Fourplex Analysis Help

Multi-Family and Apartment Investing
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Fourplex Analysis Help

Account Closed
Denton, TX · Member since 2012 · 12 posts · 0 votes

Hello BP, 25-year old from Texas here and I'm itching to get into the game. Here's the first property that I've come across that seemed actually worth my time to crunch the numbers on, help me see if this is a good deal or not. Note: I plan on living in one of the units, self-managing, and renting out the other 3. My goal for a property is to live rent free, so additional income beyond that is not essential.

All units 2/1.5 townhome style, 1050 sq ft. New water heaters installed in March. Currently 100% occupied. College town and within 4 miles of two major universities, but appears to be in better condition than many of the other local college rental properties (based on pictures, have not seen in person). Neighborhood is ok, lots of similar type properties, but is not in a bad part of town. Each unit individually metered for electric and water.

Asking Price: $229,000

Gross Rents (3 units): $2150 per month

Expenses:
Taxes: -$543 (actual 2012 taxes)
Insurance: -$100
Vacancy (6%): -$129
Repairs (8%): -$172

Total: -$944

Mortgage: -$1,055 (3.5% down with FHA. 30-year fixed at 4%)
PMI: ??? How much should I estimate for this?

NOI: $2150 - 944 = $1206

Cash Flow: $1206 - 1055 = $151 - PMI per month

On first glance, it seems like a pretty break even / live rent-free deal, which is my goal. What am I forgetting or leaving out?

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
13y

Hi Aaron,

Let me explain things so you can get a better picture of things.

In the last 10 years a loan cycle has occurred. When the boom happened many years ago conventional loans came out with 80/20 loans. There were two loans created an 80% and a 20% and this allowed there to be no mortgage insurance. It kept payments lower and buyers loved it. There was no money down loans and you could fog a mirror and get a house. Some people didn't even have a job or income! They were called NO DOC loans. Needless to say there were not hardly any loans going FHA and conventional stole the market share.

After about 3 years or so the boom went bust and conventional loans took an absolute beating on these 80/20's as most seconds were wiped out. Conventional got much more strict on lending requirements and upped the percentage of down payment.

Here comes in FHA to save the day before the market totally drops as it is cooling off some before the collapse. FHA says we will do loans at only 3% down and the mortgage insurance is at a cheap .5 of the loan amount. So tons of buyers did FHA loans and FHA stole back the market share from conventional. Then that's when the economy took a dive and FHA had billions in losses from foreclosures and insurance claims from lenders. In the past year the government has been on FHA to boost their reserves from the losses on the mortgage insurance.

How did FHA put a plan in motion?? FHA has been raising the mortgage insurance premium that is part of the loan. It has gone from .5 to 1 at the beginning of the year then about 1.2 and now just recently 1.35 for most borrowers ( the change went up just about 1 week ago).

The other change FHA is implementing is the mortgage insurance WILL NOT go away starting in June. You will be stuck with it for the life of the loan. Now according to my loan guy (verify on your own) that as long as you get a case number assigned before June on a property you buy then you won't get stuck with mortgage insurance forever. It's only if you start the case number beginning June 1st or later. If that falls close to the weekend you want to get your address in for the case number as they shut down on the weekend and you would miss the deadline. One benefit to FHA is when you sell the mortgage will be assignable at the low interest rates in the future to a qualified borrower for a 1% assumption fee according to my loan friend. Also with FHA you can get a gift from family for the down payment 3.5% without nothing down and FHA is more forgiving on credit issues.

After June many people will be using conventional. You can get a gift but also must put some of your own money down to get a loan and amount down is much greater than FHA. A benefit is the mortgage insurance is cheaper.

FHA also has an upfront portion of the mortgage insurance premium at 1.75% that you can add to your loan amount or bring the cash to closing. Most everyone adds it to the loan and saves their cash.

Hope this helps explain things more.

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  • Harry M.
    Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
    13y

    Aaron Powell - Hi, we're more or less neighbors. I live just 40 mins away in Allen.

    Anyway, I found a link for you regarding PMI:
    http://www.fha.com/fha_requirements_mortgage_insurance

    Looks like you'd be paying 1.35% for PMI.

