Would YOU consider this a great buy and hold deal????

Question

I hope that someone can help me :)  I am Realtor here in Colorado but I am slowly trying to turn myself into a real estate investor and start "house hacking". I am in a unique situation, as I bought a 2,700 square foot new construction home in 2015 and learning more and more about house hacking this year, I am wanting to buy a "duplex, 3-plex or 4-plex" by next year. But I know that the banks don't like me buying another primary residence and buying "down in square footage" Do you have any strategies on how I can go around this obstacle and still be able to buy the duplex, 3-plex or 4-plex with a FHA loan and live in one of the units? Also, I did buy my home with a FHA loan as well, so I know I will need to refi out of it and get into a conventional loan.

On a side note, I have ran my numbers on my personal home to see if it will be a great rental property for me. Could anyone tell me if this looks like a good rental property for me?  I am trying to see if I should keep it as a rental or if I should sell it. Here are the numbers:

Purchase Price: $203,000.00

Purchase Closing Costs: $1,000.00

Estimated Repair Costs: $3,000.00

Total Cost of Project: $207,000.00

After Repair Value $284,000.00

Property Description Maintenance free home in Greeley. Bright ranch plan. Beautiful kitchen w/island, granite counter, stainless appliance package, island & dining space. Large master suite w/ walk-in closet, 3/4 bath with spacious walk-in shower. Highly energy efficient home. A/C. Tankless H20 heater. Fully landscaped yard maintained by the HOA.

Down Payment: $0.00

Loan Amount: $203,000.00

Amortized Over: 30 years Loan

Interest Rate: 3.625%

Monthly P&I: $925.78

Monthly Income: $2,200.00

Monthly Expenses: $1,949.20

Monthly Cash Flow: $250.80

Pro Forma Cap Rate: 4.97%

NOI Total $14,119.00

Cash Needed $4,000

Cash on Cash ROI 75.24%

Purchase Cap Rate 6.96%

Steve K. · Answer

@Melissa Harris ,

I'm having trouble following your numbers. Are you saying you bought this home in 2015 for $203,000 with 100% financing?  If so, congrats....if it's appreciated to $284,000....wow, 40% gain in about 2 years!!!! Good for you.

Or, is that that your current balance is $203,000 (i.e. for the refi) and you prefer not to consider your "equity/down payment" in the deal from 2 years ago, and in paying 24 monthly payments???)

If it rents for $2200/mo, then that is 1.08% of the purchase price (if $203k) or 0.77% of price (if ARV is $284k). I'm most familiar with Denver, but those aren't bad numbers....it might be that Greeley market is different. (again, many BP posters are investing in the midwest for 2% rent/purchase.)

If your total expenses are $1023 per month (not counting the mortgage), then NOI is $1176 and that calculates (as you say) at 6.96% and 4.97% , respectively, for $203k and $284k purchases. Again, not bad for Denver. Are you including every expense you'd see as a land lord in the $1023/mo ? (insurance, property tax, HOA fees, maintenance expense, % vacancy, capital reserve, management fee (if any)?

Just because you think of a $1000 refi and $3000 in upgrades/maintenance before you rent, I don't believe this $4000 "investment" is the number to use for your "cash on cash return" calculation.

Add to that your equity in the deal.

Or, use "opportunity cost" concept. If you can sell it for $284,000 ARV and pay off $203,000 mortgage, you have $81,000 equity in the place (that you can keep in the rental, or cash out upon sale (less selling expenses).

So, $251/month cash flow ($3010 per year) is now just a 3.7% annual return on your $84,000 equity "invested". Not great, but only you can decide if adequate once you consider tenants are helping you pay down the mortgage and you might get nice appreciation also.

Melissa Harris · Answer

@Steve K. the $203,000 is what I currently owe on my mortgage, I bought the home in 2015 for $210,000 and I was able to use FHA grant program, which helped me with my down payment and then the lender covered most of my closing cost and then I took my some of commission I would of made on the sale and used it to pay the remaining closing cost, which was around $2,000. So I ended up getting around $1,000 back at closing.  I just got it last month and it appraised for $284,000, yeah the market in Greeley is slowly raising!

