Should I Jump On This Deal?

Question

Hey all, I'm a relatively new investor and have been looking for a house to purchase that I can rent by the room for some time now. I recently stumbled across a 5 bed 3 bath single family extremely close to the University of Minnesota campus. I ran the numbers on it and it looks promising. I'd be living in it for at least one year so I'd be getting an FHA loan. I looked at the truth of sale published just two weeks ago and everything looks good there. The listing also states that it's currently leased through August 2021. The only issue it seems I have here is funding, but I'm certain if the deal is good enough I'll find a way. Anyway, I've attached my calculations below, let me know if you have any thoughts or concerns. Thanks!

Michael Henry · Answer

Account Closed where are you getting your gross rents numbers from? The vacancy rate seems low. Something during the Summer the students don't rent rooms. A 5% management fee is not realistic. If you are planning on using a third-party management company you will be north of 8% for rental collection and additional fees and cost that might eat into your downline. Last snow removal cost will be expensive Minnestosa gets a lot of snow.

In Milwaukee, WI all the property around the UWM campus is mainly used for student housing, and because a lot of parents purchases these houses to lower the child cost for housing there are a lot of sales in this area. Check the comps to make sure you are not overpaying.

Lastly, with covid-19 you might not have any students to rent to. If the numbers work after rerun then I would move with caution. Check with the University to see if they are doing in-person classes.

I hope this helps.

Jason Wray · Answer

Moses,

Just a quick question, why FHA?  Did you factor is the 1.75% UFMIP and the .85% MIP for the monthly mortgage insurance? You could always go Fannie/Freddie and use a DPA or a 97% LTV loan.  Even a 95% with 5% down would give you a lower PMI versus the FHA MIP if your Ficos scores good.  The PMI is FICO and LTV driven but with 5% down and good credit 680-740 you could expect .30-.35% PMI which is less than half of the .85%.  Not a huge number for that loan size but if your crunching numbers you might as well factor all of the costs.  Hope that helps!