Make sure that the unit can be legally converted.
Yes I have my agent checking on that now. My contractor mentioned it shouldn't be too difficult to legally convert
Howdy @Brian Garcia
You need to provide us your Cash Flow analysis so we can provide you with an opinion.
This is what I came up with
Total Monthly income: $4,000
Total Monthly Expenses: $ 3,282
Total Monthly Cashflow: $718
Total Annual Cash flow: $8,620
Total Investment (Down payment+ closing): $14,350
Cash on Cash Return: 60%
@Brian Garcia Where's your figures for rehabbing into the residential unit?? Gotta add those costs to your initial investment. Also I'm on a cell but it looks like your allowing $17 dollars a month for taxes? In my area property management is 10%. Not sure what your number is. RR
@Brian Garcia , you mean: Monthly income = $2,000; Monthly expenses = $3,232, right?
ie. You'd only be out of pocket $1,232 per month, rather than $2,000 if you just rented there?
Yeah, that could work - but, please acknowledge what it really means to go with an FHA loan.
Of course, you may intend to rent out all of it later - but you'll still have to live somewhere.
[Also, I take it that you mean it could be an 8 bedder, rather than is an 8 bedder?] My 2c...
I can't stress how important it is to find out if the unit can be converted legally. You may have to do extreme measure to do this. Go through a zoning change, etc..
You should personally go down to the building department in that city. Your agent may be good, but don't make a mistake on this point.
@Brian Garcia It doesn't look like you're putting 20% down, have you accounted for private mortgage insurance? It also looks like you've only allotted 2.5% of gross rents for repairs; this seems low from what I've seen. That being said I'm a full fledge rookie with no experience so take what I say with a grain of salt. I just figured I'd comment on what stood out to me.
@Ralph R. I think your cell might be cutting the #s off. $917 for taxes, and the full rehab cost will be 80-90K. I plan to manage myself but I added in 9%.
@Brent Coombs Yes that would be the case for the first year or so. Until I can find the next deal. Yes the unit that needs to be converted has space for 8 rooms but i'm thinking a laundry room may be a better idea. Thanks
@Brian Ploszay Noted I'll make sure to do some digging myself. I'm across the country so I'll call but also try to have a proxy go for me. Thanks for stressing that point
@Andrew Sampino I plan on using an FHA loan so that would be 3.5% down instead of 20%. I didn't account for the Mortgage insurance. I'll look up fees associated with FHA loans and add those in. Does everyone usually use a percentage of the rent for the repairs or a flat rate?
@Brian Garcia Here's a link to some info on the upfront fee and PMI when dealing with an FHA:
Basically, there's an upfront fee of 1.75% of the loan value, which I believe you can actually role into the loan. Then the annual PMI payment is a small yet significant percentage of the loan value.
Again I've never gotten an FHA loan first hand so you'll want to fact check, but this seems consistent with what I've seen on other sites as well.
As for expenses, I would ask someone more experienced than me since that number depends on a number of factors, especially age of the property. However, from what little I have seen people seem to estimate between 5%-10% of gross rents for a first-off analysis. Of course you'll want to get actuals if you decide to go further with the deal.
This article has useful tips on how to find more accurate data for expenses rather than using a simple percent.
@Brian Garcia @Andrew Sampino Brian your correct the cell doesn't work with your spread sheet. Andrew is correct there will be PMI and I believe it never drops off with an FHA loan. You won't get the low down payment if you don't live in the property yourself for the first year or 2. There are rules about that also. I believe non owner occupied is 20 or 25 % down. Better check to be sure. RR
Originally posted by @Brian Garcia :
@Ralph R. I plan on living in this one but I do need to double check on what the best time to move out is. My Mortgage guy told me a year.
@Andrew Sampino I'll adjust my calculation thanks. I was inflating other expenses to account for anything I missed
Brian, of course "the best time to move out is": as soon as allowable! ie. After a year.
But, what's the point of that, if you don't yet have 20%+ equity to be able to refi out of that original FHA loan?
And remember, per my earlier post, if you want to rinse and repeat each year (by somehow managing to achieve the required equity), how long will it take you to actually live for free / generate positive cash flow, seeing as you'll always be only getting half of your next duplex's income; two thirds of a triplex, or three quarters of a quad's. I'm not saying that's bad, but, it does mean you'd (initially) need to refocus your thoughts to not be worrying about positive cash flow, right?
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