Owner Occupied Duplex Deal Analysis Requested

5 Replies

My wife and I want our first home that we purchase to be a duplex. We are looking for that so that we can rent one side out and therefore have a very low mortgage payment. Eventually we will purchase another property and rent both sides out. We were going to do this and put in an offer this week, but we ran into a financing snag.

The duplex will sell for $250k and is exactly where we'd want for location, and it is updated. We have a $25k down payment and we're going to finance the rest. Unfortunately, according to several mortgage companies, a15% down payment is required for traditional financing (MI companies would not insure owner occupied duplexes with less than a 15% down payment). That leaves FHA financing. I wanted to see what you all thought of the deal.

Cost: $250k Down Payment $25k

Interest rate: 3.75% (30 year fixed), 5.239% apr (includes fha funding fee of $3938)

Monthly Payment: $1766 ($1060 PI, $70 HI, $394 taxes, $241 pmi)

Rent: $1200 (currently rented, tenets are great and probably will stay)

Net monthly out-of-pocket: $566

We aren't too fond of the high pmi, or the additional fha fees, but doing a higher down payment is not really an option at the moment.  I was thinking that we would not find to many other properties this nice where our out-of-pocket would be so little.

Long term we would rent out both sides and have monthly cash flow of $634.

What do you all think of this deal?

Looks like you will hit the 1% rule but my understanding of your market is you can get closer to 2% but that is just my opinion from reading other members post on the forum, I do not know how true that is.

What jumps out to me is the financing. Have you spoke to lenders that do piggy back loans aka 80-10-10 loan? Also there are conventional loans as low as 5% down for owner occupied units. I would keep digging and stay away from standard lenders like a major banking institution. My facts may be regional but I would think there is something out there that will allow for you to put less then 15% down and it not be FHA.

sounds good, I'll keep looking!  Any suggestions for lenders to look for (credit unions or other ones)?

Love the general deal... I agree that the extra FHA fee and PMI are awful.

  • 401k loan?
  • Ask seller to take 2nd mortgage for $25K?
  • Get the tenants to pre-pay $24k for 2.5 years?
  • Work at Best Buy during the holidays?
  • Loan from family?
  • Pay the seller $5k for an option (usable towards purchase price) of right of first refusal on the property in 6 months (when you've got another $45k) at a price determined now

Some combination of the above? If not, calculate what it is going to cost you to pull the trigger on this deal now instead of waiting. I'm thinking it would be $4k FHA + $6k PMI = $10k over two years. That's a pretty big drain on a $25k investment.

" I was thinking that we would not find to many other properties this nice where our out-of-pocket would be so little" - If this truly is your gut feeling you should go for it, you know your market and area better then we do and if there are not many properties like this out there in your area that fit your criteria don't let the opportunity go! 

@Adam Moyer think you're on the right track, but I would encourage a bit more research. The right track is that you're considering "house-hacking" into a multi-family. You can get in with a low down payment and a low interest rate. Live in it for a year or two and move forward with a cash-flowing property. That's a great idea. It's my life-long dream, but I just haven't been able to pull it off yet.

The challenge in your plan is whether or not this property will really cash flow when you move out. To get your cash flow of $634 you are just doing gross rents minus your monthly payment. But you haven't added in vacancy, maintenance and property management. I use 10%, 15% and 10% of gross rents for these expenses. I think most investors use slightly lower percentages. A few use higher. In any case, you need to account for these expenses to see if it will really cash flow.

Gross Rent- $2400

Monthly payment- $1766

Vacancy- $240

Maintenance- $360

Property Management- $240

Cash Flow- negative $206

So that's something to think about. Some people might take this deal in a highly appreciating market, but most investors will not purchase a house that won't cash flow on a monthly basis after all expenses.

I would keep looking for a better deal, but stick with the same strategy.


Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here