kitchen, the same bathroom, etc. In a 6BR apartment you have anywhere from 5 - 12 people using the same kitchen, same bathroom, all causing significantly more wear and tear to your unit because of the number of people using it. If you live in the 6BR and rent out the 2BR... well... why do you need a 6BR apartment? You're 19 and probably single or with a partner (unless you have an extended family I don't know about you're hoping to move in) so that's a pretty big house for one or two people. Yes... you could rent it by the room... but the bank won't count any of the room rental income towards your loan amount and also renting by the room is a beast of its own when it comes to investing.
2) The location isn't great for Derry. At a surface level, you're in downtown Derry which has definitely grown a lot over the last few years. However, this property has a pizza shop on one side, a large strip mall abutting your backyard, a house on the other side, and a pharmacy across the street... and you're one door down from one of the busiest roads in downtown Derry. Not exactly an ideal location for a family that's going to be living in a 6BR apartment (back to my earlier point).
3) Adding units is WAY more trouble than its worth. I'll admit, I'm not the most familiar with Derry building codes, but I know pretty well what the basic standard is for places like Manchester or Nashua and usually when you add a unit or take a unit away, that requires you to bring the ENTIRE building up to code; specifically fire code. Because you'll be increasing the density of the building, there's a strong possibility that the town of Derry will require you to sprinkler the building which will not come cheap. This would range from $30,000 - $50,000 in most 3,000 SF properties depending on the layout and need for water. You will end up losing out by attempting to convert this into more than 2 units. And if you did this under an FHA loan your note could be called by the bank if they find out because they definitely do not allow people to make substantial changes to buildings that they have loans on (and adding or removing units definitely fits that criteria).
At a surface level, a 3,000 SF two family in downtown Derry for $350,000 is a pretty decent price. You'd be hard pressed to find a duplex in Manchester or Nashua for the same price point that's a nice property! But there's a reason for that asking price and I strongly advise against anyone jumping into a project that big or that quirky for your first deal (no matter if you have $10K in the bank or $1M in the bank). Certainly don't give up... but maybe change your criteria and keep an eye out for something a little bit more safe for your first house-hack because having a stable foundation in a real estate portfolio is the real path to success in investment... risky purchases with big rewards might seem like a good way to start investing... but unless you have a lot of experience and cash in the bank, its just glorified gambling in my opinion.
@Matt Lefebvre Loved your input! Thank you! What I really want is a simple duplex but they are so rare!
Great advice @Matt Lefebvre...I didn't even think to mention having to bring the entire building up to code! Definitely another hidden expense that people don't consider when doing their calculations. My recent building was a 3 unit that has one unit that's much too large (3000+ sq foot), but after realizing that same fact (adding sprinklers in a 1860s brick home), we decided against it as the cost was too high, and besides which there was no good way to add fire suppression without destroying the character of the home.
Are duplexes and other small multis in good condition cash flowing in the middle of the state? I only ask because here on the seacoast, in just about any B or A area, they are really only making sense for house hacking. I see people buying 350k duplexes where the total rents are 2500-3000, and that's just not enough in my opinion. This is a generalization of course, but some of the duplexes I see here, if they are being bought by investors, have to be from people betting on appreciation (which, to borrow your phrase, I feel is glorified gambling), because there's no way they are cash flowing long term in these units. There were duplexes in my neighborhood three years ago that were overpriced (as relative to rent, the 1% rule, the 50% rule etc), three years ago, and they are selling for 70k more now. The rents have gone up in the past three years, but not 35k a unit up. So, good on the owner for the appreciation, but I'm not sure what their play is, if not appreciation.
So if central NH is making money on good condition duplexes from just a pure cash flow standpoint, that would be good to know, since I don't want to buy a value-add property an hour away from home. Any input you have on that would be greatly appreciated.
Always have a great agent that understands construction or an agent that brings a contractor with your inspection.
These two elements will save you so much hassle.
Good luck man
@James S. no they still don't make sense... and its definitely a challenge. In most of Southern NH when you're dealing with duplexes or smaller multifamily properties, the numbers produce low cash flow, break even cash flow, or even negative cash flow (as is the case with most duplexes). It's almost impossible to purchase a duplex at full market value with minimal work and create a positive cash flow investment. The vast majority of buyers for residential multifamilies are owner-occupant or out-of-state buyers with more money to burn. I really only see a positive cash flow scenario possible with some type of value-add. That's why I'm a huge proponent right now of owner-occupying multifamilies and jumping from building to building to grow a portfolio in the short term because its so challenging to have a good cash on cash return otherwise.
@Devin Miles "simple" duplexes are more rare these days than before... but the problem isn't the rarity... it's the competition! I constantly see these types of buildings bid up on the price because there are so few of them out there. We're closing in on a sale for one of our customers of a duplex over $200K/unit in Manchester! It's crazy how competitive it gets.
@Matt Lefebvre OK so we're in agreeance that Duplexes don't make any sense basically anywhere people in NH want to live. Good to know that I'm not way off in my analysis over here, and that it's crazy all over the place in the state. Guess I'll stick to value-add stuff in my home market for now, though even those have mostly creeped up too high as well. Maybe the COVID foreclosure boom will help pull things back to semi-reasonable, though I'd rather no one lose their home.
If you want to flip you can always use hard money, but I would caution you as a first time investor. This property might be cheap for a reason and might not fetch as much as you think. Also, what sorts of improvements will you make and do you know firmly how much those will cost?
I am generally a believer in holding real estate, but that doesn't mean flipping doesn't have its place. However, be mindful of the capital gains taxes which will be taxed as short term.
@Devin Miles figure out what your goal is and work backwards to determine what investment meets your goal. For example if you need to build capital quickly then maybe flip to start or if you want long term cash flow then invest in a buy and hold. You need to figure out your goal first!
@Devin Miles A lot of good advice here already. As others mentioned, you need to know your financing situation (private money, HML, bank, seller financing, etc.) first and figure out a strategy that will work for your available resources. Once you have the strategy, establish your own criteria on what's considered a "good deal" for you, and then learn how to analyze deals. While you do that, grow your network. I would start with an investor-friendly realtor, then grow your connections from there. With the pandemic, I found that online forums and Facebook groups are good places to virtually network. The fact that you are on this website at that age, with determination, you will go a long way in the industry! I wish you the best!