How Much Cashflow To Expect? FHA, Hacked MFH. Riverside County CA
noneya · Member since 2017 · 53 posts · 20 votes
Okay I am doing research on getting my first deal. I want to set up auto notifications with some real estate agents. Tell me if this is wrong.
Hello Realtor X, Please notify me of all XX-plexes that come into the market that I can buy with an FHA Loan 3.5% down, live in one unit, rent out the others and make at least $XXX of cashflow.
I would like to utilize an agent for now, since I do not have my own actual license.
In broad terms, say we found a good deal on like a 4-plex. What would should I be looking for in income? Is it realistic to say 1000 dollars a month cash flow if all units are rented? Or would I be lucky to break even?
I want to at least get some leads coming in while I am furthering my education now, on the chance that I could get that deal sooner rather than later. I just need a bit more of a frame of reference for this market.
Let me know if I need to elaborate on anything.
I would just ask them to set you up for an autosearch that sends you all of the multi's, regardless of cashflow. This will show you everything that comes up in the area and give you good practice of analyzing all of them. An autosearch will obviously not do cashflow calculations, and expecting them to do all of that for you is a bit much.
If you don't see anything on the market, you can start up a mailing campaign to send letters to all of the multi family owners asking if they have any interest in selling. That is what I am doing right now, looking to do the same thing with an FHA and house hack.
Howdy @Stephen Bagnani
It's my understanding that it is very expensive investing in California. I guess due to higher property prices and taxes. I don't invest there so I really don't know. If it is true then I would think it would be more difficult to get that kind of Cash Flow even without House Hacking. $250 per month per unit is very good. Most are hoping for a minimum of $100 per month per unit.
Have you been looking online at multi family properties in your target area? If so what are some examples of the numbers you are seeing? I think you will find you may only be able to break even for Cash Flow while you are living there. If it will meet your Cash Flow goal after you move out and have it fully rented then it would be a good deal.
As far as the letter to Realtors you can put anything you want. Just realize they may not be able to meet that Cash Flow requirement.
I would just ask them to set you up for an autosearch that sends you all of the multi's, regardless of cashflow. This will show you everything that comes up in the area and give you good practice of analyzing all of them. An autosearch will obviously not do cashflow calculations, and expecting them to do all of that for you is a bit much.
If you don't see anything on the market, you can start up a mailing campaign to send letters to all of the multi family owners asking if they have any interest in selling. That is what I am doing right now, looking to do the same thing with an FHA and house hack.
Thanks for the input I was hoping I could use an agent to help me with analysis, because I don't really know how to do that yet.
So If I look at Trulia, the mfhs I am seeing in the area are like mid 3's, and to afford it with my FHA and 15k savings. I would need to float around low 3's.
@Stephen Bagnani Most realtors don't have a clue how to work with investors and as such would have no clue how to help you evaluate cash flow. That's up to you. If you ever run across a realtor who will evaluate a deal for you, then you had better be able to double check the figures like your financial health depended on it.
Since so few realtors know how to deal with investors I think sending letters to realtors is a waste of time.
The best way is to meet them is face to face. But where you might ask? I would go every real estate investor club in Riverside County, network your *** off, and meet all the investor friendly realtors. Investor friendly realtors go to these meeting to pick up investor clients and because they also are investors. Ask one of these realtors to work with you.
In Redlands, I got $525/door/month clear on a 6-plex, so it is possible to make a nice return.
I prefer MFUs for the economy of scale and the immunity from feast or famine on a SFR at move-out time. There's only one roof, one property tax, one insurance bill, and one sewer system to maintain.
Thanks for posting this @Stephen Bagnani. I am in LA and looking to do the same thing with perhaps only 2-3 units. I am wondering how much of a gamble I'd be taking because negative monthly cash flow seems pretty risky.
@Kiersten Vance, in your experience, is it still worth it to invest in CA if you can simply break even each month? I am a resident here so living in 1 of the 2 units would be ideal.
Renting is negative cashflow too, so even if you are only breakeven with "house hacking" you're still losing less than you would otherwise.
That said, it sounds like the original poster plans to use every last bit of cash on a 3.5% down payment, which is not a sound strategy (there will likely be additional closing costs and you'll need a cushion for repairs, etc).
