Expensive Duplex new build using FHA - Window of opportunity or run away?

Question

Wanted to get a sanity check here before we get too much momentum. We were going to wait for the market to chill out and save for downpayment, but this opportunity came up and we're inclined to seize it.

We've always rented, but at 37 with a growing family, I'd like to start building equity and eventually cashflow. Here's the prospect:

0.34 acre lot in eastern Iowa, zoned for R3 Medium Density 2-Family, 2 min from interstate, $85k

Builder is proposing ranch-style duplex, with each side having 5 bed 3 bath, 1400-1500sq ft main floor, oversized 2-car attached garage. Est. build cost of ~500-520k. All in we'd certainly be maxing out the FHA limit for duplexes at $604,400.

Builder suggested market value should be $660k when done, and rent should easily be $2300/mo for each side (though we'd live in half for at least 2 years to avoid capital gains tax).

To finance, looking at the FHA One-Time Close Construction-to-Permanent Loan to still put the 3.5% down ($21,200) which is still a stretch for us, but doable. Then we'd work our tails off to rebuild a financial buffer to handle vacancy, etc.

I'm hoping the collective wisdom here can help to steer me in the wisest direction.

A few questions/concerns:

1. How do I gauge whether the builder's suggestion of 5bd 3bath is the right move?

2. With no comparable built duplexes on the market anywhere close, how do I gauge the market value and whether the proposed price of the build is reasonable?

3. Is this more cashflow stupid than to keep renting for $1700/mo? With credit scores around 800, roughly $100k gross household income, and only a small student loan for debt, we should meet debt:income and get the best rate available right now. That's 5.75% at our bank, yielding $3400/mo not including insurance, PMI, or property tax (which is waived for first two years). My biggest fear is applying and finding out PMI is going to be 1% or more, meaning $500/mo just evaporates and we're spending at least what we spend now and only IF we have a renter at all times.

4. Any guess as to what the closing costs are that we should budget for?

5. If the cashflow scenario is too risky, are we just stuck renting for a few more years?

I sincerely appreciate the time, and all the content here. I've been lurking and searching since we found out about the deal, and have been bingeing the podcast. I'm very open to any advice you're willing to offer.

Ashley Noethe · Answer

Where is the location? I am both an investor and an agent in the Des Moines metro. The rent you are able to receive will greatly be dictated by where the property is located. For example, around here there is a stark difference in rents between the city and a suburb like Ankeny. In Ankeny, something like that could most likely do $2300/mo per side ... in the city .. ehhh depends where. Des Moines itself doesn't have the highest rents, but if you go 10-15 out into the suburbs that's where you could get those rents. If you are thinking more rural Eastern Iowa, I actually do think there is a need for rentals like this. We live in Indianola south of Des Moines and I get asked by people all the time looking for larger homes to rent because there is pretty much just condos or small studio/1/2 beds available. If it is near a hospital, you could even do short-term rentals through Furnished Finders for traveling healthcare workers. That being said, when you get out into rural then the cost of homes is cheaper and most people could just buy. I agree with what was said that you'd probably see yearly turnover.

Dave Faris · Answer

Most duplexes are 2bd, 1 or 2 bath.  Those you can buy between 200-250k.  It's uncommon to find 3+ bdrm duplexes that aren't conversions. (Converting a big house into multiple units).  Although, a lot of town homes are being built with a shared wall and 3+ bdrms.  Those are usually sold separately.

I'm not a builder, but I know new construction single family houses cost 300k or more, so building a 3bd/3bath duplex (or town home) could easily be 400-500k.

Does this area have a tax abatement for new construction?  That would help.  I'm assuming your monthly principal and interest payment is around 3000.  Add in property taxes and insurance and that's your break even number.  Sounds like 1700-1800 might be a rent target if this is comparable to your current rental.

There are easier ways to get into real estate.  But this might work if you can get by without positive cash flow for a while.

Max Ferguson · Answer

Hey man, unless Des moines has seen a stark increase in rents, I would guess you aren't going to be able to fill it at $2300. Anywhere other than Des Moines I definitely believe it is not doable. Don't just do a deal to do one, you may shoot yourself in the foot here. Anyone in eastern Iowa able to service $2300 in rent will be able to buy a very nice house for a similar number, something to consider. I would assume lots of turnover as most tenants will be looking to purchase eventually. You need to look up comparable rents for similar properties in the area to figure out if it is feasible. I hope I answered some of the stuff on their for you, but there is a ton of information to be addressed. I would say hold off, the deal doesn't make too much sense in my eyes. I can give you a more in depth explanation if you want to chat on the phone. DM me for my number if that interests you.  Let me know how it goes, thanks!

Dave Faris · Answer

Evan, you should absolutely take your good credit, good income, low debt, and $1700 rent payment and buy your own house.  I love the house hacking strategy of buying a duplex as well.  DO these things.I invest in the Des Moines area, which is comparable to  Cedar Rapids, so let me be frank.  Don't build a $600k duplex with 5bd/3ba per side that requires $2300 rent.  There are a lot of nice houses that rent for less than $2300,  let alone a duplex.  Can you cover the difference if you only rent it for 1800?  If not, can you sell it?  I doubt the value would be 660k, but even if it was and you needed to sell, you'd be looking for a unicorn to buy this property for what you owe plus the 50k in closing costs.  It might produce enough income as a short term rental or a rent by the room property.  But my recommendation is to buy a $250k duplex and start building your future.Best of luck!

Evan Heckert · Answer

Thanks for the reply, Dave. Yes, no property tax for first two years, which will offset most if not all of the PMI.

I hope to get some quotes from builders over next few days. If I can't do something for closer to $400, this may just not be the right opportunity for us.

I appreciate all the input from everyone, and the kindness to my ignorance.

Evan Heckert · Answer

Located in Robins, a suburb of Cedar Rapids.

Thanks for all the replies so far!

Evan Heckert · Answer

Any key info/context I left out that would encourage feedback? Grateful to anyone who'd share their $0.02.

Evan Heckert · Answer

Just learning about the 1% rule. So does that mean on a $600k duplex, each side should be able to rent for $3k or it's not worth it? That seems a bit high, but perhaps that's the problem, I should scale down the spec that I'm building so it's not $600k.

Expensive Duplex new build using FHA - Window of opportunity or run away?

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