Help with deal analysis on house hacking into a fourplex

[Steven DeMarco]

Hello everyone - wanted some help fleshing out my thoughts on this deal analysis for a fourplex in Utah. I'd be owner occupying one of the four units and using an FHA 3.5% down loan. Also, I may have the option to get a rate buydown from the seller, as that is mentioned in the agent remarks. Currently, I rent a 3BD/2.5BA apartment for $2,150/mo. This would be my second real estate investment. I currently own and operate a STR in Pittsburgh, PA.

Property Details: 

- Current list price: $750K

- There are 4 units (3 1BD/1BA units and 1 2BD/1BA unit); I would owner occupy the 2BD/1BA unit

- There are leases in place for the 3 1BD/1BA units, total monthly rents: $3,185 (a bit under current market rents)

Year 1: House Hack

I would owner occupy the 2BD/1BA unit and keep the other renters in place.

- Loan Details: Up front Mortgage Insurance Premium would be 1.75% and Monthly Mortgage Insurance would be 0.55%

- Loan Amount: $736K @ 5.625% making my monthly mortgage payment: $4,853/mo.

- Annual Rent Avoidance: $5,784

Year 2: Rent all Four Units

I would adjust rent for all units to current market rents. In that area, Rentometer average rents are 1BD/1BA: $1,350/mo. and 2BD/1BA: $1,650. That brings total rental income to $5,700.

- Monthly Rental Income: $5,700

- Monthly Debt Service: $4,853

- Expenses: $1,143 (includes: Vacancy (3%) $171/mo., PM Fee (9%) $497/mo., Maintenance + Capex (8%) $475/mo.)

- Monthly Cash Flow: -$486

Using this free Rental Property Calculator, it shows that I would be negative cash flow from Year 2 - Year 5. If I sum up all the negative cash flow across these years, it would be about $14K in total. If you look into the details of that rental property calculator, I had to add the MIP (I would have to borrow $736K because there is a 1.75% tacked on to my loan amount) and PMI (added the monthly mortgage insurance to the "Insurance" field). I recognize that in these calculations, I'm not considering the loan paydown, appreciation or tax savings. I currently have strong W2 income and although the -$400/mo. figure is not terrifying, I'd like the property to float itself and not get in the way of future investments (negatively impacting DTI ratio for years to come).

So, is this a good deal? What else am I missing? Blow holes in this! Any and all advice/guidance would be very much appreciated.

[Ben Firstenberg]

From what I can see, it's not a great deal. 

It today's market it's definitely hard to find house hacks that work the way they used to. It's more common to reduce your housing payment to something like $500-1000 instead of $1500-2000. So your year 1 seems fine to me. 

Years 2-5 is what seems like a problem. In my opinion, what makes a good house hack is that it's cash flow positive when you move out. In this case you're losing money every month even when you move out. That's not what you want. 

It seems like the purchase price is just too high. They say the only two things you can't change about a property are the location and the purchase price. So I'd probably walk away from this one unless the location is AMAZING. 

For your Years 2-5 analysis, I'd consider increasing vacancy to something more like 8-10%. In my experience, it typically takes at least 2 weeks to a month to re lease a unit and have a new tenant move in. 3% vacancy implies about 11 days down time in between leases which doesn't feel realistic. Annoying I know, but vacancy and turnover are by FAR your biggest costs as a landlord. Except mortgage payments of course. 

Hope this helps, feel free to respond or reach out with more questions!