Buy and Hold / Duplex / Purchase under FHA, move out in a year

22 Replies


Hoping to solidify this deal:



2000 sq ft total

3 bed / 1 bath each

Contract Price: $110,000

Monthly Costs:

Mortgage Type: FHA

PITI: $810 (4.25%)

Repairs: 0.15*$1350 = $202.50

Trash / Water: $155


Rent: $1350

Capital Costs:

3 month vacancy: $3510

3.5% down: $3850

Rehab: $6000

Inspection: $500


Cashflow: $180

COC: 15%

Cap Rate: 10.2%

Unknowns (working to solve):

ARV (post repair / garage / desert landscaping)

Timeline of getting rid of PMI (add'l $125 cashflow)

More accurate assessment of rents

Cost of a garage / add'l appraisal value / add'l cashflow

Cost of desert landscaping / add'l cashflow (~ $50 - $75 / month) / add'l appraisal value

DIY window cost (estimated as half of contractor quote)

Re-Fi costs


No lender fee w/ 4.25% FHA

Closing cost by Seller

Thoughts?  I don't like the cashflow being below $100 / door, but in this case it could be reasonable given the possible upgrades. I'm concerned the add'l upgrades will lower the COC too much.



@Andrew Whicker  

This deal looks like a pass for me.  

I get a completely different picture than you do when I run numbers on this place.  It looks to me like it is going to cost you money each month.

You talked about adding $50-75/month in landscaping fees in addition to all the other expenses.

Mortgage Rate 4.25%

Length of Mortgage in years 30

Monthly Mortgage payment $522.19 (PITI of $810)

Taxes $171.67 (made up but PITI of $810)

Sewer and Water $75.00

Trash $80.00

Heat/Utilities $-

HOA $-

Cap Ex and Ops $150.00 (your number is $50 HIGHER than this.  $150/month is my minimum, which I hope wouldn't be too severe if you are putting money into the place at the beginning.)

Insurance $116.67 (made up but PITI of $810)

Mgmt Fee $135.00

Vacancy $108.00

Total Expenses $1,358.53

Unit 1 $675.00

Unit 2 $675.00

Total Revenue $1,350.00

Cashflow/month $(8.53)

Cash on Cash Return -0.74% (this is against ~10k out of pocket in and around closing, your numbers)

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It might be good to structure the loan to absorb the UFMIP portion of the MI FHA if you plan to exit FHA relatively soon after acquisition. The 1.75% points will be well saved this way especially if you dont plan to sit on FHA for the foreseeable future.

One thing to mention, FHA mortgages no longer allow you to remove MIP if you have a term greater than 15 years or a LTV greater than 90%. Basically your screwed unless you refi the loan down the road or just pay off the loan.

I would recommend going conventional on this because the difference in down payment on 110k of 3.5% vs. 5% is very little. With a 5% down payment you can still ask for 3% seller assistance which will keep your out of pocket low. I would run the numbers with a mortgage broker to see if you still have enough cash. With a conventional loan, you will be able to remove the mortgage insurance down the road when you have 80% LTV.


@Jeff Arndt  

I can't buy a multi-unit with a 5% down conventional loan, I need 20%. I want to get rid of my PMI by increasing the property value and switching to a conventional 20% down.

@Albert Bui  

What is UFMIP?

@Aaron Montague  

- The note on landscaping was to reduce the water bill by $50 / month due to smarter landscaping which would increase my cashflow by $50.  (I live in a dry state and everyone waters their lawns)

- I will be managing by myself.  No need for including PM fees.

- A PM came back and said rents are between $675 and $775 per unit depending on quality.

@Andrew Whicker ufmip is up front mortgage insurance premium there are two parts with FHA the ufmip and mmi monthly mortgage insurance which is 1.35% of base loan / 12 months to determine monthly premium. Sorry to get technical but that's what you'll have to determine to a do it yourself approach to mortgage planning or you can message me and we can discuss.

also 3-4 even owner occupied conventional is 25% down not 20 however you can buy a 1-2 unit owner occupied with 15% to as low as 5% with single unit under 417k.

well ideally it will be 20% because on 15% down you will have MI and MI will have guidelines to adhere to as well so in essence your scenario will have to conform with conventional guidelines and MI guidelines or find an MI company willing to do non owner 2 units. 

