FHA Flea 4 family For First Property?

Question

Background:

I found a 4 family in a small town.

The current buying price is 188k, with the seller paying 2k at closing.

I will be bringing about 14k cash to close and a 2.75% interest rate.

The Rent is $2300/mo

Insurance is about 1800/yr. 150/mo

Taxes is about 2000/yr. 166/mo

PMI is 130/mo

Principal and Interest would be 740/mo

I assume that 500/mo will go to maintenance and repairs, Including initial flea treatment

Water sewer trash is 200

I have a cashflow of  a bit over 7k after I move out.

I made a couple assumptions because it is in a rural area: the home value and rental appreciation rates will be slower (1%) ,but the expenses will remain the same (3%)

I also estimated a 10% vacancy, which I think is  quite conservative considering it's a 4 family.

I understand that I am not buying the house for a huge discount, BUT, it allows me to live for free while I stay there and is one of the very few houses I found that cashflows decently when I move out.

My current plan is to hold it for as long as I possibly can, potentially refinance to get rid of the PMI.

However, if the expenses are actually going up faster than the rent, the value of the property may drastically decrease over time?

This has been somewhat of a ramble, but i would appreciate any thoughts/criticisms/recommendations on my strategy.

Matt Devincenzo · Answer

Without knowing more about local demographics and trends ect, I'd say go for it. Often on here you can get wrapped up in the 'investment' side of things and can put off a personal home purchase as not being a 'good' deal. But when you are starting out and when you are purchasing a home for you to live in then it's ok (IMHO) to go a bit more toward a retail sale. My duplex here in CA wasn't a particularly phenomenal purchase and I overspent a bit on rehab because we were moving into it. I already had REI experience and did it anyway because I spent 3 years passing on other not good enough properties that would have been 2/3 what I ended up spending. But I was able to buy a home as a single Dad in a high COLA area, and now I have a significant net worth due to the market appreciation over 4 years.

Your deal looks like it's at least decent even without knowing more about the area, so unless the area is really declining you should be ok.

Jaysen Medhurst · Answer

A few things, @Michael Crawford:

• $2300 rent. Is that with you living there or with all 4 units rented?
• Either way, you're beating the 1% rule and taxes aren't bad, you should be able to cash flow once you move out. Especially, if you can refi at only 80% LTV.
• Run the numbers each way, being careful to think about what expenses change (as a percentage) depending on the situation. Repairs, CapEx, water/sewer, trash all cost the same whether you live there or not. Vacancy will be different (3 vs. 4 potentially vacant units).
• 10% Vacancy is high. I usually use 8% for MFR, but this is super local.
• $500/month for Repairs and CapEx might be a bit high. I usually figure 15% combined, but if this is an older building or you know that you have a bunch of CapEx coming up, may be best to stay conservative.
• What about lawn care, snow removal, admin/professional costs?
• You should include Management (10%), even if you plan to self-manage at first.
• If your expenses are going up faster than rent, let's say 2% vs. 3%, then your cash flow will get squeezed over time, BUT your largest expense (debt service) is fixed, so the squeeze may not be as bad as you think.
• Since this is a residential property (1-4 units) its value is based on other comparable properties and has nothing to do with rents, expenses, cash flow, return, etc.