Owner-occupied Triplex Analysis

21 Replies

Hey everyone,

I wanted to post my analysis of this potential deal to see if I can get some input on it from the veterans in case I'm doing something wrong. This is a triplex I want to move into for about one year to satisfy FHA requirements and then I'd be looking for another triplex or quadplex to repeat the process.

Triplex (1 4BR and 2 2BR)

Asking price: 180k

Rents: 900 + 750 + 750 = 2,400 (Actual would be 1,650 because I'd be living in one unit)

PITI: 1,300

Other expenses breakdown: 

Utilities (15%): 360

Maintenance (10%): 240 

Vacancies (5%): 120

Self-managed (0%): 0

Total: 720

1650 - 1300 - 720 = (370)

I would begin showing a negative cashflow of ($4,440) for the first year, then after moving out, that number would go to:

2,400 - 1300 - 720 = 380 

(potentially more than $380 because the property is in good condition and there isn't really much to repair)

Meaning that after a down payment of $6,300 plus the $4,440 of negative cashflow I will lose the first year, that leaves me at $10,740 all-in. However, the 2nd year I would have a positive cashflow of $4,560 for the year, leaving me at a 42% ROC figure, which seems pretty enticing.

My hesitation to get into this deal stems from having to spend a whole year with negative cashflow, but I understand that sacrifices need to be made in this business, and especially when it comes to owner-occupied units. Would you recommend that I get into this deal? Or should I keep looking for a property that can still cashflow while only occupying one unit?

Thanks for your help! Any advice is appreciated.

I'd look at it like this, are you ok with paying rent at 380? 

Once you hit your reserves for the unit whatever amount your risk appetite can handle, you can stop feeding that fund.  So you'd make more eventually. 

But isn't that the whole point of owner occupied housing, to live nicely without much coming out of your pocket?

Are the meters separate or together? If together are you paying all of it? 

Just things to think about. Also, not a vet, just always curious about MF deals.

Originally posted by @Justin Fernandez :

I'd look at it like this, are you ok with paying rent at 380? 

Once you hit your reserves for the unit whatever amount your risk appetite can handle, you can stop feeding that fund.  So you'd make more eventually. 

But isn't that the whole point of owner occupied housing, to live nicely without much coming out of your pocket?

Are the meters separate or together? If together are you paying all of it? 

Just things to think about. Also, not a vet, just always curious about MF deals.

Thanks for your reply!

Well honestly I don't feel too comfortable with that monthly negative cash flow figure but the property has been updated (new roof, plumbing, renovations) so there should not be any CapEx or costly repairs needed. It's possible I may not even really 'feel' that negative cashflow coming out. However, I am aware that I may have to take money out of my pocket that first year and I am looking at the $4,440 negative cashflow as if it was part of the down payment financed throughout a year.

The listing information says that tenants pay all utilities but I am still budgeting 15% just in case. 

I feel like this can be a good investment if I can get through the first year without too many issues.. But I guess here is where risk level comes into play. I am usually a risk-welcoming individual, but being my first ever deal I want to be 100% sure of what I'm doing.

What would be needed for you to be 100%. Have those conditions been met? 

Also, your utilities shouldn't be factored when you move out, so in terms of 2 years, you'll break a little more than even.

740/month = 8880/year

1st year = -4440

Down Payment = -6300

Total = -10,740

2nd+ year = 8880/year

You should be positive in the 3rd year 1st Qtr overall for your investment minus major

catastrophes, exes, axes and aliens, should be good to go...at least on this investment providing your numbers are spot on.

What year do you plan to refi? I assume after the first since you are using FHA again, and that should be an increase in interest but PMI drops. Was that factored also?

Hi,

We are in the market for a small multifamily (4 plexes) in our area. We factor in property management at 10% even though we will most likely pay ourselves that 10% to really get a grasp of how good the deal is. We also factored in a higher vacancy rate of 8.33% which is about a month since we are starting out and want to be very conservative. 

Your anticipated 380 cashflow seems pretty low for the price you are paying for the property. that is $4560/year which is a 2.5% cap rate. Personally, if my analysis showed that without property management factored in, I would not take the deal. However, I am currently not thinking of potential appreciation. If you think you'd make money off the appreciated value over a few years, sure. But if it's purely a cashflow investment you're looking at, I would keep looking or offer a price where the numbers are more in your favor.

