[Calc Review] Help me analyze this deal
Hello, I had been search for a fourplex around within Austin and found one. However, when I ran a calculation based on BP's rental property calculation, the results show so massively negative cashflow due to high mortgage amount, the interest at 6.5%, for FHA loan. According to Zillow's estimated data, it is about a $4,000 total expensive using a base 25% downpayment. With rental calculation, it tells me that the total cashflow is about negative $2,000 per monthly. Since the rental income is not detail in Zillow, I used a rent estimator from google and they tells me the rental is about $2,600 from all 4 units. I am bit confused.
So, I would like to expands my limited experience and with calculation by ask here what is correct calculation process and after result is show, what will be ideal moves about this fourplex? The property is attached below.
Address:
6420 S 1st St, Austin, TX 78745https://www.zillow.com/homedet...
*This link comes directly from our calculators, based on information input by the member who posted.
Aaron -
Help me clarify the type of loan your looking at:
FHA (3.5% down payment - but you have to live in it), or
Conventional investment loan (25% down payment - rent out all four rooms)
@Aaron Kelly I looked up median rent and it showed 1 bed as $1450 and 2 bed at $1780. Total gross rents would be $6460 at median rates. Your due diligence would be to get the most accurate numbers. Are all the utilities separated. Who does the landscaping? Can you get insurance for $60 per unit in Texas?
It looks like you've accounted for all the right expenses. I would double check your rent estimates though. I quickly checked the facebook marketplace around this address and there are 1 bed 1 bath units listed at $900+. At $2,600 for 4 units, you're looking at $650 per unit. I wouldn't completely trust zillow or google on the rent estimates. Use them as a starting point and then make your own estimates with data from apartment postings on facebook, craigslist, zillow, or wherever units are advertised locally to see if they make sense. Then run it by another investor in your area. Also remember that a lot of the asking prices listed on the MLS won't make good deals, so run your numbers and only make offers that work for you. If the seller thinks your offer is too low, then they won't accept it and you move to the next deal.
Quote from @Clayton Plummer:
Aaron -
Help me clarify the type of loan your looking at:
FHA (3.5% down payment - but you have to live in it), or
Conventional investment loan (25% down payment - rent out all four rooms)
Hi, the loan will for FHA loan for 3.5%. Right now I am still searching for Home Possible Loan by Freddie Mac with 5% and flexible PMI (so, it won't be lock for the entire mortgage), so far none came up.
Quote from @Tim Herman:
@Aaron Kelly I looked up median rent and it showed 1 bed as $1450 and 2 bed at $1780. Total gross rents would be $6460 at median rates. Your due diligence would be to get the most accurate numbers. Are all the utilities separated. Who does the landscaping? Can you get insurance for $60 per unit in Texas?
For now, the rental calculation I came up with is without any utilities. Good thing I got result from my real estate agent just now and it stated that electrical and gas are separate but water is together. And for landscaping, there is no other information. I assume it will be up to owner to be responsible for it? For insurance, I believed so. I will use Steadily to look up some property insurances for better rate.
Aaron -
Not all deals are good deals, this one looks like the price is too high.
To assume you're using the 25% down payment version:
If you look at Realtor.com's listing:https://www.realtor.com/reales... you get a better description of the property, including rent roll. 810 and 820 for the two 1beds currently, 1030 and 940 for the two 2beds currently. Those are all WAY below market rent.
Market rent in Austin looks like it's about $1100 for each of the 1beds on the low end and $1350 for the 2beds on the low end. Raising the rent to current market value would be your biggest challenge, especially if the tenets come with the building and they've been there for a while. Low market rents put you at $4900 per month. If you bump the 1/1 up to $1150, you hit $5000/mo.
I used the BP rent calculator to get current market rent numbers:https://www.biggerpockets.com/... I switched the beds/baths between 1/1 and 2/1 to see other offerings in the area.
