Is this a good deal?

Question

I am possibly about to buy my first fourplex. My fiance and I will be living in one of the units and renting out the other three. We only plan on living there for the required minimum of 1 year. I will include the rent that we will get for our unit when we move out to determin if this is a good deal. We have been going back and forth with the owner and got him down to $163K but I don't think he is going to budge any more. We will also be borrowing about $30K for some rehab with a 203K loan. Here are the details:

Purchase and repairs: $193K

Down Payment: $6755

Rents: $2500 (Could be raised after rehabbing to about $2800/mo)

Mortgage: $967

Taxes: $415

Insurance: $100?

Repairs: $250

Vavancies $250

Total monthy expenses $1982

$518/mo cashflow

Would you do this deal? I know there are better deals out there but since we have to live in it for a year, we would rather not be in a war zone.

Steve Skinner · Answer

I don't think you'ld find many investors (getting only a 4.9% cap rate) being interested?

Melissa Sturges · Answer

Thanks for your advice!  I just needed a little reassurance since I am new at this and always second guessing myself. It's so nice to have the bigger pockets community for support!

Chris Martin · Answer

From what I see, I think this is a GO vs. a NO GO. The good thing about complete rehabs is that you can expect lower maintenance costs in the short term. It's still a good thing to set aside money for CapEx items on a monthly basis, but if systems are new a lot of REI 'cheat' a little and underfund (or don't fund at all) CapEx in the first few years.

Melissa Sturges · Answer

The tennants pay all utilities. By cap ex do you mean the rehabbing I will be doing? Or future replacements of HVAC, water heater, appliances, etc? Those things are all fairly new and in good condition. I know I will have to replace them eventually since those things don't last forever but they should last a long time from now. Is the 10% I took out for maintenence enough to go towards those things in the future? The up front work I will be doing to the property just to update it will be included in my loan. If I am able to get that $725/mo in rent after the reahabbing I will actually make about $758/mo in profit so if I decide in the future to use a property manager for around 10% of the monthy rent I will still have a profit of $478 per month on the building. I think that's okay for only putting $6755 of my own money into it right?

Melissa Sturges · Answer

I will be using an FHA 203K loan so I only have to put down 3.5%. I am hoping to get closer to $725/mo after I do some remodeling and the rental comps do support that higher rent. I suppose I could refinance later on since I plan on creating more equity after the biulding is rehabbed but the only way that would bring my payments down is if I put more cash towards it or get a better interest rate. Or am I missing something?

Melissa Sturges · Answer

$2500 is for all four units. Since we will only be living there for a year I wanted to run the numbers as if we don't live there. We agreed on a price two weeks ago and are still waiting for the sellers signature on the contract. The owner bought the building in 2006 and paid too much for it by todays standards so I think he is having a hard time deciding for sure if he wants to sell.

Chris Martin · Answer

Did you go forward with this? The $2500 is for 3 units, right? And so you get the use of the fourth unit for 'free'. The numbers look good to me, although insurance might be higher.