Am I making a HUGE Mistake?

[Gerardo Hernandez]

Hello Everyone,

I want to start my real estate portfolio. I want to start with a house hack But can't find a duplex. I found a fourplex that is 419k but its been in the market for a long time. I did the number for 400k and this is what I got. 

Price:400k

Taxes 2019- $7631

Rents for 3 of the units-currently 800 but raising it to 900 = 2700

Down payment 3%

Home insurance- 828 annually (used the number the calculator gave me)

Repair and maintenance- 10%

Vacancy- 5%

Mortgage Insurance- 350 per month? I used what the calculator came up with not sure its accurate 

All in all I should be paying around 500 out of pocket till that PMI comes off. Is this a decent deal? I know It doesn't make the 1% rule but I hear those are hard to come by now and my area is very hot overall to find anything ATM. Am I missing something? My hope is to stay in the apartment for 1-2 years and than try to another duplex or fourplex to do it again. I am currently driving 2.5 hours a day to get to work and it's getting to the point where I get a single family home or rent an apartment. I am barely paying any rent there but the drive totally sucks and the savings are going out the window when I think of gas and the time wasted.

[Erik W.]

Hi @Gerardo Hernandez and welcome to BP!

$891 for insurance on a $400K property?  Mmmm....that sounds very LOW.  I live in a lower cost of living area, and my $250K personal residence is $1200, and we keep a high deductible, have no claims, and we have one of the lowest cost providers in the nation (USAA, for military).  Call 3-4 agencies and get some real quotes.  You have to remember too that you'll want increased liability insurance.  This is a business asset, not just your personal home.  I recommend at least having $1 million in liability.

I do not see any figures for Capital Expense repairs.  Big ticket items like roof, hvac, water heaters, flooring, etc.  Figure 5% per month of gross potential rents (GPR).

I also don't see any numbers for Professional Management.  I realize you intend to self-manage, but it should still be factored in as a cost that you pay to yourself because again we are evaluating this property as a business decision, not a personal decision.  Otherwise, you've just bought yourself an unpaid volunteer job.  figure 10% per month of GPR.

Who is mowing the yard and shoveling the snow?  I don't know where your duplex is located, but figure $100 / month minimum for the lawn, 7 months of the year, and if you have snow figure 3-4 plows per years at $50 per event.

10% maintenance?  That might work if the place is fairly flawless at the moment and you plan to donate your labor unpaid.  But again...this is a business decision and the cost should be included even if you are paying yourself.  We don't "invest" in real estate when we work for free.

So what we see here is there are many costs which haven't been accounted for, and at least one cost that may be account for but is too low. A general rule of thumb for a well-maintained property is figure 30% of GPR just for operating expenses, and that doesn't include any mortgage or PMI. If the property is older or requiring more maintenance, figure 40-45%.

My guess is you will cash flow significantly more negative than $500 per month.  Re-run your numbers and see where you are.