So just because the loan says yes doesn't always mean you will get what the first loan says because if other parties are involved you'll have to appease them both.

This is similar to the 10 max properties by Fannie Mae you might hear about that topic being tossed back and forth. The reason some banks may be able to sell up to 10 loans per borrower but don't is the risk associated with that borrower so a bank may put an addition restriction on their company guidelines to not lend to anyone with more than 4. It doesn't mean 10 doesn't exist it just means you'll have to find someone willing to take the risk or have an operation that can handle that appetite.

Also, these calculations assume the tenants will not pay for any of the water / trash / sewer, but I don't see why I couldn't transfer some of that burden onto the tenants.  The water is not split between units, but I could charge the tenant a flat rate for water (say $50 / tenant / month) that would cover most of the bill.  Is there another way to charge tenants for this bill when the bill is not split by meter?

It would help my cashflow greatly if I could transfer some of this cost onto the tenant and from the advice I've received from PM's, it seems that the rents they predicted do NOT include any utilities, including water.


@Albert Bui  

Thanks a lot for your info.  Something to look into.

Here is a summary of changes (water partially paid by tenant):


Duplex (year: 1958)

Contract Price: $110,000

2,000 Sq Ft Total

3 bed / 1 bath each

House is Vacant (Fannie Mae)

Monthly Costs:

Mortgage, FHA (PITI): $810

Repairs: .15*1350 = $202.50

Trash / Water (avg): $55**

Vacancy: $108

**After billing tenants flat rate of $50 each.  Water bill high in summer due to watering lawn.

Monthly Revenue:

Rent: $1350

Monthly Profit:

Cashflow: $172

One time costs:

Closing costs: $3,850

Inspection: $500

3 Month Vacancy: $3,534 

Rehab: $6000

CoC: 15%

Cap Rate: 10%


PS: Still a chance to reduce water costs by landscaping and reduce mortgage payment by re-financing and getting rid of PMI.

No thoughts?  I've gone back and forth with this one.  I think that the house could rent for more than $675 as some of the rentals nearby seem to be going for $700 at the minimum.  I am being conservative with my numbers.

@William Hochstedler  

@Aaron Montague  

It sounds like you are trying to make the numbers work in your favor. I'm new to this, but I would definitely pass on this deal.

I'm not really trying to.  I talked to a property manager and a PM would pass the water bill onto the tenants.  That changes my numbers quite a bit.  

I also didn't include a property manager fee into the equation because I planned on doing my own management.  Do most people keep this in to plan for the future of management?  That would make sense.

One of the big problems I have is the PMI. It's $125 / month. I guess that brings up a big question: can I re-fi when interest rates are low enough that I remove the majority of that $125 / month? How much will my house renovation work bring up the appraisal value? Right now, at $170 / month cashflow I don't have enough to pay someone to manage the property.

I don't feel there is a risk of not getting $1350 / month, but a risk of not getting $1500 / month.

Also, the comps show that most 'turnkey' duplexes in the area go for ~140k with ~$1300 / month in rent. That would allow me to argue for the appraisal value I need in order to re-fi and remove the PMI once the house is rented.

Anyway, I hope that helps and, no, I'm not trying to get the numbers work.  I'm trying to make sure I see the potential / lack of potential for what it is.  I don't want to turn this house down because I saw it in the wrong light.  

Hi @Andrew Whicker  

Thanks for the ping.  A few questions and a few thoughts:

What is the current property condition?  $6K can go quickly.

Is it up and down or side-by-side?  Basements typically rent for less than above ground units.

Is it occupied and what are the current rents?

Who does mowing and snow removal? This is often an overlooked expense in multi's.

Is there adequate parking?

Have you asked about the possibility of a 1 year seller finance while you do repairs? After 6 months (for many programs), you can refi based on appraised value.

