Good deal...or am I missing something?

Question

Hi Everyone,Still adjusting to this forum...so many thread areas, I'm not sure if I am in the right one....forgive me if I'm not.

I've been looking "at the numbers" so long, I'm not sure if I'm looking at them right. I am looking at a 2 family. Here are the numbers:

Costs
Cost to buy: 130,000
Down payment: 25% (32,500)
Mortgage interest rate and payment: Let's say 3.8% to be safe. Online calculators tells me it will be around 750/mo, including the taxes.

Taxes: 3500/yr

I'm factoring 2400/yr for insurance.Separate electric, separate water. Only other costs I can foresee are trash, common area lights (if any), vacancy times, and general upkeep. Most of these are unknown at the time.

Income:One unit currently rented (3BR): 1275/moSecond Unit vacant (2BR, fully remodeled): I can probably get 1000ish (if/when I rent it out)

It's not in a busy apartment - like area, but there are certainly rentals nearby. I think I could fill the vacancy after a few months of owner occupying it (to get the conventional owner's occupied interest rate).

So let's say I can get 2375/mo. That get's me well past the 50% rule, and pretty close to the 2% rule.

I think that's all the info I have right now. My calcs tell me I walk away with ~15K a year minus those unknown costs, and a payment to uncle sam come tax time. Am I off, or does it look as good as I think it does?

Sorry for the long post...much love and appreciation for anyone that can help this new guy out... :)

Ken P. · Answer

If the property is in a decent area and you can attract good tenants paying the rents you've written above, then this does look interesting.  As @Michael Noto wrote above, your homeowners insurance estimate of $2400 is way too high.  You don't want to "wing" anything when you're making a major commitment like buying an investment property, or the house you intend to live in for that matter, so pick up the phone, make some calls to insurance agents or brokers, and within an hour you should have a very good idea of how much insurance will actually cost.

Also, every ROI calculation should include a line for CapEx, capital expenditures which include things such as the roof, HVAC, driveway replacement, etc.  The exception might be if the property has been completely renovated and everything is new or like new, and you plan to dispose of the property within the remaining lifetime of the major systems.  If the property is less than like-new, and/or you plan to hold on to it for more than a few years, then you need to be setting aside funds for major repairs.  Even if you're lucky and nothing expensive like a roof goes bad during your ownership, a prospective buyer may balk at buying at your price if their inspection turns up a roof with many cracked and curling shingles that is clearly at the end of life, or a 30 year old furnace.

Michael Noto · Answer

@Filipe Pereira

$2400 for insurance is way high. Even for a non-owner occupied.

It is impossible to know if this is a good deal without knowing where it is. Where is this place?

You need to live in the one of the units for a year to get the 3-5% down FHA loan

Also a lot of the unknowns will either make the deal worth it or not so it is hard to give any advice without that info.

Do you have an agent? If so, they should be able to answer all of these questions pretty easily.

Brent Coombs · Answer

@Filipe Pereira, I'll leave it to others to look at those figures more closely. My concern is: where will you live after those "few months"? The same place you ALREADY live?

I hope you get why I am asking that question? It's because the bank will ASK YOU of your intentions. What if they track you down to this very thread?

But, so long as they AGREE to you swapping it into an investment property after just a few months - then sure, we won't need to warn you of the words: "mortgage fraud"! Cheers...

Filipe Pereira · Answer

looks like CHFA loans are only good for primary residences, and require owner occupied for multi fams.

http://www.chfa.org/Homeownership/for%20Homebuyers/FrequentlyAskedQuestions.aspx

Filipe Pereira · Answer

great info and lots to chew there @artem. I am only at the beginning phases of the financing side. I haven't done too much research on the matter. Yes, I am considering an owner occupied situation for the lower rate. Like you said I need to compare the difference in savings vs potential rental revenue from that unit. If it's only a year, or less,  it probably makes sense to do the owner occupied. Thanks!

Artem Lopatchenko · Answer

Filipe,

If I'm following you correctly you're saying that you want to avoid PMI and would rather pay 20-25% down as an owner occupied property?  Have you looked into whether this will prevent you from taking a 3.5% down loan in the future?  The reason I ask is you can always re-fi and put more money into it, however you won't be able to pull 96.5% equity out and convert backwards.  I'd look into CHFA (CT first time home buyer) loans in your area before you discount it completely.  Also, if you are putting down 20-25% what are the intentions of living there?  It sounds like a conventional loan, I can't imagine there would be stipulations forcing you to live there, unless of course you are doing it for the rate.   In which case you need to consider whether the additional say $100 or less in interest is worth not having one of the units rented for a year?

As far as costs are concerned, Brandon's book on real estate investing has a great check list of the items to check off when estimating monthly expenses.  The book is worth every penny, however if you don't want to buy the book, ask around if anyone on the forum would be willing to share their walk through check list.  It'll give you a better idea of which items to include/exclude from the calculations.

Filipe Pereira · Answer

Thanks, do appreciate it. I know the house has new hot water heaters and new multizone heat. I would imagine that the plumbing, for the most part, is original to how it was built. I know each unit has a 100Amp box, but beyond that, I am unaware of the condition of the wiring/electrical. I will find out more soon, once I pay a visit! The cash flow IS promising though.

Jeff Bridges · Answer

When I  think older buildings, I think of major mechanical items that need to be fully replaced over time to meet current fire code or modern amenities that are expected or reached the end of lifecycle before they fail. The older the house, the less likely these items have been replaced by prior owners and are in need of replacement.  Old plumbing can go anytime and can be costly to re-pipe, old electrical wiring or sub-panel can be expensive to replace, roof at end of life, HVAC end of life, Water heater end of life, exterior siding, insulation on older houses can also be non-existent or in need of replacement, foundation can shift or crack and needs attention. I personally only like properties 1950 or newer, but also still need to scrutinize to rule out properties that have Poly-butyl plumbing or aluminum wiring, both of which require immediate replacement due to defects or fire concerns. Those that think they can put carpet and paint in an older property, rent it out and have no problems/ expenses are not planning for success. Of course a good professional inspection can help on a case by case to anticipate the type of repairs required, but the above issues expected on older properties should not be a surprise when found during an inspection and if you've gotten that far in the purchase process.

Filipe Pereira · Answer

What do you guys think are some concerns with older buildings? Assuming its structurally safe, and not "leaking" asbestos out of the corners, what should I be concerned with? I am not concerned about it appreciating as much as I am concerned with it depreciating. I am more interested in buy and hold, but either way I am still going to have to sell it eventually.

Filipe Pereira · Answer

@Jason A. I was told by the person who prequalified me that lenders generally like to see 25% over the typical 20%. I haven't quite done my homework here yet though. The property was built in the mid to late 1800s, and was renovated within the last 5 years.

Good deal...or am I missing something?

Most Popular Reply