    For estimating your expenses, I'd just estimate it as if you weren't living there, and then when you have the final number, subtract off the rent for one unit to see how you will do with you living there.
    That way you'll get a clearer idea of how the property will perform long term, after you've moved out. For the same reason, don't nudge down the vacancy/repairs to account for you not moving out in the middle of the night or deciding to trash your own property.
    Also I'd do the estimate based both on the 50% rule and by itemizing the expenses that you know about. The 50% rule is a good gut check to compare your itemized figures against.
    Best of luck. I think getting a multi and occupying one of the units is a great way to get started.
    The one bit of additional advice I have is that if you are renting to mostly college students, just be careful that they don't end up seeing you more as a peer, and not the landlord. Not that you have to be "The Evil Landlord" or anything, but I think it's something to watch out for given that you will be pretty close in age to them.
    -Harry

    0Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    13y

    New water heaters... and all the appliances, roof, siding, HVAC, etc. are new, right? Otherwise, calculate in reserves.

    The goal is to live rent free, but don't make it an obsession. You are most likely to have up and down months so make sure you have some reserves ready.

    0Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    13y

    I have learned from others here on BP to always conservatively factor 10% each for vacancy, repairs, and Management. Management because you will want to pay yourself for your time involved in managing the property. Also, for the future in case you decide to have a PM work for you.

    What about the gas/trash/sewer etc? Don't see those.
    Long term Capital Expenditures/emergency reserves: Big ticket items like roof/furnace, evictions, tenant turnover. You'll want to set money aside monthly for this.

    What will the property tax be @ the purchase price? Thats the tax number you want.

    If the building hits positive with all these factored in, if it were rented to 4 people instead of you living there, then its a good buy IMO.
    Do you have other income as well?

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  • Account Closed
    OP
    Denton, TX · Member since 2012 · 12 posts · 0 votes
    13y

    Mehran Kamari

    Good advice on the 10% all around. I wasn't think about the possibility of choosing to be more hands-off with PM in the long-term.

    Yes, I knew I was missing something utility wise, thanks for the reminder. Is there a good percentage estimate for gas/trash/sewer or does it vary a lot from place to place?

    Could you explain a little more about the tax @ the purchase price? Are you saying that when a property is sold they use that figure for tax valuation? How do I go about calculating what the tax would be for the purchase price?

    I have a full-time salaried job and am also part-time self-employed. My wife works full-time with hourly pay. We live on about a third of what we take in, so we've got a pretty comfortable budget.

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  • Account Closed
    OP
    Denton, TX · Member since 2012 · 12 posts · 0 votes
    13y

    Harry M.

    Thanks for the link, that's exactly what I was looking for. How does PMI work? Is it a 1.35% annual fee? Does this get wrapped into the mortgage, or is it kept as a separate charge? A mortgage banker I was talking to said that in June the FHA is changing the rules to no longer remove PMI after 20% equity has been reached, is this accurate?

    Good advice about crunching the numbers without me in the picture, as well as the strict 50% rule. I had figured that since I wasn't using PM I could comfortably weigh in under 50%, but I obviously wasn't think the long-term buy and hold possibility.

    That's a really good point about the age similarities to my prospective tenants and I.

    0Reply
  • Account Closed
    OP
    Denton, TX · Member since 2012 · 12 posts · 0 votes
    13y

    Chris Martin

    Thanks for the reality check.

    As far as calculations go, how do you figure in reserves? If I refigure the above numbers to show 10% of property income towards maintenance and repairs, does this rule-of-thumb figure include the cost of capital expenditures as well (over the long-term)? Or do I need to plan on setting aside more in addition to this 10% for capital expenditures?

    Getting initial reserves ready won't be an issue thanks to my wife and I making much more at our jobs than we currently spend.

    0Reply
  • Harry M.
    Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
    13y

    Aaron Powell

    Couple more links for you -

    This one mentions the upcoming changes but doesn't have the new figures/rules, but it has some info I thought you'd find useful about how mip works (it is paid monthly as part of your mortgage btw):

    http://themortgagereports.com/7570/fha-mip-cancel

    This one talks about the new rules regarding when you can/can't cancel MIP:

    http://portal.hud.gov/hudportal/documents/huddoc?id=13-04ml.pdf

    It does seem that you can only cancel your MIP if your loan for 90% or less of the purchase price, and even then only after 11 years.

    Hope this helps.
    -Harry

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    13y

    Hi Aaron,

    Let me explain things so you can get a better picture of things.

    In the last 10 years a loan cycle has occurred. When the boom happened many years ago conventional loans came out with 80/20 loans. There were two loans created an 80% and a 20% and this allowed there to be no mortgage insurance. It kept payments lower and buyers loved it. There was no money down loans and you could fog a mirror and get a house. Some people didn't even have a job or income! They were called NO DOC loans. Needless to say there were not hardly any loans going FHA and conventional stole the market share.