Please provide the PITI breakdown. @Aaron Montague  guessed at the taxes & insurance but I can't believe they're upwards of $3500/yr.

As far as the municipal bill (water/sewer/garbage/911), we always pass it on to tenants.  As you have two 3/1's, it would be easy to just split and rebill.  We even charge a handling fee for this.  Make sure it's in your lease.

Up here, duplexes like this (usually converted older SFR's) go for $140-160K depending on condition and parking.

I've run a bunch of scenarios for FHA's on multis and they are rarely the best option, particularly if you don't plan to occupy it. If FHA is your only choice, make sure you have a plan to get out of it. Remember that a future refi will also cost $3-5K which could possibly be rolled into the loan.

Windows are always tough to gauge ROI on holds when tenants are paying utilities.

As a rule, we always calculate management fees in our numbers whether self managed or not.  Pay yourself or allow room for someone else to do it.  And most definitely include it in the cap rate calculation.

Here's how I'd calculate the cap rate (with your numbers and some guesses):

Vacancy (@8%): $1296

Taxes & insurance: $3000

Maintenance & repairs: $2430

Management: $1490 (9.2% to account for 8% vacancy)

Utilities (when vacant): $130

Landscaping & snow removal: $600

Total expenses: $8946

Scheduled income: $16,200

NOI: $7,254

@ $110k, the cap rate would be 6.6%.  With $0 repairs, your at 8.8%

Another way to look at it is after closing costs and rehab, your into it around $120K. If it's worth $140K ARV a quick sale at 95% of market and 7% closing costs would net you $123,690.

The good news is all the numbers are positive, but pretty thin.  There have to be better opportunities down there.

PM me the address if you want me to run some comps.

Hope this helps.


@William Hochstedler  

- Vast majority of the repairs is new paint / flooring.  Both kitchens need to be updated and the bathroom needs to be updated downstairs.

- Up and Down.  I really had the estimated rents at 700 up and 650 down.

- Vacant.  This is a Fannie Mae property

- Parking is adequate, this is a properly zoned property.

- Don't have costs for lawn care and snow removal.

- See above.  Fannie Mae property.

- PITI: Mortgage: $541, PMI: $123, Taxes: $92, Insurance (worst of 3 quotes): $54

- Future re-fi costs ~$1500 (conservative) when staying with the same broker

- Had an investor friend walk through with me and gave me some good advice on when to replace windows

- Central heat, but no central air conditioning.  Actually, no air conditioning.  The 140k comps also tend to have central AC.  Another upgrade that I've costed out yet.

Thanks for the follow-up.  I agree that the numbers are thin.  I just feel like I've been looking for a while.  I'll keep looking...


Updated over 4 years ago

**EDIT: I have NOT costed out the addition of central AC.

I rescinded.

Thanks for all the help.  It's just aggravating to keep making mistakes when getting these properties under contract.  Learning a lot though.  Also learning who to talk to and what to expect.  

I'm constantly trying to make more offer more realistic from the very beginning.  

Arrgh, I'm just aggravated right now because I thought this was a solid go when that price was accepted. If the price was 100k, then the PITI would be about $50 less. I guess at what point would this particular deal be considered 'good'?


BTW, here are the final numbers that reflect the rental:

- Tenants paying 100% water, trash, etc

- Me paying lawncare and snow removal

- No property management fee included







Run the numbers before you offer a contract.  Once you run a couple properties you'll get a feel for the numbers that are going to work for your risk vs reward tolerance and your strategy.  If you find a property you like but the numbers don't work, lower your price or change your financing till it does...if the offer doesn't get accepted then move on to the next one.

There'll be more. And don't be shy about low-balling REO's. If this one is on the market in a month, you might consider another offer at $80-90K.

Looking at the FHA monthly breakdown, that PMI is killer (over 10% of your expenses). I wonder how many FHA's go under because borrowers run into trouble paying the extra premium.

There's also a HomePath renovation lending program.  I've never been in a transaction that used one, but worth looking into.

Keep 'em coming!

I'm not a big fan of 3/1s- more difficult to get rented out. 

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