How hard is it to get + cashflow on owner occupied property (250k+)?

12 Replies

Hello All, 

I'm new to the forums and am interested in owner occupying a 'plex (2-3 units most likely). Prior to discovering BP I assumed the only rules for successful renting were to not have vacancies and not to take massive losses due to repairs/bad tenants. After browsing it seems that a lot of people here adhere to the 50% rule and having positive cashflow of $100+ per door. These metrics have completely changed my outlook on becoming a landlord. In the area that I'm searching (University City-Philadelphia) du/triplexes are going for $250-400k with average rent of 800-1200 per unit. Using this calculator{1}, every deal I look at results in thousands of dollars in NEGATIVE cash flow per year. 

So my questions are:

1) Do these metrics make sense in the context of higher cost RE? Most of the comments I see on here involve properties in the 80-120k range. 

2) Does the fact I'll owner occupied change how I should look at this? ie: opportunity cost savings. Honestly I'd be fine with someone paying my mortgage for me and just saving market rate rent/mortgage every month...perhaps to use later for properties I don't occupy. Is this good enough or are the risks of being a landlord too great for "Hey, at least I don't pay any mortgage" to be sufficient? Basically do I NEED positive cashflow for an investment to make sense?

Thanks for any input!

1. (http://www.goodmortgage.com/Calculators/Investment...)

The reason people discuss lower cost properties is because that's where the cash flow is.  A $400K duplex with total rents of $1600 is going to be deeply cash flow negative.  If you're living in one half, its even worse.

OTOH, a $360K triplex with total rents of $3600 is going to be close to break even, assuming all three units are rented.   If you can buy that for $250K, you should be cash flow positive if all units are rented.

If you live in a multi, you're going to have one tenant who never pays - YOU!  OTOH, you're not going to be evicted or wreck the place.

The 50% rule is a simple rule of thumb for estimating vacancy, expenses and capital.  A big chunk of that is property management.  If you're living next door, I assume you would be doing the management yourself.  So can earn the PM's cut.  PM's here charge 10% of collected rents plus half a month's rent to fill a vacancy.  So, I use 14% as the overall PM costs.  That reduces the 50% number to 36%.

I would still use that estimate, even with the OO. You won't cause yourself some issues that tenants might, but you will also likely spend more on your unit than you might for a rental. So, if total rents are $3600, 36% is about $1300. Your collected rent will be only $2400. So if your payment is $1100 or less you should be roughly break even.

Jon Holdman, Flying Phoenix LLC

Hey D, 

I don't know about other investors but I don't believe in buying anything that produces a negative cashflow, especially as an investment.  Even as an owner occupant of a MultiFamily, My number 1 rule has been make my money when I purchase. That means it must cashflow after expenses and debt service at the point of purchase (or after rehab) and have the potential increase in value at some point in the future for resale.  

But I must admit, great deals are hard to find in desirable areas.  If the property is well kept, has tenants, and is cashflowing you are likely going to be paying retail prices for it, which leaves little profit for you when you want to sell it. 

To counteract this, I began to target foreclosed properties that had no tenants and needed alot of rehab in less than desirable area.   Sure I had to live in a less then desirable neighborhood for a while, but the rewards are worth it in the long run.  

Now if this is just to reduce your house payment and have someone else paying down your mortgage while you live in a desirable part of town then negative cashflow is not a deal killer.

E.J. Mayers

@Jon Holdman Actually I'm not sure if I would even serve as PM, as I have no handy man skills and work full time. So that would be an added expense. It seems like I need to either find a cheap property in a high rent area or combat the income deficiency with unit volume. The former is unlikely and the latter doesn't make much sense in my situation.

