Hoping to get your opinion on me and my husband's first potential investment property. For reference, we don't have kids (maybe in the future) and our combined income is a comfortable $200k so we don't need the rental income for our own personal expenses. We have 6 months reserves for the property already.

It's a 3-unit (each unit 2br/1ba) MFH for $650k in a market with high rental demand. Our plan is to live in one unit and rent out the rest, then probably eventually move out and rent out the whole thing, and to hold long-term. With 5% down and 4% closing at 6.75% FHA interest rate and accounting for PMI, the PITI is ~$5461.Currently each unit would rent for $1600, so as it stands this listing does not make sense.

BUT, the reason I am giving it another look is because the property does have a well-maintained unfinished basement with separate exit and plumbing in place to add another bathroom. So we could convert the basement into a separate 2br/1ba unit, add in-unit laundry to each unit, add central air/heat, and make minor cosmetic upgrades which we're estimating would cost another $100-120k. After all that, the rents would come out to be $2100 x 3 + $1800 for the basement= $8100 total. The total initial investment (down, closing, renovations) = $158.5k. After accounting for utilities/lawn/trash and 10%-5%-5% (of monthly gross rents) for future property management, cap ex, vacancy, and repairs/maintenance, this makes the cash-on-cash return after we move out is still only 2.95% (about $390/mo). But with all the renovations, the property value will have gone up past the $1 mill mark based on comps.

Given this would be my first investment property, I wanted to ask those more experienced if this is obviously a bad deal or if it's something worth pursuing. I'm nervous that the main feature of this deal is appreciation/value-add potential and not cash flow (at least not immediately), which to my understanding should be the main factor in deal analysis. Other thoughts going through my mind are how I could just use that renovation money and put it into stocks instead, or buy multiple smaller properties in a cheaper area instead of this one expensive place.

Thanks so much for your input!

Chicago, Illinois

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