First Investment Deal Help: 4 Plex

[Lynn Tran]

Hello Bigger Pockets Family! 

I would love your advice for this 4 Plex property I'm on contract with where I'm worried if it's worth its trouble for the first year. Its in a good growing area in south Louisiana, but currently in a less than desirable area of town that's used to, but reduced, known to be dangerous but its shifting into a working class spot with new grocery stores and lots of growing neighborhoods nearby. 

The building is 4 units, each with 2 bed, 1.5 bath that has been nicely renovated in 2019. HVAC is noted to be 2 years old, new stairs for second story, new sheet rock. Roof is noted to be 8 years old. 3 units has granite countertops and 1 a has butcher block countertop. It says 2 year old appliances and plumbing. I'll be inheriting the current tenants. At the walk through, I only got to visit 2 of the units but they seemed to take care of their home. One that I met and she seems like a great tenant to keep. Realtor and I are curious if the other 2 unit tenants are less than desirable.

I'm going in for an inspection on this upcoming Tuesday.

I'll be using a FHA loan and will be putting 3.5% down. This is the general work up:

Purchase Price: $285,000

Closing Costs: $9,395
Down Payment: $10,000
=$19,395 Cash to Close

Monthly Note: $2,120.76 Based on locked 5.625% apr 30 year loan
(Principle & Interest: $1,610.90; Mortgage Insurances $194; Estimated Escrow $315 = $2120)

Monthly Property Taxes: $250

Monthly Insurance: $210

Monthly Maintenance: $100​

Total Monthly Expenses: $2,680

Total Income based on $750 mo x 3 units: $2,250

Total Income based on $750/mo x 4 units after year 1: $3,000

The going rate for rentals is $750, possibly could bring it up to $800 in the future. Please note with my FHA loan I will be living in 1 unit for house hacking, so I will have total income of $2250 for the first year. I will attempt to rent out a room in the unit but unsure how it will work out. What do you think of this deal and is it worth it? It's -$480 a month the first year where I worry about keeping it afloat, but I can manage it with working my job as long as my tenants at the other 3 units do not leave. The next year I will profit $320/mo once I move out and get another tenant in.

Any advice helps!

[Scott E.]

Most experienced and sophisticated investors will look at these numbers and say that the margins are far too thin, and suggest that you walk away from this "deal." You're not accounting for things like vacancy and cap-ex, plus there doesn't sound like much room for rent growth.

With that being said, getting into this deal will allow you to live almost for free while you live there, and it will cash flow a bit when you move out which is impressive considering you're financing 96.5% of the deal and have to pay mortgage insurance.

If you feel strongly about the location, I say go for it. Aim to lower your interest rate and drop the mortgage insurance through a refinance at some point in the next 3-5 years. And in the meantime you'll just deal with tight margins. Shouldn't have much come up for cap-ex due to the units all sound recently renovated.