I'm looking for some opinions regarding buying a duplex to househack. I have a property thats on mls I made in mind. I want to purchase with a FHA loan so I will have PMI. With this property the owner pays all utilities besides electric. I'm trying to base my offer on the numbers after I am no longer living there as I plan to for a year or so and then try to househack something else. The numbers:
Will rent for $1700 (whole building after I move out)
Taxes/insurance are $375/month
Utilities are around $250/month
I'll set aside $340/month for reserves
I offered $109000 so that I would be financing around $105000 and that would give me a PITI of around $1025 (including PMI), and because its very close to 80% of ARV allowing me to potentially refi out of the FHA and free up that PMI money. I'm looking for feedback on the line of thinking here. I know there are things I can do to alleviate the burden of the utilities or get more rent (I.e. raising rents, coin laundry, charging for storage/garage) but I don't want to count on them when determining an offer.
Thanks in advance!
@Alexander Gee , with your current numbers, do I understand correctly that you will cash flow about $85/mo after you move out? that's a small margin for a duplex. Scale of 1 to 10, how confident are you that you can increase the cash flow by the time you are ready to move out?
Refinances are not free, maybe run number to see if a new loan for 109k without PMI is going to improve your situation.
@Amanda G. That’s about right, I knew the margins were pretty thin and I i was trying to weigh that fact with the benefits I’ll get from hacking. It seems like most investors would probably buy with the same criteria as any other investment irrespective of the benefit from hacking.
@Alexander Gee . People buy for all sorts of strange reasons. Disciplined investors make choices based on their buying criteria. Some of those criteria can be intangibles- it's not all about the numbers. For example, I only buy where I would feel comfortable walking by myself. If this meets your intangible criteria, it may be worth doing, even with currently slim margins. (Incidentally, that's why there seems to be a lot of action in small multi- people are willing to pay more because they are living there). I kind of wonder if BP is changing the market by promoting this house hacking idea. But I digress.
Hi @Alexander Gee ,
This doesn't look bad. The first few years may have small cash flow. Refinancing after you are past needing PMI can be worth it if the mortgage rates don't go up. You should consider the refi cost and where the interest rates are at a the time.
When I first started I also set aside a large amount for repairs and maintenance. However once that savings gets large enough you may not need to set aside as much. If you are saving $340 a month and do not have large things pop up in a couple years you have a bit over 8k sitting there. So if in a couple years you haven't had a lot of repairs come up you could reduce that saving each month from $340 to $170. I tend to keep 10% of rents for repairs until there is 20k in savings and I have 7 units. With one unit having 8k set aside should be plenty. This way you could have better cash flow later.
Have you checked the rents in the area for similar places? This is often the best way to know if the rents are accurate. I like to run the numbers as if I had to rent the place out for 10% less than the area average. Sometimes selling agents can list rents that aren't accurate. I have even seen a lease that was inflated to make the numbers look better. The tenant had not paid a deposit so they had added $200 a month over the first year to build a deposit. If I hadn't talked with the tenant during the inspection I wouldn't have known.
I hope this helps. Good luck.
Great thoughts from both of you guys, thanks for the input! I think thats where I struggle, based on everything I hear and read I feel like I need to be strict on the reserves. I also don't have much capital right now so I'd really want to focus on building that up. I feel like I would be more apt to move on it at a higher price if the situation were to make my cost of living a lot cheaper right now but that would not be the case given the piti/utility situation. I really appreciate the comments from everyone!!