@Justin Fernandez - Yes, at this rate I could break even after 2 years. I have not factored the interest increase because I assumed it would just get canceled out by the removal of PMI, although I know the interest increase will be more costly than PMI but I don't expect it to make much of a difference in cash flow. Would you recommend this deal with a break even point of 2 years?

@Arianne L. - Hi, thanks for your reply. It would indeed be a good idea to factor a management fee but since I would be living at the property I figured I'd never have to go out of my way to manage it so I left it at 0%. And my analysis is showing a 9% cap rate when calculated using NOI, not cash flow. If you don't mind me asking, how much do you usually expect per door? I've heard @Brandon Turner say that he expects at least $100 per door, so using that guideline I thought I was within the ballpark, although I'd love to see closer to $200 per door but that seems to be difficult to accomplish with the current market up here.

You had me at 380 rent (I would've moved in yesterday). Any room to improve rents or decrease expenses? I prefer GRM and cash flow and then potential cashflow with multis under 4 and below. Cap Rate isn't that determining of a factor until you hit 5+.

Things you need to consider prior to closing. 

Do you have a closing date? If so, when?

Is your financing lined up? 

Does your bank have homeowner programs? 

Originally posted by @Justin Fernandez :

You had me at 380 rent (I would've moved in yesterday). Any room to improve rents or decrease expenses? I prefer GRM and cash flow and then potential cashflow with multis under 4 and below. Cap Rate isn't that determining of a factor until you hit 5+.

Things you need to consider prior to closing. 

Do you have a closing date? If so, when?

Is your financing lined up? 

Does your bank have homeowner programs? 

I am actually going to look at this property this weekend and then decide if I want to make an offer or not, so there is no closing date as of yet. I have spoken to a lender though and he gave me the loan estimates. Now he's waiting for me to call back when I make a decision. He suggested I ask the seller to pay closing costs since I don't want to empty out my cash reserves and I'd have a better chance of getting the loan if I do that.

Yes, there is room to increase rents as they are below market.

What exactly do you mean by homeowner programs? I was told that small local lenders are more convenient to deal with than big banks so I've only been speaking to the local ones and they don't seem to have any programs, at least none that I know about. 

Since there are tenants in place, close on the 2nd or 3rd of the month.  That is a seller credit/concession, along with any deposit but remember to have that money on hand as it isn't yours but it's still a credit.

You'll get the prorated portion of taxes for the year.  Also a seller credit/concession.

Look up FHL bank and search for a bank near you that participates in the Homeowner program, that's an additional 5K.

Also, google the county the house is in to see if they have any programs for you and see if you qualify. I know in the area I'm looking the non profits offer free housing education and some assistance of which you would qualify under since you are living there.

Even if you pay the downpayment, you could get a check when you close. 

@Nelson M. Ah yes my mistake in my rushed calculation. Sorry, ignore the previous post about the cap rate.

Are property taxes and insurance included in your PITI? I don't see them mentioned. Also, are you including Pest control, termite inspections, lawn care (if there is one) and garbage disposal (that may be included in utilities) in your calculations? These are some things that we initially didn't account for.

Right now, with the offers we are submitting, we are expecting 150 per door with room to increase rents and make 200 per door. Since the properties we are looking at have been on market for a long time, we are offering lower than list price and hope to negotiate from there.

@Justin Fernandez - Thank you for that very useful information! I will definitely look for banks that have homeowner programs. To be honest, I am not sure of how a seller credit/concession works though, so it would be great if you can elaborate on that process.

@Arianne L. - Yes, property taxes and insurance are included in the $1,300 PITI figure. I do need to look into prices for pest control and termite inspections, thank you for mentioning that. $150 per door is a good guideline, for this particular property I should be able to raise rents and cut down expenses to satisfy that figure. Have you had any experience asking sellers to pay closing costs on a full (or above) price offer? My analysis hinges on the seller accepting these terms, since it may prove difficult to obtain a loan without rolling the closing costs into the mortgage.

It will be in your contract when you put it together.  I would recommend having a lawyer look over it to make sure it's put together properly as I am not one, nor do I know your laws in NJ.

Essentially, if there is any down payment left after seller concessions, you can ask the seller to finance it for you by the seller giving the concession and then tacking it on top of the sale price.  But, your credits for taxes and rents should mitigate most of it. Asking the seller to do that shouldn't be a problem for them, but you never know.

