[Calc Review] Philadelphia, Multifamily, House Hack, FHA 203K

Member since 2019 · 6 posts · 1 vote

Sounds like quite the project to undertake. I wish you the best of luck. I’m currently looking to undertake a single family house for myself on a vacant lot. What I have been quoted for designs have been upwards of 15k+. Might be something you want to get some proposals on soon.

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Jaysen Medhurst

Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes

7y

@Nick Schmid, I love your ambition and vision. Seeing opportunity where others don't is a real differentiation in this business. That being said, you really need to get aligned with a great, experienced, local contractor sooner rather than later. That's the only way your going to know what the realistic cost might be. Things get real expensive real fast when you're working in the city. Right now my initial concerns would be (aside from financial ones, which I'll outline below):

What environmental concerns exist on the site? Oil tanks, etc.
Can the current foundation even accommodate an additional story? The building is likely 75-100 years old or older. If the foundation isn't capable of the additional load, it's game over (as far as FHA 203K).
Is the lot zoned for an additional unit?
How much will the utilities need to be updated? Can they support a 4th unit? How old are they? Will the city require you to bring the water, sewer, power, and gas connections up to 2019 standards?

Financially speaking, Oi! This is not a project for the uninitiated. There are so many hoops and so much red tape. The road to new construction is filled with potholes, all of which could leave you in ruin. I'm not being dramatic here. There's a ton of risk. And the fact that you've never done any deals (let alone ground-up construction, in the city no less) makes me very nervous.

I think your construction costs are unlikely. The costs could easily be double what you estimated. @ill this even qualify for FHA? What's the limit in Philly?
Your ARV looks low. I'm seeing 4-units around the $1MM mark on Trulia. This is where things get super tricky. Will this be worth what it costs to build? In order to extract the most value, you'll need to put up an A-class property, which can balloon your costs.
Construction time could easily be a year or longer. How are you going to carry this? You could be looking close to $6000/month just for the mortgage.
$10k for plans sounds super optimistic. Have you called any architectural firms?
Your rents don't look high enough to support this even at the $600k ARV. You're just hitting the 1% rule and have nearly 100% financing. Some of your expenses look overly optimistic (water/sewer, electric, garbage).

The reality is that small multi-family (4 or less units) are rarely built for a reason: the economics just don't work. Look at other new construction going up in the city and what do you likely see? Small 3 or 4-unit buildings being replaced with 6 to 10+ unit, A-class buildings would be my guess. That's where the numbers start to work. The professional developers have figured that out.

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Troy Sheets

Developer · Philadelphia, PA · Member since 2013 · 1k+ posts · 902 votes

7y

Originally posted by @Nick Schmid:

I have spent considerable time looking at this ambitious deal. It is fairly complex, especially for a first time house hack investment. I want to know what I am not taking into consideration & what questions other experienced investors would be asking. My hope would be to refi to a conventional loan & drop the PMI after roughly 3.5 years when I calculated I would have 20% of the loan paid down. (correct me if I'm wrong with any of these numbers)

There are several challenges with this deal & property as well as a few unknown variables which I will address. It is currently a corner triplex row home that is metered with separate water & electric & qualifies for a 10 year tax abatement. There is significant structural damage that leads me to believe a complete demolition & rebuild would be the best way to approach. I know this is possible with a 203k as long as there is a pre-existing foundation. My hope would be to transform it into a 4 story, each of the 4 units having 2 Beds & 2 Baths & a common access to a roof deck area.

Here are the Big unknowns as of now.

- Cost of a complete demolition & debris removal. (In Philadelphia I have found some estimates to be roughly 10k-15k) this would be rolled into the mortgage & obviously known before hand. (waiting to hear back from my 203k contractor on this)

- Cost of Architectural plans (estimating roughly $10,000) separate from analysis. This will allow my FHA consultant to dictated must have components.

- Approval of permits & blueprints as well as the time it will take for them to be approved.

This is my biggest concern, the time it will take for the City to approve the necessary permits & complete required inspections. There are no guarantees as to how long each of the needed items will take & I can only sustain for so long with the monthly payments while it is an active construction zone & not being rented out.

Things to consider, I will be house hacking the deal living in a unit for at least a year & even though I have allocated 10% for Property management fees I will be the PM for the meantime. This all means I will be cash flowing $273 a month while I live at the property.

BP community is rich with knowledge & insight I welcome feedback & questions. This is the 25th multifamily property I have walked through & the 60th property I have seriously analyzed since I have started my journey. If pulling off something like this was easy everyone would be doing it, I'm set in my ways to take a different approach towards my ideal freedom. Thanks for the help!

View report

*This link comes directly from our calculators, based on information input by the member who posted.

A few things that jump out at me. 4 stories (above grade) requires 2 stairwells. Can you fit 2 stairwells and still get 2/2's on every floor? Just because there's 3 units there now doesn't mean you'd be allowed to put 3 units back, let alone 4. You can only build 80% lot coverage on most zoning classifications for a corner property, so how big is the parcel? What's it currently zoned? This will tell you the footprint you're working with and what you're allowed to do by right. A zoning variance can get you more units or square footage but they take an extra 3-4 months at best and cost a few thousand and they're not guaranteed.

Demo will likely cost more than $15k. Plans will likely cost more than $10k. You'll also need structural and mechanical engineering. You should budget around $117/ft for construction not including any of the other stuff I just mentioned. The demo and plans could take up to 6 months then construction could be anywhere from 6-9 months. I didn't look at your calculator so not sure how any of this lines up with your projections, just FYI. Good luck!