Hello @Alyssa B.
What is your goal with real estate? Are you currently renting or do you own a home? Do you have kids? Will you be staying in the same general area for a while? It all really depends on your specific situation whether or not it is worth it to invest in CA right now.
Example situation here: Say someone buys a 4 plex (the max # of units you can buy with a residential loan) and lives in one of the units. The person was previously renting a similar type apartment for X per month in a similar area. To make the example simple, the transition of moving from their previous place to the new place doesn't affect their life at all. If you can buy the new building and break even every month including repairs, cap X, mortgage, insurance, taxes ect, then you are now saving that X per month you were paying before in rent. I would say that is a great deal as you are paying less than you were before and your tenants are paying down the mortgage for you. This type of situation will be a little hard to find, especially in the LA area as prices are high. I would still say it is a good deal if you can find a place with negative cash flow of anything up to X dollars that you were spending on rent. You would just be paying yourself rent instead of a landlord. Some would argue that it is still a decent deal to buy something with more than X in negative cash flow as you are paying down the mortgage and hopefully accumulating appreciation.
Hopefully my explanation is easy to understand and easy to see how it depends on your goals and whether or not moving into a unit would drastically change your life and if the benefits would be worth it to you or not. Feel free to reach out if you have any questions!
@Kiersten Vance I am currently renting and single. No kids. I do plan on staying in the area. I realize MFUs are a good investment, though breaking even with a MFU comes with a lot of landlording responsibilities in addition to my full time job. Ultimately, I'd be working 2 full time jobs in the hope that my free labor will result in a great investment down the road. I'm very new to REI but I'm also 26 and looking to get myself in the door. Right now, I'm thinking that house hacking with a SFR in a growing neighborhood with a good school district would actually be a more sound strategy. With that being said, I really need the right real estate agent to know what neighborhoods those would be. What are your thoughts on that strategy vs. a MFU?
Hello @Alyssa B.. I would not say managing 3 tenants (in a 4 unit MFR with you living in the 4th unit) would be a full time job for you. I have 8 units and it is no where close to a full time job for me and my units are short term rentals so we have a lot more turn over than most long term renters would. Depending on your area and your type of tenants obviously you will have more/fewer responsibilities. Even though you would not be cashing flowing every month, your tenants would be paying down the mortgage for you so in a sense you are making money every month, it is just going into your equity. House hacking is also a great idea, but you would definitely not be breaking even unless you found a killer situation. You would still have land-lording responsibilities, albeit less of them. I see you mentioned growing neighborhoods, are you hoping to bet on appreciation and sell in couple years for a much greater return? This may or may not happen. The market is high right now and may come down. Everyone has their own beliefs about what will happen in the market, but solely betting on appreciation isn't the best strategy unless you can hold on to the property for 10+ years. You can also house hack a duplex/triplex/quad as well. If you are living in a 2 bedroom or 3 bedroom unit, you could rent out those extra rooms as well to help make more profit. If you are willing to share your own house with other people, that might be a great option.
I just moved out of a sfh with like 12 tenants. Lol! So sfr are my backup plan.
@Stephen Bagnani Every market is different but I know the Riverside market is one of the more affordable markets compared to SD, OC and LA. Cash flow might be still minimal. Definitely connect with an agent that knows investment properties who can fill you in on the market condition and outlook.
@Kiersten Vance Great explanation on the renting vs buying situation! I agree with your opinion; much better to own and pay down the mortgage compared to renting.
@Casey Murray I'm glad you said that about the market condition and outlook. I have begun looking to see what's out there and the MFRs are VERY hard to find in my price range. The area I'm looking in is a hot area also so any investor would be eager to pay cash for it. I do intend to live in my investment property, at least to start, but also realize that any MFR I find in my price range may not look nearly as nice as a SFR that I may able to buy in the same price range. I suppose one might call this a conflict of interest in a crazy market.
I talked to a loan officer and a realtor a couple weeks ago and basically, what Alyssa said. MFR's get snatched up by cash buyers. It's kind of sad. What is entry-level?
@Alyssa B. Not only is it hard to find deals in So Cal but most traditional buyers putting 3.5%-20% of the purchase price as a down payment are losing out to buyers putting down 30% and up. I would consider expanding the location of where you want to live/invest to increase your odds of getting a good property. Not the answer most want to hear but until we have the next market correction, competition will remain the same.