@Eric Mayers There are cheaper properties in Philadelphia but I won't be able to sell those locations to my wife. As I mentioned to jon holdman, I have no handyman/rehab experience and feel those types of properties may further complicate matters as I expect to get jerked on my first couple of contractor engagements. It seems like I need to figure out if the potential to have $800-2000 a month extra income outweighs the stress/risk of being a landlord. I'm moving into a property in the price range I mentioned either way, I just figured this would be a good way to save or make money in the process. Any property I purchase would be a long hold unless the market just exploded to the point I'd make massive profits by selling. So maybe breaking even is not a bad thing if in 20-25 yrs the properties are purely positive cashflow due to principal reduction. 

Property management isn't handyman work. Its about finding and screening tenants, collecting rents, and dealing with moveouts. When something breaks, you call an appropriate contractor to fix it, if you're not a DIY'er. IMHO if you're going to buy an OO multi you ABSOLUTELY must do the PM job. Even if you choose not to down the road, this is the core job of owning rentals. If you have a PM you need to understand the job they're doing for you. Doing it yourself when you start is the best way to learn that job.

IMHO, though, the idea of an OO multi is not as attractive as it seems. When you're buying rentals your ONLY goal is profitability. You have to buy the properties that are going to be most profitable for your budget and geographical restrictions. When you buy a residence (which is NOT an investment in my opinion) you typically have much different criteria in mind. Proximity to your job, entertainment, or whatever. View, style, etc. Trying to jam these two sets of criteria into one property almost certainly means giving up many of your requirements on one side or the other. You buy a place you like as a residence that sucks money out of your pocket (most residences do, if you think about it) with some tenants to offset some of the cost. Or you buy a profitable rental that's not where you really want to live.

Jon Holdman, Flying Phoenix LLC

The 2% or 50% rule is very hard to hit in areas you'd actually want to live in. Like stupid hard. If you're going to live in a certain geographical area anyway and your choices are; buy a $300k property and get no mortgage help or, buy a $300k property and have the tenants pay a large portion (or all) of your mortgage...not sure there's even a question there?

I paid $350k for my 4-plex and used an FHA loan. Even with putting only 3.5% down, PMI, etc., the tenants still cover my entire mortgage. I live for free and actually clear ~$150/month. I'm not silly enough to think that's $150/month cash flow but it beats paying the mortgage every month out of my own pocket! My tenants are buying me a building that's only appreciating each year. Pretty nice of them, no? When I move out I'll actually cash flow a few hundred a month even withholding 25% for vacancy, maintenance and CapEx.

Find a place that needs work. If you're contractor averse, maybe not $100k in work but a place you can improve and raise the value on, hopefully raising rents as well. My 4-plex has worked out amazingly well for my wife and I. We selected our tenants carefully and now have a great little community. We're animal friendly so if someone's working late or away we'll take care of each others pets, we have dinners at each others units every few months, etc. I can't recommend this route highly enough. 

I have to clarify this:

The 2% or 50% rule is very hard to hit in areas you'd actually want to live in.

I agree about the 2% rule.  I think that's a bad rule anyway.

The 50% rule, OTOH, appears to apply everywhere.  You don't "hit" the 50% rule.  It hits you.  Its is simply a gross rule of thumb to estimate the expenses, capital and vacancy you will experience on a rental unit.  Its an empirical rule of thumb derived from some large datasets from apartment management.  None of which are currently available here, unfortunately.

When you're analyzing a property, you can use whatever number you want.  25% is an unrealistically low number, though.  Over the long term and for a portfolio of properties when using a property manager you'll be much closer to 50% than 25%.  For any particular property in any particular year you may do somewhat better.  Taxes and insurance are about the lower limit and its hard to get by with zero maintenance (even for newly contructed or rehabbed properties.)  Or your actual results can be much worse.  One of my properties had a major expense, a sewer line replacement, that consumed over 50% of the gross rents all by itself.  You will have those big expenses routinely when you own a portfolio.  If you have just a few properties, its a lot like stepping up to the blackjack table.   Sometimes you have a run of good luck and have a bunch of wins.  Sometimes hand after hand is a loser.

Jon Holdman, Flying Phoenix LLC

Originally posted by @Troy S. :

The 2% or 50% rule is very hard to hit in areas you'd actually want to live in. Like stupid hard. 

