FHA Fourplex Opportunity anaysis: FHA 3.5% vs Conventional 25%

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FHA Fourplex Opportunity anaysis: FHA 3.5% vs Conventional 25%

Gary Thao
Fresno, CA · Member since 2013 · 30 posts · 4 votes

I have the opportunity to purchase a fourplex using an FHA loan. A decent fourplex is ~$345k here in Portland, Oregon. Yes, it's high and that's just the way the market is. Typical rents are in the $725.00+ for a 2bed/1bath or $2,900.00 total for a fourplex in the area that I'm interested in. The problem is that it will not meet the 1% of total monthly rents rule nor cashflow due to myself only putting down 3.5% per FHA. The scenarios below do not involve myself owner occupying just for the sake of if I were to move out. Of course I could learn the ropes of property management (in which I plan to) and save some costs also, but I just want to list all related costs that may occur.

Purchase Price: $345,000.00
3.5% FHA Down Payment: -$12,075.00
Total Loan Amount: $332,925.00
1% rule: $3,329.25?monthly rents required (I’m only making $2,900.00 which is a -$429.25 per the 1% rule)
Monthly Rents: $2,900.00
Expenses: $880.00 (PM, Waste, Water, 10% vacancy, landscaping, insurance)
NOI: $2,020.00
Monthly Mortgage (3.125%): ~$2,267.00
Monthly Cashflow: -$247.00

Yes, if I had the 25% down payment, then it would cashflow.

Purchase Price: $345,000.00
25% Down Payment: -$86,250.00
Total Loan Amount: $258,750.00
1% rule: $2,587.50?monthly rents required (I’m only making $2,900.00 which is a +$312.50 per the 1% rule)
Monthly Rents: $2,900.00
Expenses: $900.00 (PM, Waste, Water, 10% vacancy, landscaping, insurance)
NOI: $2,020.00
Monthly Mortgage: ~$1,950.00
Monthly Cash flow: +$70.00

There are discussions regarding leverage and how it’s great to put as little down as possible, but I’m questioning this decision. It is good, but at the same time, I’m relying on appreciation, equity, and taxes. Getting something that can cash flow from the start is nice, but requires the 25% downpayment ($87,500.00). Can anyone give an opinion on pros and cons or am I just destined to purchase a single family home for myself and not reap the benefits of this multiplex opportunity?

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Nicholas Stevens
Everett, MA · Member since 2013 · 49 posts · 11 votes
12y

If you believe in real estate and can afford/willing to pay the monthly costs that rents don't cover then I would say to go head with something like that. With the low 3.5% downpayment, you're essentially acquiring a $385k asset and having tenants pay for 90% of the cost of it. Just because it doesn't meet a magical 1% rule or 2% rule doesn't mean it's a horrible decision to go forward with it. If you purchased and lived in a single family home its instantly a negative cash flow situation that you pay for 100% of all expenses. The 1 and 2% rules are good reference points but make sure you don't let it drive all of your decisions.

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  • Don KonipolBusiness Member
    Investor · The Woodlands TX / Avon, CT · Member since 2009 · 6k+ posts · 10k+ votes
    13y

    Using 96.5% leverage, most real estate investments will suffer negative cash flow. You can do what seasoned investors do - i.e. find a distress situation and negotiate a below market price.

    Private Mortgage Financing Partners, LLC
    WebsiteView Page
    0Reply
  • Carlos Lopez
    Angwin, CA · Member since 2012 · 13 posts · 0 votes
    13y

    Hey Gary did you go through with this deal? And if you did, how is it working out for you ?
    Your situation is very similar to what I'm looking at right now.
    Fourplex at 420k. (northern California) rents yield 4050 total if I wasn't to live in it. I'm also planning to use FHA. After all expenses and mortgage I'm calculating -$299. If I don't account for Property management I should break even.
    How did things work out for you ? Specially the 'becoming a landlord part' some people advise me to be careful about going from zero landlord experience to managing 3 tenants....

    0Reply
  • Michael B.
    Apopka, FL · Member since 2012 · 207 posts · 120 votes
    13y

    It definitely doesn't cashflow at the 3.5% down, and I don't think it will at 25% down.

    I think you're low on the expenses. You don't have reserves for big things going bad. A better way to estimate the expenses is just to say it's going to take 50% of all rents to make expenses (including vacancy). It may be that this 4-plex takes a little less than that, but don't assume it will.

    Using that number that means you're going to bleed (2,900/2) - 2,267 or -$817 / month at 3.5% down. At 25% down you're going to have a cashflow of (2,900/2) - 1,950 or -$500.

    Even shoveling $500 into an investment every month will be bad on your balance sheet. This looks overpriced, and even if you're managing it yourself it's still tough.

    It's tough being an undercapitalized landlord. You tend to put off maintenance which makes it more expensive in the long run. A single non paying tenant can be devastating. Think long and hard before yo do this.