    After about 3 years or so the boom went bust and conventional loans took an absolute beating on these 80/20's as most seconds were wiped out. Conventional got much more strict on lending requirements and upped the percentage of down payment.

    Here comes in FHA to save the day before the market totally drops as it is cooling off some before the collapse. FHA says we will do loans at only 3% down and the mortgage insurance is at a cheap .5 of the loan amount. So tons of buyers did FHA loans and FHA stole back the market share from conventional. Then that's when the economy took a dive and FHA had billions in losses from foreclosures and insurance claims from lenders. In the past year the government has been on FHA to boost their reserves from the losses on the mortgage insurance.

    How did FHA put a plan in motion?? FHA has been raising the mortgage insurance premium that is part of the loan. It has gone from .5 to 1 at the beginning of the year then about 1.2 and now just recently 1.35 for most borrowers ( the change went up just about 1 week ago).

    The other change FHA is implementing is the mortgage insurance WILL NOT go away starting in June. You will be stuck with it for the life of the loan. Now according to my loan guy (verify on your own) that as long as you get a case number assigned before June on a property you buy then you won't get stuck with mortgage insurance forever. It's only if you start the case number beginning June 1st or later. If that falls close to the weekend you want to get your address in for the case number as they shut down on the weekend and you would miss the deadline. One benefit to FHA is when you sell the mortgage will be assignable at the low interest rates in the future to a qualified borrower for a 1% assumption fee according to my loan friend. Also with FHA you can get a gift from family for the down payment 3.5% without nothing down and FHA is more forgiving on credit issues.

    After June many people will be using conventional. You can get a gift but also must put some of your own money down to get a loan and amount down is much greater than FHA. A benefit is the mortgage insurance is cheaper.

    FHA also has an upfront portion of the mortgage insurance premium at 1.75% that you can add to your loan amount or bring the cash to closing. Most everyone adds it to the loan and saves their cash.

    Hope this helps explain things more.

    Podcast Guest on Show #47
    NNN Invest53 Reviews
    WebsiteView Page
    1Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    13y

    Aaron Powell
    Honestly I don't know the percentages for those utilities because I have made it a buying criteria so far on my properties to have them individually metered and tenants pay all utilities (Duplex/SFH). You can ask the seller for his statements for these costs THEN confirm with the actual utility providers(Can't trust seller). This is what I've read, but I've never actually called myself hehe. Benefit of this is you can see if the seller has a knack for "miscalculating"

    Yes, they will use the purchase price for the new tax valuation. So figure out how they are calculating their property tax for that county. What exact percentage for the area your property is in. You can google search for "____ County Property tax Percentage 2013" Or straight up contact the tax assessor

    Make sure the quad will pass FHA inspections. I hear they are pretty picky when it comes to certain minor things and this can delay closing big time.

    Awesome with living on 1/3 of your income. Use the rest to acquire assets and you guys will have a great life!

    0Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    13y

    Thanks Joel Owens for taking the time to share that with us. Great/Useful info!

    0Reply
  • Harry M.
    Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
    13y
    Originally posted by Aaron Powell:

    As far as calculations go, how do you figure in reserves? If I refigure the above numbers to show 10% of property income towards maintenance and repairs, does this rule-of-thumb figure include the cost of capital expenditures as well (over the long-term)? Or do I need to plan on setting aside more in addition to this 10% for capital expenditures?

    Getting initial reserves ready won't be an issue thanks to my wife and I making much more at our jobs than we currently spend.

    Hey Aaron, regarding reserves - for smaller properties (ie 1-4 units), most people don't necessarily allocate a percentage above and beyond what you would for CAPEX. You just maintain a floor - no less than 6 month's PITI per property. If you fall below it, you put 100% of cash flow towards replenishing it, if it's intact, you leave it be, and continue saving for the next property.

    @Mehran Kamari - what you said about the tax assessor setting the tax valuation to the purchase price isn't 100% accurate for TX (or at least Dallas and surrounding counties). They come up with a fair market value using a kind of mass appraisal technique - looking at comps and adjusting for sqft, beds/baths, condition, etc. They don't just set it automatically to what you paid.