This gets into the ethical side of landlording. Yes, you're in the business of making money, but at the same time, these people might not be able to swing $1150/mo and $1350/mo rent. Maybe a more humanitarian approach is like $900 for the 1/1's and $1100 for the 2/1's. That puts you at $4000/mo. This way you're helping close that cashflow gap and still maintaining your renters while the entire country is dealing with the current economy and price jumps on everything.
All that said - It's still a bad deal using 25% down at the full asking price - according to the numbers I used on my calculator: $665,000 asking, 25% down,7% APR and 30 year note, 2% closing costs, $880/mo taxes, $500/mo insurance, 7% for repairs, 7% vacancy, 7% CapEx, and 10% for management.
Good luck. This was fun. Thank you for the exercise.
Quote from @Michael Paling:
It looks like you've accounted for all the right expenses. I would double check your rent estimates though. I quickly checked the facebook marketplace around this address and there are 1 bed 1 bath units listed at $900+. At $2,600 for 4 units, you're looking at $650 per unit. I wouldn't completely trust zillow or google on the rent estimates. Use them as a starting point and then make your own estimates with data from apartment postings on facebook, craigslist, zillow, or wherever units are advertised locally to see if they make sense. Then run it by another investor in your area. Also remember that a lot of the asking prices listed on the MLS won't make good deals, so run your numbers and only make offers that work for you. If the seller thinks your offer is too low, then they won't accept it and you move to the next deal.
Ooh, yeah I think you are right. $2,6000 total rental income which results in about $650 for each unit don't seem correct measure to me. Thank you so much for point it clearly! So, I should not be limited myself from just Google or Zillow, but more outsde sources.
@Aaron Kelly your rent is low. I would say $1250 for one beds and $1450-1500 for two beds. The expenses are really high here too. The way you've budgeted for capex and repairs you would be spending $1000 a month on the units. I spend a few hundred on average for duplexes in the area. Maybe $100-200. What we don't know is what upfront capex and repairs the place needs, you'd need to inspect it and get quotes. I actually live right down the street in a duplex and drive by this a few times a week.
Yeah, you all are right. Nearly all of the expenses are high enough that the income from rental are not able produce a decent cashflow. Based on my gathering so far, I was unable to find any good deals from properties within and around of Austin city, with duplex starting at $400k and go upward to over $800k and even worse, the inventory of triplex and fourplexes are so rare. In addition, I noticed most duplex properties priced easily high as much as 500k to 800k while the price of that fourplex I found is only price at 665k, kinda seem like a different measure or in scale something. But even though the price of 665k seem great deal for a huge fourplex property, it is true that most of items are not looks so luxury which will help boost the rental income. I might will also plan to improve that property overt time, as long as I can keep afford to continue for the first few years.
Are you aware of the self-sufficiency requirement for an FHA loan on a 3-4 unit property? A property meets the self-sufficiency requirement if, and only if, the total monthly mortgage payment (PITI) is less than 75% of the property's total monthly market rent. The fourplex you're considering in Austin will qualify for an FHA loan, only if it meets the self-sufficiency requirement. If this is the first time hearing about this requirement, you should get in touch with your lender for details.
This requirement only applies to FHA loans on 3-4 unit properties. It doesn't apply to duplexes.
Quote from @David Ivy:
Are you aware of the self-sufficiency requirement for an FHA loan on a 3-4 unit property? A property meets the self-sufficiency requirement if, and only if, the total monthly mortgage payment (PITI) is less than 75% of the property's total monthly market rent. The fourplex you're considering in Austin will qualify for an FHA loan, only if it meets the self-sufficiency requirement. If this is the first time hearing about this requirement, you should get in touch with your lender for details.
This requirement only applies to FHA loans on 3-4 unit properties. It doesn't apply to duplexes.
Ooh, dang. When I did calculated again for the PITI (Principle, Interest, Tax, and Insurance) together, it is result of about 5,400 which is more than rental income I estimated to come up at 5k. So, in other words, this will fail to qualify for the sufficient requirement. Alright, thank you so much!
lets chat. i used fha multiple times before and as well as conventional to buy. hope i can guide you in any way i can