To be accurate, this statement should be amended to: "The 2% or 50% rule is very hard to hit in areas you'd actually want to live in, in certain markets.  In other markets, you can find properties meeting the 2% rule that are in decent, working class neighborhoods."

Dawn Anastasi, Core Properties, LLC | http://www.coreprop.biz | Podcast Guest on Show #29

@Troy S.  

Thanks for the input. I'm leaning toward doing this since I will be buying a home anyway. Further, even if I operate at a loss it is likely to be a net positive when compared to what my expenditures would be if I simply bought and lived in a SFH. I plan to use a FHA as well, and perhaps leverage some of my current savings to rehab the property and increase the appeal.

@Jon Holdman  

Thanks for the clarification re: property management companies. I will be able to handle finding tenants and screening, I figured the real value in using a PM company was in having a network of handyman/contractors who could QUICKLY address situations. If an emergency arises I will first have to research costs and then interview and select a vendor to perform the work.That could take a couple of days and then the work STILL may not be satisfactory. I assume PM companies handle this more efficiently, but maybe it's just not cost effective to have them when there are only 1-2 units

Hey @Dave Alexander I am looking into owner occupied multifamily properties and have the same question you had. The current property I am looking at wouldn't have much if any cash flow right off the bat even if I rented out the unit I would be living in after one year. But it is a nice property I would have no problem living in for several years. Despite it not being the best cash flowing property it still seem like a better deal then buying a SFH with no rental income. It would also allow me to further save for higher cash flowing deals down the road. I was wonder if you had any updates on this or any further insight?

@Troy S. you also seem to have to same view on this subject. I was wondering if you had any advice to offer and if your property is still working out well for you?

Thank you for any responses 

Originally posted by @Ryan Ogilvie :

@Troy S. you also seem to have to same view on this subject. I was wondering if you had any advice to offer and if your property is still working out well for you?

Thank you for any responses 

No advice specific to this, it's not much different than buying any multi, you're just losing one of the rents but not bearing the brunt of the entire mortgage on your own as you would a SFH for your primary residence. I'm still in my quad and it's going great. I've put ~$25k into it sprucing it up, upgrading units, repairs, etc. and it's probably worth $100k more than I paid 1.5 years ago. Some of that is value I added through upgrades/repairs and raising rents and some is simply appreciation in my neighborhood. I recently refinanced and now I'm "making" $300/month with me living in it. As rents go up that number will increase. Mind you, I put "making" in quotation marks because that's not actual cash flow, it's simply Rents - PITI = $300/month leftover. When we move out and rent our unit, the building will truly cashflow several hundred a month at least.

I do pay common area electric of ~$18/month, water for all 4 units at ~$110/month, and then there's always CAPEX, vacancy, rental licences, etc. Right now I'm certainly losing a few hundred a month overall to those things but let's not forget the tax breaks and that you have maintenance on any house whether it's a SFH for your primary or a MFH for your primary. Obviously the maintenance will be higher with more units but still, it's a factor with any house.

If you're buying a MFH, the best advice I can give you is separate utilities or budget to make that happen. Next thing is cash flow/breaking even, you should try as hard as you can to at least break even with you living in it, that way, when you leave, you'll actually cash flow. I'd look at it this way; you want to invest, you want to build equity, you want to learn landlording and you need a place to live. Why not combine them and reduce or eliminate your mortgage obligation from your monthly expenses? This frees up money to pay down the house faster, save more for your next investment or take a vacation. I can't recommend it highly enough. 

Wow this is 2 years old but I'll give an update. I ended up purchasing a SFH to live in....:(

Ultimately comfort, location, and amenities of a SFH in the area we liked most won over trying to reduce costs and live in areas we weren't thrilled in and with tenants. The nail in the coffin was when we went to look at an occupied property and the current tenants were aggressive and mean in regards to letting us access the property.

I'm now back in the real estate investment game and am looking for SFH in the sub 100k range in Philadelphia. (Most MFH are above that range)