Hey @Jarrod Frankum
First of all, this is great that you put this much effort into analyzing the numbers. Even more so that you put it online for others to critique and hopefully learn from!
Questions: Are you planning to occupy the property? If so, for how long? Where is your closing cost estimate coming from? I see $829 in “loan points”, are you buying down your rate? When does the current lease expire? How much do you have saved up? Have you spoken to any lenders about getting qualified?
There are a few areas of concern with your numbers. (if anyone would like to chime in or correct me, please do)
1. A 203K loan is an FHA loan. I am not sure that property would qualify with FHA guidelines. FHA does not allow peeling paint, cracked windows, heating/cooling issues, electrical issues, and a bunch of other items. I can see from the picture that the fascia boards have peeling paint. **Im not sure if FHA allows you to use a 203K to improve the property up to FHA standards.
2. With an FHA loan you are correct, 3.5% down payment is required. However, you will also have Mortgage Insurance added to your monthly payment and FHA charges a funding fee as well. For what you're looking at, I would estimate about $30/m. This does NOT go away when you his 20% equity in the home. Only way to get it to go away is to refinance the property with another loan program. **you can only have 1 FHA mortgage at a time. So if you use it on this property, then want to buy a quad-plex with 3.5 down, you will need to sell this property
3. Your closing costs are pretty low. This becomes a big issue with traditional mortgages with low-priced properties. You will pay a lot of the same costs for the mortgage with a $40,000 house or a $300,000 house (appraisal, survey, attorney fees are the same with $40K as $300K). With a more expensive property its not as big of a deal. But after I ran some numbers (these are only estimates) I would expect your closing cost to be closer to $5,000-6,000 (origination fees, appraisal, survey (if needed), closing, doc prep, attorney fees, flood cert, title, prepaid insurance/taxes/mortgage insurance, and initial deposits to escrow) Paying 15% of the value of the home in closing costs is pretty high. This would raise your total cash outlay to $6-7K
4. Your insurance quote seems quite low. Insurance premiums are not linear with home values. For instance, a brand-new house worth $150,000 should have insurance < $100/m. A $120,000 home built in the 80’s with a 10+ year old roof could be $125-250. A lot of times a lower priced home will not have drastically cheaper insurance. I would estimate this home would be close $60-100/m (I am by no means an expert with insurance. I would suggest speaking with a few insurance companies).
4. The home is in a lower income area. I’m sure there are good people who live there but I am not sure I would feel safe. Also, who do you think will rent the property? I don’t know many TTU kids in that area. I think it’s safe to say you should factor a little more into your vacancy cost (this can go for evictions as well). Also, what shape will the home be after they move out?
5. Like John mentioned, if you were to refi the property, you will likely get 80% of the value. (most lenders require 80% LTV) Then, depending on how you are refinancing the property, you will have more closing costs.
Make sure you really want to be in this area. I have never lived over there and I can’t say I would feel comfortable/safe. Talk to a bank about purchasing the home with a bank loan. With a mortgage company, you will have a lot more closing costs. I would also talk with a mortgage company (Prime West Mortgage would be my choice 😉 ) Also, call some landlords and even the police department and get their take on the area. At the end of the day it really comes down to what your goals are, how much you have saved up, and what you can qualify for right now. If all three of these lead back to only this property, then I would consider it. It might not be the best deal ever, but either way you will learn more about real estate, make connections, and be less afraid to take action.
Good luck man and I hope this helps!
