Am I setting myself up for success or failure?

Question

Hello all, I am in the process of buying my first multifamily investment property and would like some feedback or advice on my strategy. Can anyone poke a hole in this plan? It looks great on paper but as we all know life is like a box of chocolates.

I am using cash and part of my HELOC for a downpayment on a new construction three family house for $680k. My first house is paid off and I plan to rent it for $1800 a month. I will use this rent plus part of my salary to pay the heloc off as soon as possible. I figure two years.

I will live in one unit of the MFH and rent the other two for $1900 a month. I figure interest and principle on my Heloc will be $1200 a month and roughly $3500 on the MFH. If things get a little tight financially I plan to only pay the interest on the heloc.

Is this a solid plan. Can I improve it in any way. My biggest fear is that someone will not pay their rent and put me at risk of loosing my properties. Someone suggested i rent to section 8 so the rent would be guaranteed.

What do you guys think?. Thanks in advance.

Tom Goans · Answer

@Francisco B.,

There are many great things about your consideration.

However, at the risk of raining on your parade, based upon my experience, I see many major problems with your business plan.

From your post, it appears you are not very confident in the project. You may want to go with your gut feeling on this one.

I am a firm believer each investment should support itself, even during the challenging times. From what you stated, it would appear you will be feeding this investment because it is a negative cash flow.

I may have misread or understood.

If you are feeding the investment, or if the cash flow potential is so marginal, you may want to reconsider the investment.

Sleep well at night and have less stress in your life. A good goal is having investments that are good positive cash flow producers and will support themselves. Moreover, they will provide you with a profit and positive cash flow so that you can enjoy life and invest more.

One thought on a negative cash flow investment, when a lender reviews your P&L and financial history, it may be more difficult in the future to borrow money or deal with investors because of a negative business history. I would suggest trying to build a very positive business and decision making history that reflects positively on your decisions and skills.

Best of luck with your investment endeavors.

Kurt Kwart · Answer

@Francisco B. I was ignorant to the returns in different types of rental markets. Diving into BP forums, podcasts and articles I read up on the 50% rule and 2% rule.  I found sfr in my area offering 2%+ rents similar to what is covered in Podcast 29.

Also Podcast 8: Learning to Be a Profitable but Ethical Landlord with Al Williamson planted in my head the potential to not be another slumlord like I see so much in lower income areas.

John Rooster · Answer

It is a good plan assuming you are not over paying for the 3 unit and you are getting owner occupied market rate rate on the 3 unit

Francisco B. · Answer

@Michael J.  Thanks for the thorough break down. You brought up some very good points that will make me crunch the numbers again. This property is in NY so prices out here are a bit high. I could find a lower priced older MFH but not in an area where I would want to live. The older homes I saw were smaller and needed lots of work so I chose to stay away. At the time they were priced $150k less than this house. Now those same older homes are almost as much as this new construction home. I will definitely reconsider this deal after using the information you gave gave me. Thanks again.

@ Raynomd B. Thanks for the wake up call. I don't know what I was thinking. Water and common area lights are only paid by the landlord in multifamily properties. Thanks again.

Michael J. · Answer

RE can vary a lot based on where you live but IMO this is not a good deal. You should approach each RE transaction individually and crunch numbers based on the single property, don't rely on another property to carry something else. Of course if you live in one unit you have to figure that when crunching the numbers. I would look at the tri based on three people renting it and see if the numbers make sense.

You also have to figure in vacancies, other expenses like yard care, cleaning, any common electricity you pay like lights? Being a new building you should have very little maintenance issues but you should still calculate something into your numbers for maintenance, save it up in a separate account so when something expensive breaks you can use it.

You should always get decent cash flow from the get go in a property. From what you said

3 x 1900 = 5700
	 
	 Expenses
	 -3700
	 -200 (is this your unit or are you paying for tenants?)
	 =3900
	 
	 5700 income
	 -3900 expense
	 = $1800

This doesn't include any other expenses or vacancies, one month without rent in a unit is $1900 or $158 a month.

Could you find a older building that is much cheaper but rents the same? Most properties I have looked at don't necessarily rent for more given a similar area and condition if it is new construction.

The best peace of mind is buying right and having some money in savings for repairs and vacancies. My goal is to try and keep about $1,500 per unit in savings at least up to a certain point. My units rent more for $600 though. Again it varies but I would feel better with 1.5% - 2% rent.

P.S. For the house the tenant should pay all utilities and lawn care (no if I can't get tenant to pay water). Your property your rules, the applicant can accept or reject them, move on to the next applicant. If for some reason in your area all the LL's pay water for a SFH then you might have to also, or reduce the rent a little but 95% of the people I have talked to with SFH's the tenant pay utilities and take care of grass.

Scott Isley · Answer

great insight Michael! I would agree that a deal making sense in the worse case scenario is important to keep in mind....

Raymond B. · Answer

@Francisco B.,

Concerning renting your Single Family Home:

My tenant is responsible for ALL of the Utilities at my SF House, that he rents.

That includes paying the Water and Sewer Bill.

He is also responsible for Lawn Maintenance, Snow and Ice removal, etc.

He must provide his OWN equipment and supplies to do the above.

If I get a Fine,  because he didn't do any of the above, it is added to his rent.

Raymond

Francisco B. · Answer

@Kurt

Thanks for your response. Can you elaborate on why your opinion changed from last year? Thanks

@ Tom

Thanks for your Response also. The lack of confidence in the deal is just my nerves working on me about being a first time landlord. I have friends who say they felt the same way in the beginig also. I am doing my homework on the do's and dont's of being a landlord in order to avoid costly mistakes.

Here is a snap shot of what I think the numbers will be.

Current house with no mortgage.

Rent         $1800 a month

Taxes       $-442 a month

Water.      $-50 a month if I can't get the tenant to pay for it.

Insurance $-100

Left over.  $1158 which i will apply to the heloc i used for the down payment on the MFH. Interest would be $450 appx. a month

Now for the MFH

Unit #1 will be the unit I stay in.

Unit #2     $1900 tenants pay utilities

Unit #3     $1900 tenants pay utilities

Mortgage $-3700 including taxes and insurance.

Water.      $-200

Total        $-100

I figure it will only cost me $100 a month to live at the MFH plus utilities and food of course. In order to pay the heloc off faster I would apply an extra 2k a month out of pocket just towards the principle. Once the heloc is paid off I could apply the $1158 from the first property, $450 interest i no longer have to pay on the heloc, and the extra 2k a month to attack the MFH mortgage. Once the MFH is paid off I would take a heloc out on it,  sell the SFH and use the cash to buy the next MFH. Am I crazy or do the numbers make sense?

Thanks again for your input.

Kurt Kwart · Answer

congratulations on having your primary residence paid off.  That is awesome!

A year ago i might have thought this was a decent plan.  35 podcasts later and learning so much in these forums I have redefined the deals I want to get into.  Personally I would find a smaller deal with less leverage  and risk.

Am I setting myself up for success or failure?

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