The Numbers - Am I Doing This Right?

Question

My wife and I moved to Philly one year ago and have rented for this past year. We're looking for a multi-family property to buy so we can "house hack." I've been listening to past episodes of podcasts and lurking the forums. I've been running the numbers on different properties but I'm not sure I'm doing it right. Could you guys help me out?

Property 1: Triplex

Gross rents are $2925/mo. Rule of thumb is 1/2 for costs, which leaves $1462. At $100 per door that means my mortgage should be $1162. At 100% financing (that's how I'm supposed to look at this right?) the purchase price should be $260,000 max (This is assuming 3.5% FHA loan).

The other way to look at it would be cap rate. $2925/mo. -1/2 for costs, leaves $1462. Multiply that by 12 for $17,550 yearly net income. That puts the purchase price at $175,500 for a 10% cap rate.

This is where I get confused. The two methods put the purchase price in way different ranges. Is there some other method for calculating costs when doing cap rate, or does the $100/door method just result in higher purchase prices because the formula is just for $100/door and not a percentage of the purchase price or monthly rents?

I'll wait for feedback before I post another example. Thanks everyone.

Jeremy Chaudet · Answer

Thanks Troy!

Total rent is $1,570 with me living in there (I probably could have gotten a little more but I wanted to get it filled fast- which I did in 2 weeks). If I rented my place out I would estimate that I should get at least $2,200.  I'm expecting PITI to be in the $1,300-1,400 ballpark when I refinance. The units consist of two 1BR apartments and one studio apartment.

When I refinance in August, assuming it appraises for $235,000- 80% cash out is $188,000. So i'm planning on taking that extra money to reinvest into other properties.

Here are some pictures:

Joshua Nudell · Answer

@Daniel Flesher The 50% rule is not a hard and fast rule, it's just a gentle guideline and depending upon the area you're investing in can vary a lot.  It's good for a quick eyeball of a potential deal, but you're better off trying to get real numbers for your expenses.

As others have mentioned, cap rate does not come into the equation at all from a lender perspective for anything non-commercial (4 units or less).  They will only use comps to determine the value of a property that they consider residential (4 units or less).  You can, however, use cap rate for your own internal calculations on whether a property makes sense or not, but you have to know what the comparable cap rates in the area are for similar properties, and that's going to be mostly guess work.  As you mentioned, using a 10% cap rate makes then numbers look way off base, but you're not looking in a 10% cap rate area, you're looking in a 5% - 6% cap rate area.

A little bit more information regarding the property you're looking at would be helpful in determining if it makes sense or not.  What is the current asking price?

Additionally a more concrete description of your goals would be beneficial as well.  Are you really looking for cash-flow?  Or are you looking to house-hack and live at a reduced rate, and then cash-flow when you move to your next property?  I don't think you'll have cash-flow while you're living in the triplex, but you might pay less in monthly expenses because a lot will be covered by the other $1950 you get from the tenants in your property.

It also seems like the area you're investigating is a B class or better area, where you will end up with lower ROI for the higher desirability and stability of the neighborhood.  It also means that the cash-flow will be lower.

If you're really interested in knowing if your calculations are going to be valid, make use of the BiggerPockets analysis tools, or use some of the freely available calculators out there on the web.  If you're not sure what's good, let me know and I can send you some links.

Won Lee · Answer

I think what most people are saying is this, a triplex isn't a commercial deal. Even the banks consider a 4-plex a residential property. When you get to a 5-plex, then it would be commercial and thats when you use NOI and cap rate to establish value of property. With commercial, the only thing that matters is NOI and to lesser degree cap rate. When getting loans on commercial, you will need 25-30% down and banks don't care necessarily about your financial situation but rather the properties. So there is a difference.

With triplexes, think about it as residential. The banks care about YOUR finances for the most part. You will have an advantage here cause since you will house hack, you will save on property management and maintanence costs since you will be doing it yourself. But CAPEX, vacancy loss, taxes, insurance, prob utilities, mortgage will probably add up to 40% of gross rental income.

Every deal is different I am sure so you gotta runs the numbers based on 2 years of P/L's of the triplex and not pro forma fantasy numbers. Try to be conservative with expectations.

Hope this helps.

Rafael Floresta · Answer

Roxborough is a nice area. I wouldnt get too caught with the cap rates at this point, You can just look at straight up cashflow, specially if you intent on living in the property.

I invest in South Philly and DelCo, and 100 per door is not a good cashflow for lower income properties (rents below 1.5k), but it can be ok if you are going with FHA 3.5% and pay PMI. With 100 dollars of cashflow, I would be worried about anything breaking in the first 5 years, putting you in a bad spot.

Dont forget to calculate your PMI, and add about 200 bucks monthly for Capital Expenses and repairs.

The BP calculators are a great way to analyse your deal. I strongly recommend.

I would stay away from the pool, or budget someone to come to maintain the pool from the start. If you choose to do it for a while, you keep that extra cash, but you should not corner yourself to HAVE to maintain yourself. Same goes for Property management.

I am local'ish, if you need anything, feel free to ask.

Won Lee · Answer

In above statement, please take out mortgage payment...even without that the costs should be approx 40% of gross rents..typically its 50% but since you are house hacking it should be 40% and maybe 35%

Account Closed · Answer

There are no cap rates for triplexes.  To get a cap rate you need operating expenses.  The 50% guess includes more than operating expenses so at best it will give you a crap rate.

Steve Vaughan · Answer

I think the $100/door number may be cashflow folks shoot for? (which is low, try and get closer to $200)     Maybe you're mixing your end result in with your cost and value metrics.  I followed along with you until the $100/door number.

Most properties cost 50% of gross rent to operate.  What is left over is the amount available for debt service and cash flow, or NOI.  Cap rate is a function of NOI.  A Cap of 10% would be 10x your NOI, giving you an offering price to shoot for.  If 10 is what you seek. I wouldn't accept less than that for the hassles of tenants and toilets.

For my area:  In general, if a property is grossing 1% per month, I will look at it closer for further analysis.  A quick 2-second initial screening. In the Midwest they may need closer to 2%/mo to look at it.   Hope this helps @Daniel Flesher

Jeremy Chaudet · Answer

Thanks! Here is one more picture:

Troy Sheets · Answer

Congrats @Jeremy Chaudet, the neighbors must be thrilled too, what a difference! Living for free is great, I'm not sure how I'll ever be able to live in a SFH again where I'm paying the whole mortgage!

Troy Sheets · Answer

Great deal Jeremy! What're gross monthly rents? Got any pictures, love me some before and after pics!

The Numbers - Am I Doing This Right?

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