Originally posted by @Nelson M. :

This is a triplex I want to move into for about one year to satisfy FHA requirements and then I'd be looking for another triplex or quadplex to repeat the process.

Look into your strategy real quick. If you buy FHA and then try to buy FHA again you will likely get told "no" unless your circumstances changed (need to move for work, had a child, etc.). That means you will need to refinance out of the FHA loan, which means you will need to have created 20% equity from the 3.5% you used at purchase.

Originally posted by @Justin Fernandez :

How did it end up going?

Thanks for following up, Justin. I am still in the process of trying to get the pre-approval. Bank of America pre-approved me for 150k so I'm trying to get them to raise that amount. One of the local lenders said they would only finance a duplex and not a 3 or 4-unit due to my lack of experience with investment properties. Hopefully I can get financing from somewhere, but if it falls through I plan on starting out small with single-family rentals. Although it also seems difficult to get those smaller loans. Either way, where there's a will there's a way, right? 

Get a letter from a pm company stating their experience, and how they manage.  Have them put it on a letterhead and submit it to the bank.  See if the ends the issue.

Update:

I offered 15k below listing price and the seller countered with 5k more than my offer. We just need to sign off on it and the property will be under contract. I'm preparing myself for what follows! Will be posting a new thread under Investor Deal Diaries shortly to keep track of updates and expenses, in case anyone is interested. 

@Justin Fernandez @Benjamin Blackburn

Awesome! Did the deal work in your favor and your lender approve?

Originally posted by @Justin Fernandez :

Awesome! Did the deal work in your favor and your lender approve?

Yes, my lender revised my pre-approval letter and the analysis numbers seem to make sense. I'm looking forward to the inspections! My only worry is the age of the home (1820) but it does look well-maintained. Hopefully I'm not setting myself up for any big CapEx items.

@Nelson M. Any new updates? I am currently in the same exact situation you were in 8 months ago. I am interested in a duplex in Northeast Indiana and I plan on owner occupying it for at least a year and then getting a refi. There is a tenant currently renting the 2/2 (i would live in the 1/1) for $700. At best (with an accepted offer) I could break even. But I am willing to pay rent for occupying it at first. When I move out and a tenant is in place the property will cash flow $401 a month. This will be my first owner-occupy property and this particular property is a good fit for my new family as it is turnkey. Therefore my expenditures going in are pretty low at $5000. 

List Price $ 109,900
Fair Market Value $ 97,900
Discount (%,$) 23% $ 22,517
Purchase Price (Max Offer Price) $ 75,383
Percent Down 3%
Down Payment Amount $ 2,261
Amount Financed $ 73,122
Interest Rate 4.00%
Costs of Repairs (Make Ready) $ 5,000
Length of Mortgage (Years) 30
Payment Monthly Annual
Monthly Mortgage Payment $349.09 $ 4,189.12
Rental Income Monthly Annual
Unit A $ 700.00 $ 8,400.00 
Unit B $ -
Gross Rental Income $ 700.00 $ 8,400.00
Vacancy Rate 8%
Net Rental Income $ 644.00 $ 7,728.00
Expenses Monthly Annual
Property Management Fees $ - $ -
Leasing Costs $ -
Maintenance Reserve 32.20 $ 386.40
Utilities $ - $ -
PropertyTaxes $ 121.42 $ 1,457.00
Insurance $ 129.50 $ 1,554.00
Other (HOA fees, Lawn Care, Trash, etc) $ 6.67 $ 80.00
Total Expenses $ 289.78 $ 3,477.40
Net Operating Income $ 354.22 $ 4,250.60
Mortgage Payment $ 349.09 $ 4,189.12
Total Cash In (Downpayment + Repairs) $ 7,261.49
Net Cash Flow $ 5.12 $ 61.48 

I worked backwards to see at what price do I earn a profit/ break-even my first year.

Thanks for any advice in advance!!

Michelle

Congrats @Nelson M. ! Sorry for being a bit late to the party but what concerned me is that there was no CapEx nor property management included. What is your overall strategy with this triplex? How long do you want to hold it? I know you said it is in good condition but I still like to sock away for CapEx. I would also run the numbers with PM just because I might not want to manage it 10 years from now. If you plan to sell or have it paid off by then maybe these things are less significant for you! Regardless 380 of CF after you move out seems attractive to me if you only have 10k in the deal.

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