4-Plex house hack - IRR too good?

Question

Hi BP,

I've been learning more and more and I feel like I'm ready to take on my first house hack of a 4 plex.

I've done some napkin math  and can't really see how I'd go wrong, even with an economic crash and having a seriously poor first experience.

For reference and the scope of this deal: I have great credit, a high paying job, and a current mortgage of 2300/mo where myself and my girlfriend reside. I live in WA state on the western side near Seattle. Our market does not cash flow unless you are seriously in the know and doing some creative rehabbing/developing/zoning shenanigans. (or maybe have some great sources for finding undervalued deals) My girlfriend and I have spoken extensively about doing this, and we are both on the same page.

For this example I will use a property that is currently available and listed for $815,000.

We would be doing an FHA loan. My payment on the 4 plex would be approximately $4,500 after taxes, insurance, interest,principal.

The property is currently owner occupied, and the other 3 rents are 1250, 1250, and 1500. A quick tap on Rentomer and Zillow shows me they would max out at around 1600, and I could probably easily bump them to 1500 no worries. Tenants pay utilities.

I'm estimating loosely that between the 3.5% down payment and closing costs I'd be somewhere into it for 50k to get into the property. This is not a problem.

So here is where I am:

Saving $2300/mox12 by eliminating my mortgage: $27,600

Appreciation of 3% on 815k (this is extremely conservative for Seattle): $24,450

Loan paydown/Tax writoffs: In the neighborhood of 15k

Total: $67,050 for my first year, totaling a 130% IRR on my investment.

Even in the event where I only were to collect half of what I think I will for the rents, I would still be up about $40k IRR and at an 80% return. Lets say I have to spend 20k to redo roof and heating on top of that in an absolute worst case scenario and I'm only up 20k IRR my first year. Still at 40%.

I realize I still need to do all of my due diligence once I'm under contract, but I feel like from my position now to where we could be it is just a no brainer.

After the year is up we would either move back into a SFH, or jump to the next 4 plex.

Any thoughts, comments, concerns would be highly appreciated.

Jaysen Medhurst · Answer

Good news, @Jesse Wolf, you are wrong. I have no idea if Fannie Mae has that rule to that effect, but it doesn't matter. Not all lenders sell their loans to Fannie / Freddie and therefore don't have to follow their rules.

Here are some WA state lenders that do low down payment loans. It's worth your time to call all the local Credit Unions and Banks to see what products they offer:

Columbia Credit Union

Harborstone Credit Union

Homestreet Bank

Sound Community Bank

Jesse Wolf · Answer

@Jaysen Medhurst

Thank you for the reply! I really appreciate the insight.

After my initial into the investment I would still have a very conservative cushion for expenses, vacancies, etc.

I did not consider snow removal. Good call!

To my understanding, anything less than 20% down on a multi unit via conventional is not possible, even if you are owner occupied. I believe this to be a Fannie Mae rule.

if anyone would like to inform me that I'm wrong, I'd be over the moon!

Thanks again guys!

Jaysen Medhurst · Answer

@Jesse Wolf, yeah, your overall return looks good. A few things to keep in mind:

• I think you're forgetting about $17k/year in expenses. This is for repairs, CapEx, Vacancy, and Water/Sewer.
• Yes, you'll still be up over all if you have a few big repairs/CapEx items, but that's going to cash out of pocket and with such a low down payment, there's little chance of getting at the equity to pay for them.
• When you move out, you should also plan on expenses for Management and perhaps lawn care/snow removal, as you mentioned in a latter post. My math puts you ($650)/month. That's negative. This may not continue to be a great investment after you move out. Just know what you're getting into at the front.
• I'd look real hard at how smart a move it is to rent out your current SFH. The numbers rarely work out in HCOL areas.
• Consider doing a non-FHA loan. I bet you can still get one for around 5% down and you'll automatically drop PMI when you hit 20% equity, unlike FHA where you keep it for the life of the loan.

Jesse Wolf · Answer

@Antre Lindsey

I would be managing the unit myself while I live there. I feel like this would be an easy way to introduce myself to land lording and get some hands on experience. Once I move out I would be cash flowing approx $1,200/month after property management, and this is if rents stagnate (before vacancy, expenses, cap ex). I realize this is not near the 1% rule, but the entire idea is to elimate the 30k/year I'm looking at paying on the SFH in which we currently reside. I would rent out the current home we are in and in addition I do have one SFH which I currently pay a property management company to fully take care of for me a few hours away, so I have an idea of what that will entail.

50k is me ballparking what my down payment @ 3.5% (28,525) plus closing costs on the loan. This is a conservative estimate - after speaking with a few lenders it looks like my closing costs would be as low as $11,000 so my all in initial investment may be closer to 40k

I don't believe I was including my down payment in the return....just adding 3% to 815k (815x.03) = $24,450

I appreciate everyone's comments and insights. I feel like this is a pretty straight forward equation (as long as my due diligence is done correctly) but I really appreciate the outside views and input as it helps me solidify my positon and gives me peace of mind knowing there isn't an angle I'm missing.

Antre Lindsey · Answer

Hello Jesse! Seems like a reasonable analysis. Have you considered other expenses such as maintenance and property management? Also, is $50k the figure that represents your initial investment? It looks as if you've included your down payment as a return under appreciation. Would that be realized through a refinance?

Brent Paul · Answer

John pretty much nailed the points on this one.  It's a good way to go provided you have 3 of the 4 rented and you live in the 4th unit to save some money.  In a few years you should have enough saved to possibly do this again and rent out that 4th unit to increase that cash flow.

John Warren · Answer

@Jesse Wolf house hacking is an extremely low risk strategy as you mentioned. The one caveat is that as you grow you will take on additional risk. For instance, if you buy one four plex that more or less covers its costs you may win big over time through appreciation and your risk is relatively low while you are living there. In a worst case scenario you can cover the note from your job, and in a normal and best case scenario you will probably even see a bit of cash flow/reduced housing cost.

The issues comes when you start grabbing several of these properties at once. I typically focus on this with my clients here in Chicago. You want to make sure that the properties will cash flow once you move out of them, and you want to make sure you have plenty of cash reserves as you build up. Otherwise, you are correct that this is a fairly low risk endeavor. You are locking in the banks money for 30 years at super low interest rates which is another reason this strategy works so well.