    0Reply
  • Gary Thao
    OP
    Fresno, CA · Member since 2013 · 30 posts · 4 votes
    13y
    Hey Gary did you go through with this deal? And if you did, how is it working out for you ?
    Your situation is very similar to what I'm looking at right now.
    Fourplex at 420k. (northern California) rents yield 4050 total if I wasn't to live in it. I'm also planning to use FHA. After all expenses and mortgage I'm calculating -$299. If I don't account for Property management I should break even.
    How did things work out for you ? Specially the 'becoming a landlord part' some people advise me to be careful about going from zero landlord experience to managing 3 tenants....

    Carlos, I am still working on the deal. I believe timing is everything with "investment properties". If you have time to wait for a "better" deal as most investors, then great. If not, this may be your opportunity, but just make sure you will be able to handle the consequences.

    0Reply
  • Anthony Farmer
    Easton, CT · Member since 2013 · 9 posts · 2 votes
    13y

    You make your money when you buy a property.

    Lock in a good rate and make sure you can cash flow. If the market goes down and you are negative each month, you are in big trouble since you cannot exit without a bigger loss.
    If you are positive in cash flow, you can simply wait out a market dip until it is in your interest. Make sure the mortgage can get paid every month from the asset alone (and you build reserves). You can exit after a market dip when either the value rises higher than the note (and associated costs), or it has paid down to a level where you are even or better.

    The only way I would want to be in on a deal like this is as a buyer from the distressed seller who was hoping for appreciation.

    Cash flow from the start, have at least two profitable or break even exit strategies.

    0Reply
  • Uy NGUYEN
    Investor · Seattle, WA · Member since 2013 · 8 posts · 7 votes
    12y

    This looks like an old post, but i m looking in the same situation in the 4 plex, but the above numbers don't add up?

    "Total Loan Amount: $332,925.00

    Monthly Mortgage (3.125%): ~$2,267.00"

    That monthly mortgage seem too high per month, are you doing a 15 years or 30 years fixed? If 30 years, you cash flow for sure.

    with 30 year fix, you looking at ~$1500/month mortgage for 330k loan, plus all your other monthly expenses (tax, insurance, etc) you calculated to= $880

    rent 2900, cost 2350, cash flow + 530/month.

    correct me if i m wrong.

    0Reply
  • Gary Thao
    OP
    Fresno, CA · Member since 2013 · 30 posts · 4 votes
    12y

    Uy,

    There is PMI involved in the first example.

    0Reply
  • Nicholas Stevens
    Everett, MA · Member since 2013 · 49 posts · 11 votes
    12y

    If you believe in real estate and can afford/willing to pay the monthly costs that rents don't cover then I would say to go head with something like that. With the low 3.5% downpayment, you're essentially acquiring a $385k asset and having tenants pay for 90% of the cost of it. Just because it doesn't meet a magical 1% rule or 2% rule doesn't mean it's a horrible decision to go forward with it. If you purchased and lived in a single family home its instantly a negative cash flow situation that you pay for 100% of all expenses. The 1 and 2% rules are good reference points but make sure you don't let it drive all of your decisions.

    2Reply
  • Nicholas Stevens
    Everett, MA · Member since 2013 · 49 posts · 11 votes
    12y

    $345k***...

    0Reply
  • Aaron Montague
    Rental Property Investor · Brookline, MA · Member since 2013 · 1k+ posts · 777 votes
    12y

    @Gary Thao 

    How much are you paying for taxes and insurance on this place?

    This is a serious money pit.  And these numbers don't take the fact that you have to live there for 12 months, which will reduce one of the $725 monthly rent numbers down even more.

    I'd switch over the 203k rehab loan, find yourself a beat to heck place and build your equity that way.

    The most dangerous thing you can do in my opinion is to do a deal just because you want to do a deal.

    Here is how I see your deal by the numbers with $5500 in closing costs:

    Mortgage Rate 6.00%

    Length of Mortgage in years 30

    Monthly Mortgage payment $1,996.05

    Taxes $416.67

    Sewer and Water $150.00

    Trash $-

    Heat/Utilities $-

    HOA $-

    Cap Ex and Ops $172.50

    Insurance $125.00

    Mgmt Fee $290.00

    Vacancy $290.00

    Total Expenses $3,440.22

    Unit 1 $725.00

    Unit 2 $725.00

    Unit 3 $725.00

    Unit 4 $725.00

    Total Revenue $2,900.00

    Cashflow/month $(540.22)

    Cashflow/year $(6,482.64)

    Cash on Cash Return-36.89%

    0Reply
  • Mark McInnis
    Investor · Fort Lauderdale, FL · Member since 2015 · 10 posts · 3 votes
    11y

    I hate to bring up an old thread as a first time poster but what ever happened with this deal? Did you go ahead with it? Or did you wait and actually find a better deal? This example is ideally something I'll be looking for soon. It's hard to find properties at exactly a 1 percent rule and this property is just shy of 1% and as a first time investment it's hard to see you losing unless you bought over market value and sold for less than you bought it for as an exit strategy (which I wouldnt do). But as I first time investment I don't think $247/ month going into a $345,000 asset should be considered a money pit. as a beginner can that be looked at as a way of building wealth? I plan to pay of my first investment loan-principle as fast as humanly possible with my savings (20k per year) and any yearly cashflow capital from that property. Sooner the better so I can work on getting another fourplex 

    2Reply
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