    0Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    13y
    Originally posted by Harry M.:
    Originally posted by Aaron Powell:

    As far as calculations go, how do you figure in reserves? If I refigure the above numbers to show 10% of property income towards maintenance and repairs, does this rule-of-thumb figure include the cost of capital expenditures as well (over the long-term)? Or do I need to plan on setting aside more in addition to this 10% for capital expenditures?

    Getting initial reserves ready won't be an issue thanks to my wife and I making much more at our jobs than we currently spend.

    Hey Aaron, regarding reserves - for smaller properties (ie 1-4 units), most people don't necessarily allocate a percentage above and beyond what you would for CAPEX. You just maintain a floor - no less than 6 month's PITI per property. If you fall below it, you put 100% of cash flow towards replenishing it, if it's intact, you leave it be, and continue saving for the next property.

    You can figure out reserves by using the Replacement Reserve Schedule on the Operating Income statement of Freddie Mac Form 998, which is also Fannie Mae Form 216. I don't have a link to the interactive form.

    I have no idea if lenders require this form or equivalent any more, but regardless it is helpful for keeping track of future expenditures.

    1Reply
  • Mehran K.
    Investor · Wichita Falls, TX · Member since 2010 · 3k+ posts · 603 votes
    13y

    Ah didn't know that about the property tax around there. Good Info. Just be sure you know what it's going to be so your analysis is accurate.

    0Reply
  • Kelly N.
    Investor · SE, MI · Member since 2013 · 1k+ posts · 461 votes
    13y

    Hi Aaron,

    Looks like you've received lots of great advice, I love this community!

    On the utilities, I don't even bother asking the seller. If they provide numbers, great, but as Mehran mentioned you are not going to want to trust them anyhow. It only takes a little time to call the providers yourself, and even if they are metered individually you want to check that the tenant is paying the bill. We are closing on a triplex (any day now!) and the gas and electric are separated, but the previous landlord pays the gas bills. I am guessing it is to be more competitive with the local market, but we'll look at changing that when we take possession.

    On the taxes, pretty much just assume they are going up. Our other triplex closed in January, we got the new assessment about a month later, totally unrelated to purchase price (we paid a lot less than what they claim it is worth). It was a 2.3% increase on our already high taxes. You should get a little break of the taxes while you live there, at least on the portion of the square footage you occupy, but I'd do the calculations based on what the numbers would be if the whole thing was being rented out.

    Kelly

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    13y

    Chris Martin gave you a wonderful link for calculating the expenses and reserves. The one issue with that form for the reserves is determining remaining life; you'll notice that the remaining life duration is left blank. I suggest you look up useful life for each class of equipment first, and then subtract the date of manufacture from today's date to get the "consumed" life, then subtracting that consumed life to get the remaining life. Note that you don't have to use the IRS figures for expected life (the next link gives some IRS expected life figures).

    http://www.dummies.com/how-to/content/calculating-the-useful-life-of-a-fixed-asset.html

    Some sources of info for useful life expectancy of equipment:

    http://www.nahb.org/fileUpload_details.aspx?contentID=99359

    http://www.oldhouseweb.com/how-to-advice/life-expectancy.shtml

    http://news.consumerreports.org/home/2009/03/appliance-life-expectancy-national-association-of-home-buildersbank-of-america-home-equity-study-of-.html

    http://www.cibse.org/pdfs/newOOMtable1.pdf

    Cost segregation link for those who feel the need:
    http://www.costsegs.com/sites/default/files/media/Repair%20v%20Cap%20ATG_0.pdf

    0Reply
  • Michael Heisterkamp
    Arlington, TX · Member since 2013 · 62 posts · 11 votes
    13y

    I also live in Texas, as far as the use of life goes for major property operational equipment. I figure it this way. Anything that derives the majority of its use in the summer subtract 15% of the expected life and allocate money accordingly. Anything that gets the majority of its use in the winter add 5% to the operational life. Roofs, subtract 30% of the operational life for composite roofs, ie normal shingles. The heat and high amounts of direct sunlight are terrible for the bonding compounds in the shingles. Before you go forward with the purchase check the zoning regulations in the area and see if you can put up a metal roof that slides together as a roofing material. This will lower your insurance costs as well as greatly extend the life of your roof and has far superior protection against hail and repels a high majority of solar radiation. I am not exactly sure what the metal type is called but its that stuff they use on barns and what not. Not the metal that looks like slate but the kind they put up in roof pitch segments.