This thread has been super helpful. Thanks all for your responses. I have a few more questions for anyone willing to answer:
I received 1 pre approval quote from a mortgage broker and would like to see what my options are. How many brokers does one get a number from when "shopping around?" Do any of you have any recommendations for brokers in the area?
What does it take to be able to see listings before they are posted? How does that process work?
@Casey Murray another newbie question since I clearly don't know the market...
Do people have any idea when the next market correction might be? Years?
@Alyssa B. No worries. That's a tough question to answer since there's so many micro and macro variables at play. The median home price today is near the median home price at the height of the market in 2008 before the crash. A couple of economists I follow suggest the next market correction will be sometime in 2018 but again everyone has a different opinion. Time will tell!
@Casey Murray hm so the question is, should I buy now when prices are inflated to own something? Or should
I wait to see if prices go down...
@Alyssa B. its nice to see someone so active in the forums. In regards to your question about shopping around for mortgage brokers. I would call a bunch. Just make sure they don't all pull your credit. Only let 1 pull your credit and then just tell the others what your credit is and ask them their fees and rates. There is a lot of variation in broker fees and rates. Make sure you shop around and get the best deal for your situation.
As for seeing listings before they are posted, its hard to do and very unlikely that you would be able to get any of them since you need a loan. Real Estate Agents are not allowed to hold their listings off the market unless the seller expressly agrees in writing for them to do so. With the market being pretty good, it is unlikely a seller would want to do that.
As for waiting for the market to drop again, it depends on your situation as I mentioned before. If you are wanting to stay in the same place for a while and you can find a deal where you break even or at least break even with you paying a "normal rent", then it buying now and having the tenants pay your mortgage would seem like a good idea. If you are banking on appreciation and hoping to sell in a couple years for a large gain, that may or may not happen. If @Casey Murray is right and the market crashes in 2018, you wouldn't be able to sell for a while without losing money. There are some deals to be found however that need some updating and work. By putting in a little sweat equity, you can give yourself a small buffer for when the market drops.
The reason I aim for rental income is because it is not affected by a real estate crash.
The reason I aim for rental income is because it is not affected by a real estate crash.
That's a good one Stephen ... if the real estate market crashes, I assure you that the rest of the economy and your rental income will not be immune.
They are few and far between these days, but you may consider looking at HUD foreclosures. They usually open up the bidding to folks like you who plan to use them for their primary residence first for a window of time before it is opened up to all (including investors).
Also, if you are planning on buying a 3 or 4-plex using FHA, you should research the "self sufficiency rule" as this may limit the markets and price points you could buy in.
Finally, the advise given to find something that needs work that you could add equity to is good advice, even if you plan to hold not sell. Problem with that is the FHA inspections are so picky, they will not allow a FHA lone on a property with hardly any defect, including something as minor as flecking paint (I sold a property with a 3 year old paint job to a FHA buyer and this got called out, mortgage refused until remedied). It will therefore be difficult to find a fixer (which you should) that you can qualify to buy with FHA. For this and other reasons, I would research if you could qualify for a low down payment conventional mortgage with PMI instead of FHA.
@Alyssa B. I agree with @Kiersten Vance and would add that if you buy now, make sure the demand in that specific market won't fall because of the crash. The last thing you need is to buy a property towards the top of the market and then subsequently experience vacancy.
@Alyssa B. I agree with @Kiersten Vance and would add that if you buy now, make sure the demand in that specific market won't fall because of the crash. The last thing you need is to buy a property towards the top of the market and then subsequently experience vacancy.
Where are all of these magical markets there rental demand is high and they are more immune to experiencing increases in vacancy (or price drops for that matter) when the economy has a downturn? I will tell you where, they are in the nicer neighborhoods, where the prices are higher and the initial cash flow is lower. It is these same neighborhoods where rents will tend to go up the most and fastest when the economy is running on all cylinders. These neighborhoods are not totally immune to increased vacancy in a downturn, but the effect is far, far less. However, this is in direct contrast to the OPs stated desires (if I'm understanding correctly) to have higher cash flow day one ... always important to consider both the quality of the cash flow in addition to the quantity ...