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Austin Haley

Property Manager · Philadelphia, PA · Member since 2018 · 10 posts · 4 votes

7y

Hey Nick I would be happy to help. I'm a licensed agent here in Philly, but I deal strictly with investment properties. I have very good connections with zoning lawyers and demolition guys as well. Might I ask the location? The lot size will determine how many units you can build. If the lot isn't large enough, you might be stuck with a triplex. What does public record say about the lot dimensions?

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Troy Sheets

Developer · Philadelphia, PA · Member since 2013 · 1k+ posts · 902 votes

7y

Originally posted by @Austin Haley:

Hey Nick I would be happy to help. I'm a licensed agent here in Philly, but I deal strictly with investment properties. I have very good connections with zoning lawyers and demolition guys as well. Might I ask the location? The lot size will determine how many units you can build. If the lot isn't large enough, you might be stuck with a triplex. What does public record say about the lot dimensions?

Or, as I stated above, he could only be allowed a single family in its place. What's there now may be illegal, which I see often, especially in W. Philly, and won't be allowed to go back up as a triplex.

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Mayer M.

Investor · Cherry Hill, NJ · Member since 2016 · 860 posts · 324 votes

7y

@Nick Schmid

@Troy S.

I completely agree with Troys statements. I am quickly learning the ins and outs as I have a few multi family projects in the philly area. My first order of business was to always make sure I had the correct zoning.

plans are around $10k + MEPs and Architectural

Geotech is about $1200

Demo $15k+ depending on the structure

it would great if you could provide the lot and structure size and current zoning

Good luck with everything.

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Nick Schmid

OP

Real Estate Investor · Philadelphia, PA · Member since 2016 · 9 posts · 1 vote

7y

I appreciate all of the feedback and insight. @Jaysen Medhurst you bring up a lot of good points. The property currently has 3 separate water & electric meters. @Troy Sheets I did not know about the two stairwells that is an interesting point and that amount of time for plans and construction seems to push the limits of what is allowable with a 203k loan yet alone what I could afford to pay per month without rental income. @Austin Haley @Mayer M. Per the Philadelphia Property records website & a phone call to the zoning office it is currently Zoned RM-1 with a Land Area of 1440 (SQFT) and an Improvement Area of 3099 (SQFT). I'm currently waiting to hear back form my contractor regarding some of these specific questions I will be sure to let you know how this plays out. Thanks all.

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Austin Haley

Property Manager · Philadelphia, PA · Member since 2018 · 10 posts · 4 votes

7y

@Nick Schmid RM1 allows for multi family 2-4 units. You should be able to build a quad with 1440 sqft lot size. Minimum is 360 per unit so you're right on the money.

check out page 12 and 13 for more details:

https://www.phila.gov/CityPlanning/resources/Publications/Philadelphia%20Zoning%20Code_Quick%20Reference%20Manual.pdf

I'll PM you my zoning lawyer's info, he's incredibly knowledgeable and always happy to help

1 Reply

Ryan D.

Developer · Philadelphia, PA · Member since 2018 · 100 posts · 81 votes

7y

Nick, I love your ambition and admire your vision. What are your cash reserves? If you're spending all of your available cash for your 3.5% FHA down payment then this is a horrifying amount of leverage. There are far too many unknowns and this is the type of deal that only makes sense if everything goes as planned - not a good risk-reward ratio in my mind. The city will drag its feet throughout the whole process and your cash burn will be rampant. Too many variables, keep searching and don't let the results deter you. My partner and I walked through over 100 properties before buying our first in Fishtown. With the amount of creativity you show with finding this deal, you'll definitely land a great deal when it comes your way.

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Joe White

Property Manager · Philadelphia, PA · Member since 2015 · 515 posts · 196 votes

7y

@Nick Schmid It does seem ambitious. So many variables and hidden costs, you will not know about until the uncover themselves, one by one. It's the type of thing that you don't know what you don't know. Just my two cents!

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Nick Schmid

OP

Real Estate Investor · Philadelphia, PA · Member since 2016 · 9 posts · 1 vote

7y

Brief follow up on response from contractor regarding some aspects of this potential project. The following are the most accurate estimates my contractor was able to provide. Complete demolition cost $30-$40K. Cost to build 4 new Units $200/sf. Quote for roof deck $10-$15K. Cost for Architectural plans $15K. Length of time for all necessary permits 3-6 months. I feel confident my numbers & projected rental rates were accurate. Knowing what I know it seems like it is still a good deal for someone who is able to ride out the long renovation process. The search continues, I appreciate the feedback & insight.

1 Reply

Tom Wagner

Real Estate Agent · Minneapolis · Member since 2019 · 338 posts · 219 votes

5y

Originally posted by @Nick Schmid:

Brief follow up on response from contractor regarding some aspects of this potential project. The following are the most accurate estimates my contractor was able to provide. Complete demolition cost $30-$40K. Cost to build 4 new Units $200/sf. Quote for roof deck $10-$15K. Cost for Architectural plans $15K. Length of time for all necessary permits 3-6 months. I feel confident my numbers & projected rental rates were accurate. Knowing what I know it seems like it is still a good deal for someone who is able to ride out the long renovation process. The search continues, I appreciate the feedback & insight.

Hi Nick! Super curious to hear how this worked out for you -- did you follow through with this ground-up 203k new construction?

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[Calc Review] Philadelphia, Multifamily, House Hack, FHA 203K

[Calc Review] Philadelphia, Multifamily, House Hack, FHA 203K

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