Am I missing something?

Question

Hello everyone!

My name is Eric Galey and my wife (Lindsay) and I are trying to purchase our first multi-unit property to house hack in the Louisville, KY. However, we are getting discourage when evaluating properties using the BiggerPockets Rental Property Calculator. Just about every property we evaluate does not even come close to getting us to at least $100 per door, when evaluated as if we were not going to live there.

Here's an example, please tell me if i doing something wrong, making false assumptions, etc.

See image below:

We used 5% for vacancy, repairs, and cap ex

We used 10% for management fee but would manage ourselves while living there.

To get to $100 per door would have to get the property for 130,000 but it's currently listed at 205,000.

What am I missing? Please help!

Thanks in advance!

Michael Seeker · Answer

@Lindsay Galey - I have to take back some of my comments on the feasibility of this property after taking a look at the google streetview.  I was thinking this was on another, more desirable section of Garvin, but it is right next to a very ugly 60's multifamily property.  This isn't an area that will attract great renters and you might not be able to be as aggressive with the rents as I had previously mentioned.

You can change a lot of things about a property, but you can't change the neighbors!

G. Brian Davis · Answer

@Lindsay Galey - I agree that $100/door is a good minimum target. I wouldn't go below that. The numbers you're using aren't necessarily wrong, either.

To answer your question, I wouldn't be afraid to make lowball offers. The worst they can do is come back at you with a counteroffer you don't like.

Lindsay Galey · Answer

@Pavel Reyes Valdes - Thank you for the reply. I sent you a connect request so I can private message you in the future. However, in the meantime, I will just post answers to your questions here.

Property address is 1116 Garvin Pl, 40203

I used 3.5% as down payment but could go higher. Currently looking at FHA loan but that is not a necessity. Did include PMI but just guessed on the amount per google searches. Property is a duplex with 1 unit currently rented at $800/month so I used $800 for second unit.

Thanks again for your help and advice!

@Brian Davis Thank you for the reply. You are right about it being hard to find a good deal, but I guess if it was easy everyone would be doing it :-). I appreciate the advice on getting off-markets deals. We've been following Brandon Turner's and Scott Trench's advise on making sure to include cap ex, vacancy and management fees and feel better now knowing that the numbers don't work because the deals are bad, not because the numbers are necessarily wrong.

Do you think $100 per door is a good target?

Would you recommend I just run the numbers and figure out what price actually works for the property and make an offer even if it is incredibly low?

Thanks again for your help and advice!

G. Brian Davis · Answer

Hi @Lindsay Galey & Eric,

As you're discovering, finding a good deal can be a big challenge.

One of the strategies we recommend to our students for on-market deals is setting alerts and trying to make offers on the same day that a deal hits the MLS. Occasionally good deals come along on the MLS, but they move quickly.

You can also try to find off-market deals, by talking to wholesalers, turnkey providers, and REO managers. And there's the oldie-but-goodie of driving for dollars.

But it's definitely hard work to find a good deal.

No matter what, do NOT compromise on your ROI and cashflow targets. You'll find a good deal sooner or later, just be patient and invest the time and effort.

Feel free to shoot me a PM any time.

Best,

Michael Seeker · Answer

Thanks for the mention Pavel - you've set the bar pretty high!

Lindsay - As Pavel mentioned, I love the Old Louisville neighborhood and own several properties there (and always have an eye out for more).  There are a lot of bad properties in the area that will be nothing but headaches due to poor maintenance/ownership practices for many years.  The property you're looking does not appear to be one of them.  It's on a nice, quiet street and looks to have been completely updated very recently.  It appears whoever did the work ran out of money and fudged on the cabinets and some of the appliances to save a buck.  The cabinets are probably good for 5-10 years, but they are cheap, low quality and will not weather very well.  That being said, it's got all new mechanicals and most/all sheetrock.  You will be hard pressed to find another multifamily building in this area that is for sale, at a reasonable price and in such good shape.

Duplexes in this area and/or the Highlands don't usually look good on paper due to the high comps and low rental income (compared to a larger multifamily).  You'd probably be able to push rents up to $900 range or maybe even a bit higher if you put in nicer appliances and both units have access to laundry and offstreet parking.

Overall, you might be hard pressed to find a better owner-occupied property than this one.  If you're only planning to live there temporarily (0-2 years), then you might want to find something where the numbers crunch much better.  If you'll be there a while, then I would say the personal appeal and ease of ownership should weigh more heavily than the bottom line.

You may also want to play with the numbers you are using in the BP rental calculator.  Maintenance and upkeep expenses should be much lower on this property than many other multifamily properties in this area.  If you're using a flat amount (say 25%), then a poorly maintained property with lots of deferred maintenance will look better on paper than this one but you'll likely not do as well with regards to net income.

Feel free to PM me if there's anything I can help with

Tom Ott · Answer

MFRs are a bit risky no matter how you slice it. You cannot estimate that both units will be full. You will never sync up those leases.

Lindsay Galey · Answer

@Michael Seeker Wow!!! Thank you for the detailed response and for taking the time to really look into the property and give an honest assessment. Being this is my first post on the forum, I am blow away by the response. I was worried I wouldn't get a single reply.

@Andrew Johnson Here's the thing: we are in the process of selling our primary residence and are looking for a house hack. We have been evaluating properties looking for a good deal and have been coming across the issues discussed in this post. We considered reverse engineering the sale price needed to make the numbers work but have been reluctant to make any offers at those price since they are so much lower than the asking price. So to answer your question, we are newbies who are too scared to make an offer largely because the price difference between a cash flowing offer and the asking price are so large. However, thanks to you guys, we have a new found confidence and will be making low ball offers like the dickens, lol!

Pavel Reyes Valdes · Answer

@Lindsay Galey Now I understand your numbers a lot better. Location is prime in this case and that's why their price is so high. I think your best option is to follow other's advice here and just run the numbers that make sense for you and submit your best offer. If they won't take it, move on. Louisville's market for MF is getting hotter and hotter.

I think that the best advice for you looking for MF in that area will come from @Michael Seeker. He owns several units in Old Louisville and the Highlands and will tell you a ballpark opinion about price with a quick analysis.

If you ever need some help with comps or ARV just send me a PM and I will be glad to help.

Pavel

Pavel Reyes Valdes · Answer

Hi, I would like to help you look into it, but without the address or at least the location is hard to give you an opinion about price. The amount you are using for down payment does not come even close to 5%. What kind of loan are you looking for? I'm assuming you are shooting for an FHA Loan with 3.5% down.

You will need to factor in your PMI, but some lenders will give you a loan with a Lender paid PMI if you are willing to take a higher interest rate.

If you cannot get the property for a price close to what you need, you will have to move on to the next one or put more money down to make the numbers work.

Your monthly income seems pretty low also. In Louisville, a 1 bedroom apartment in a not so good location rents for no less than $550.00 a month. Same location for a two bedroom 1 bath rents aroung $600-$650 a month.

Send me a PM with the actual address and your rents so I can give you a more accurate opinion.

Regards,

Pavel

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