how much is a realistic down payment

Question

hey all!

So we were originally budgeting for around 100k and have saved 22k for a down payment.

last night my fiance and i found a 4 plex listed for 233k.  They originally listed the building for 225k on 9/15.  On 12/15 they raised it to 233k.  The current owner has revonvated all 4 units HVAC's, a 3 year old roof, and remodeled some 3 of the 4 units.

The location is 2 miles from a main interstate, blocks away from the local mall, restaurants, and several large factory employers.

The property appears to be well taken care of.  So last night we used the buy and hold calculator and with 20% down i need 45k down payment.  The property will cash flow $499 a month assuming 3.9% loan at 1 point, 120 month management fees (doing it ourselves) 5% cap ex, 10% maintenance.  2% property value increase and 3% cost and rent increases.

So at first glance it looks like a solid investment.  But, my questions is,  should i really expect to come up with 45k down payment?  Or is it possible to get a conventional mortgage at somewhere around 10%.  If i need to raise the other half of the down payment we are considering selling equity partnerships to some family members.  We still want to look up the legal ramifications for that as well.

Any thoughts or opinions would be grateful. Thanks

Jerry Padilla · Answer

@Josh Key

The only way this property would work is if you "house hacked" and lived in one of the units. Remember there are reserve requirements as well as the down payment and closing costs. FHA requires 3.5% down and you could ask the seller to pay 6% towards closing costs. Conventional requires 25% down for a MFR and 6 months reserves! And only 2% sellers concessions is allowed on an investment purchase.

Josh Key · Answer

Hey you guys are awesome. Thanks for the lending advice.  We researched it more and I found several partners but once I found the numbers to make it work I was setting a ton of money aside for approx a 5% return at best.  So we are going back to our original budget and keep looking.

The house hacking idea would not be ideal for us unfortunately.  We currently live in a town home that is paid off and 20 mins from our work.  The 4 plex is over an hour away from our work and not worth us living there.

Currently our plans are to just rent our current house for 1500 a month and use that money as reserve or to pay for the next mortgage while still saving or paying down the new note too.  Our main problem is we need a mortgage as a tax write off and we want to invest our savings at more than 1 or 2% savings in a bank account.  And stocks are not what we are looking for.

I'll keep looking at more properties and keep trying.

Logan Allec · Answer

Why not?  House hacking works great with multifamily homes!  House hacking a 3- or 4-unit property using FHA 3.5%-down financing is in my opinion the best option for a young person looking to get started investing in real estate.  It frees up so much cash (if you have it) to invest elsewhere.

One thing to keep in mind when looking for an FHA owner-occupied triplex or fourplex is that 85% of the market rents on all the units need to cover your monthly payment (principal, interest, taxes, insurance, and mortgage insurance). This is known as the self-sufficiency rule. It only applies to 3- and 4-unit properties (not SFRs or duplex) bought using FHA financing. I put together a spreadsheet here to help potential house hackers quickly analyze whether or not a property qualifies. There are other FHA requirements concerning which you should contact your local lender, but determining whether or not a triplex or fourplex meets the self-sufficiency rule is a good place to start as this rule will immediately eliminate many properties from your search.

Jesse Peña · Answer

@Josh Key

Welcome to BiggerPockets! House hacking with an FHA mortgage is a great way to start with purchasing up to a 4 unit property and only 3.5% down.

203K Loan is part of the FHA loan program. This is another great way to start.

Much success to you!

Josh Key · Answer

OK, i only factored in 10% vacancy.  We didn't really intend to house hack a multifamily home.  If i do it would be a single family. And then we would just rent our current home out to pay the new mortgage.

With 25% vacancy it would put our cash flow at -$100 a month.  Which isn't really a deal breaker, but i know it wouldn't be sustainable.

So at the 5% loan and a 25% down payment I wouldn't feel comfortable raising that much money for a down payment.  We would likely have to take out a line of credit on our current home and we we're looking to keep it paid off 100%.

JR T. · Answer

If even one unit goes vacant bye bye cash flow and hello monthly contribution into the property. Running 25% vacancy happens all the time in rental portfolios. That's just one factor (of many) you're missing in your calculation.

Unless you are going to live in one unit and rent out the other 3 I disagree with your statement that this is a good investment.

how much is a realistic down payment

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