Making it work - owner occupied multifamily residence in high cost area

[Norm M.]

Hi everyone,

I only discovered biggerpockets yesterday and I've already learned so much! Wanted to bounce some ideas off of the pros here...

I'm a soon to be high income earner (stable, high demand job) who is looking to start out in the westchester NY area (location forced by employment) - I was looking for housing for my young family, but realized that the high cost nature (both housing as well as property taxes) of westchester will make housing a financial sink hole. I eventually discovered MFR's and found some that are priced reasonably (in the range of SFRs that I've been looking at) - these are by no means comparable to the investments you guys put up here (doesnt even come close to meeting the 2% rule). Also - although I am fairly financial saavy (with equities etc), I am a total newbie to the RE market - have been a renter my entire life.

here are some questions for you guys:

1) assuming i will stay in one of the units, I should be able to finance it using the standard ridiculously low mortgage rates, correct?

2) should I purchase this in an LLC for liability issues? i would hate to get sued because someone slipped on ice in front of my building (although i know there are landlord insurances). For financing reasons, would it be easiest for me to buy it under my name, then deed it to a LLC?

3) being in westchester, its impossible to make the 2% guideline work - its more like .92% with some conservative estimates (i think - ie: 2.2% of MFR price in maint&repairs) the rest of the stats are: price/rent ratio: 9%, gross rent yield = 11%, cap rate ~5% - the numbers aren't great - but im just looking for a way to have my 'housing' cost work for me.

4) As with most housing stock in NY, it is an old building - built in 1924 - how much should I be aloting to maintenance? How much for insurance? should I be running away?

5) Since I have no experience with RE, much less landlording - i was wondering if it was worth hiring a PM for a small apartment complex such as this (who will effectively be managing 3 units if i live in one of them) and as far as i know, all of them are occupied currently. If I was to hire a PM, does my role as landlord basically become simply an investor?

6) for what its worth, my income would allow me to comfortably afford the mortgage payments even assuming i collect 0 rent. which should help with financing, and I have enough capital to put down 20%. My plan would be to move out within 1-2 years once my kid grows up and starts school. (apt is in a safe area, but not great schools - its about .5 miles from a commuter trainstation into NYC and walkable to a nice downtown area though), after 1-2 years I anticipate i would need to find somewhere nicer to live (or my wife would kill me).

FWIW, i expect life to be pretty busy the next year or two - with a newborn, a new job, and the requirement to pass some certification exams. - will having a PM be able to defray enough of the time to make this workable? or should I just buy a regular SFR or rent (2k for 2br!!) for a few years until life allows me to landlord?

Thanks for any insights or suggestions.

[Jeff Bridges]

1) You should be fine with a normal mortgage in a 1-4 unit building using owner occupied loan rates.
2) You cant use owner occupied loan products with LLCs at closing. If you buy with LLC as owner, you'll need commercial financing which has higher fees and interest rates. Many are comfortable buying under their own name, using standard financing, and buying umbrella policy on top of regular hazard insurance to the tune of 1-2 million. there are other threads here which discuss the liability concerns of LLC vs. personal ownership. too lengthy to debate here but do your own comparison.
3) You can think of it as subsidizing your housing cost when you have 3 units rented and you are in the 4th one. do some calculations/ analysis and see what your cashflow is like is with rental income of three units with the expenses of 4 units. compare this to what it would be if you just rented a place. Is that difference worth the headache of 3 tenants, unexpected maintenance costs, and administration/ paperwork of rental investment property?
4) I'm not as knowledgeable with older buildings but assume that a good inspector will tell you the age of systems (i.e. roof, boiler, AC) and tell you what needs to be replaced. If you do alot of this rehab before you move in such as replace the roof, and all systems to modern standards, there will be less repair headaches/ costs later on. If you delay repairs or wait to replace a 15 year XXXX with a 20 year lifespan, then account for that possible future replacement in your repair costs... You can call any insurance carrier and get a quote on your exact property with the options you prefer. You'll find out if the property is insurable to begin with (has no major prior claims) and what that cost will be.... do that with at least one to get a ballpark...
5)PM charges 6-10% of your rent rolls. Can you afford to take 10% less each month from your rent and still be happy with your housing expenses vs. renting? You'll be living next door to all of your tenants and can walk by once a month to collect rent. The PM can help with tenant placement/ evictions and other things like maintenance but again, you'll likely become involved anyway since your home is connected to these.
brandon turner put out a great how-to article recently on how to do this yourself without the help of a PM. (you can do it)
http://www.biggerpockets.com/renewsblog/2013/01/04/how-to-rent-your-house/
6) weigh it all out. calculate costs of rent vs. expenses with 3 units rented and living in one unit. then check the cashflow with 4 units rented vs. expenses once you want to move out. then check if you can add on a PM once you move-out to minimize costs. do you break-even for either of these situations? If it cashflows, how much? Would a roof repair or a single system malfunction and replacement put you in serious negative territory? as for property management, many believe if you are living in the property and your commute time is zero, then your time spent dealing with tenants wont be such a hassle assuming you screened your tenants properly and have a good system. Its also good learning experience on how to handle property management when you are ready to hand it over to a property manager.

other relevant articles:
http://www.biggerpockets.com/renewsblog/2012/09/04/why-i-have-to-use-property-managers/

http://www.biggerpockets.com/renewsblog/2012/11/13/managing-property-repairs-keeping-molehills-from-turning-into-mountains/