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  • Account Closed
    OP
    Denton, TX · Member since 2012 · 12 posts · 0 votes
    13y

    Joel Owens

    Thanks for taking the time to reply at length to give me some background. It's been stressful trying to wrap my brain around the world of financing. I only have one question for you: What exactly defines "starting a case number". What step of the home buying/closing process is that?

    0Reply
  • Account Closed
    OP
    Denton, TX · Member since 2012 · 12 posts · 0 votes
    13y

    Harry M. Ok, thanks for clearing that up. I figured the rule-of-thumb percentage would have factored in CAPEX.

    0Reply
  • Account Closed
    OP
    Denton, TX · Member since 2012 · 12 posts · 0 votes
    13y

    Harry M. Also, you mentioned a "mass-appraisal" technique done for tax valuation. Is there a way to know what that is going to be for sure at this point in the game, or is it guess work until everything is said and done?

    If not, will using the highest amount of taxes paid in recent years give my calculations enough of a safety margin?

    0Reply
  • Harry M.
    Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
    13y

    Aaron Powell - No way to know for sure what the taxes are going to be for future years. What you could do is look at the tax values of surrounding similar properties. If yours is considerably lower, then that may indicate a greater chance of it going up faster.

    0Reply
  • Account Closed
    OP
    Denton, TX · Member since 2012 · 12 posts · 0 votes
    13y

    Great, thanks

    0Reply
  • Account Closed
    OP
    Denton, TX · Member since 2012 · 12 posts · 0 votes
    13y

    Another noob question for anyone who wants to answer:

    I factored in potential insurance costs, but was really just making a guess, as I have never owned a property or been required to hold insurance. First, is this just "homeowner's insurance", or is it called something else when you own an investment property (or in my situation, where you live in your investment property)? How does an insurance company determine your rates, is it just based on certain characteristics of the property being insured? What insurance companies offer competitive rates that I should check out first?

    0Reply
  • Angie Menegay
    Rental Property Investor · Irving, TX · Member since 2010 · 107 posts · 34 votes
    13y

    Here's my understanding about insurance based on my personal experience with rental properties:

    1) You'd want a Landlord policy, not Homeowner. The biggest difference is the amount of personal property coverage you want to purchase. Tenants will typically need to purchase their own renter's insurance policies to cover their personal properties. You'll probably buy another renter's policy cover the gap for yourself if needed. Other things that come with a Landlord policy are Liability (also available for Homeowner's), Vandalism, Theft, Lost Rent coverages, though these are mostly optional. Landlord policies are usually a tad cheaper than Homeowner because of the reduced personal property coverage afore-mentioned.

    2) Your rates will depend on your own credit score, age, and condition of the property. And sometimes whether you bundle policies with a carrier or not.

    3) I personally use Allstate because I have all Homeowner, Auto, Umbrella and Landlord policies with them. So far, they give me the best premiums for the coverages (knocking on wood...). I haven't been able to find a better deal, even from independent insurance brokers. I know they're not the best, but they're the best I could find at the moment.

    Hope that helps,
    Angie

    1Reply
  • Account Closed
    OP
    Denton, TX · Member since 2012 · 12 posts · 0 votes
    13y

    Thanks Angie, that helps a lot.

    On a side note, the seller's agent sent me a P&L statement from 2012, and it wasn't too exciting.

    2012 had an NOI of of $7972 and had 74% of gross income go towards expenses, and that's with the current owner self-managing the property. Two out of the four tenants were paying very sporadically, granted, they are both gone now. Also, new wood floors, new a/c unit, new appliances in one of the units, in addition to smaller maintenance issues. I'm waiting to see if he can produce sheets from the previous years to see if it's any different.

    Are numbers like that a dead giveaway of a dud property that's not worth my time, or is one year's P&L Statement not enough data to make that determination?

    0Reply
  • Angie Menegay
    Rental Property Investor · Irving, TX · Member since 2010 · 107 posts · 34 votes
    13y

    I think you'd have to analyze those 74%. What are the details? Taxes, insurance, repairs? The taxes and insurance numbers help give you a better picture of what they might actually cost. What is the nature of the the repairs? Are they big ticket items that would typically happen every few years? Are they those new wood floors, A/C unit, appliances that you just mentioned? If so, they wouldn't be typical maintenance issues that you expect every year. In fact, they would be nice updates to the property that you didn't have to pay for.

    I don't think there's a short and simple answer to your question :-(. You need to study the details of those numbers to get a better understanding of the units' condition.

    Angie

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