First time Buyer is the deal worth it?

Question

Hello,

I've been searching for a 3-4unit multifamily home in CT as first time home owner taking advantage of the CFHA program. Great interest rates (3.375%) and low down payment (5%). How ever the market is in a very short supply and finding a deal is hard been looking for 9 months now. Finally in negotiations with a 3 family however the cap rate is really low 1.0%. However the house with a renovated bath room and kitchen could probably get about 400$ more a  month per a unit. Which would put my cap rate at ~4.5%. Whats your thoughts BiggerPockets? Is this a good deal or am I get tired of living in my parents basement while I search for a home?

Thanks!

Steven Clark · Answer

@Michael Noto Manchester

Michael Noto · Answer

@Steven Clark Where In CT is this property located? That could probably help people from the area give an informed opinion on the deal you outlined.

Russell Brazil · Answer

That property appears to be closer to a 10% cap rate than a 1% cap rate.

The high cap rate, with sub $1,000 rents indicate to me ita likely in the ghetto.

Steven Clark · Answer

@Victor S. I did re run the numbers without principal and makes my cap rate to 6.7% before renovations. Have been in negations with the owner getting it 30k less then asking price (it was way over priced). Buying in CT which is not a growing area but staying steady. Its also where I am employed/living.

Victor S. · Answer

cap rate calc should exclude your principal and include only operating expenses (does include tax and insurance).  either way, this property will be assessed on sold comps, not its cap rate. are you paying retail price for this? is the area appreciating? (what part of the country are you in?)

Steven Clark · Answer

Thank you @Tim Herman and @Michael A. for the insight your insights really helped me feel more confident going forward with this deal.

Michael A. · Answer

@Tim Herman This is a good point. My bias was toward this being purely a rental. If you can live for free, why wouldn't you? While the margin is super tight, you're having someone else pay for your home for you. If/when you move out you've got equity in an asset. This sounds like a good move to me.

Tim Herman · Answer

@Steven Clark i always do the analysis as if I am not living there. This is not your forever home. If you are essentially living for free this would be a good buy. I would increase the repair capex budget at least another 5%. Example floors 800 sf @ $6 sf = $4800 / 8 year life span / 12 months = $50 per month * 4 units = $200 per month on capex alone for floors.

Steven Clark · Answer

@Tim Herman This is the spread sheet that I had made myself. Very good point on how some areas just dont cash flow

@Michael A. I am going to live in one of the units so at end of the day It would be living for free and once I finish renovating would be getting a cash flow.

Michael A. · Answer

@Steven Clark I would also consider appreciation. You will have MUCH mess headache investing your money elsewhere if all you want to make is 5%. If the property is sure to appreciate then it may be worth the trouble. If it is in a stagnant area that is going nowhere fast then it may not be the best use of your money.

Did you say you were going to house jack and live in one of the units?