So I calculate what I bought it for in the rental property calculator? I am still getting use to it and wasn't sure how to input those numbers. I just spoke to a local property management company and they looked up my address and they are saying that I actually can only get $1,850/month with the tenants paying utilities. So I will have to re-run my numbers.

Yes I did put in my monthly expenses. Which I put:

Water- $80 (HOA pays for exterior water & trash)

HOA- $130/month

PMI- $143/month

Vacancy- 5%

CapEx- 5%

Repairs & Maintenance- 5%

Property Management- 10%

Property Taxes- $100.42/month

Then for the future assumptions-

Annual Income Growth- 1%

Annual PV Growth- 3%

Annual Expense Growth- 1%

Sales Expense- 9%

Do you think my repair/maintenance and CapEx is high? With it being only 2 years old(just replaced my roof this month with Class 4 Impact resistant shingles), do you think I can lower those "%'s" or should I keep them at 5%?

Melissa Harris · Answer

@Linda Weygant I heard this from another class I attend on "house hacking" but maybe I heard him wrong, which could be a possibly! Glad to know that this is NOT true. Thanks for clearly this up for me :)

I was told that I am not able to purchase another FHA property if I currently have one in place, I can only do this if I bought a house "certain miles" away from my current home, this is a question I will have to ask my lender it looks like to get the right answer.

Thank you for your advice!

Melissa Harris · Answer

@brent coombs yes I didn't think it of that way but I guess I am asking that! If I would sale my home, I would use the $80k to pay of a tax lien I have which is $23,000 and then invest the rest into my next investment property. Which I plan on "house hacking" and buy either a duplex, 3-plex or 4-plex. I am not sure on the term of the new loan yet but I plan on using a FHA 3.5% down. My lender is working on the numbers for me.

Thank you for the advice and feedback!

Melissa Harris · Answer

@jennifer s I am not sure what the $4,000 cash needed is about. I used the "rental property calculator" and it put that in there.

Yes I did put in my monthly expenses. Which I put:

Water- $80 (HOA pays for exterior water & trash)

HOA- $130/month

PMI- $143/month

Vacancy- 5%

CapEx- 5%

Repairs & Maintenance- 5%

Property Management- 10%

Property Taxes- $100.42/month

Then for the future assumptions-

Annual Income Growth- 1%

Annual PV Growth- 3%

Annual Expense Growth- 1%

Sales Expense- 9%

Linda Weygant · Answer

I'd like to clear up a little misinformation you've got in your first paragraph.

First statement:  "I know that the banks don't like me buying another primary residence and buying "down in square footage"

I'm not sure where you heard these things, but I don't think either is true.  Even if you were buying another primary (which you aren't - you are converting your primary to a rental, then buying a new primary) the bank doesn't care as long as your DTI ratio and credit score can handle it.  The phrase "buying down in square footage" is a complete mystery to me.  Not sure where you heard that, but it's pretty far off the mark.

Second statement "Also, I did buy my home with a FHA loan as well, so I know I will need to refi out of it and get into a conventional loan."

This is also not true.  You can have multiple FHA backed loans, however you must always live up to the conditions of the loan.  Usually, the main condition is that you will live in the property within 60 days of purchase and will live in it as your primary residence for at least one year.  If you bought your current home in 2015 and have lived in it as your primary the whole time, you have already met the requirement.

You can buy up to 4 units on an FHA loan.

As for whether the other stuff you've mentioned are great deals - it's WAY too subjective of a question.  A "good deal" is a matter of your personal conditions, comfort level and where else you would be able to invest your money.  Your math looks good, but only you can say whether it's a Good Deal.

Brent Coombs · Answer

@Melissa Harris, so you're asking if continuing to net $3k per year for your $4k outlay is better than netting a one-off profit of $80k for that same $4k outlay two years ago? Well, "it depends".

eg. How would you invest that $80k? Also, will your next loan terms be just as favorable?

Personally, I like the thought that all my investments would at least attain the "1% Rule" - which this one DOESN'T.

(What I mean by the "1% Rule" is: 1% gross rent per month obtainable on its CURRENT value - not what was paid).

I wouldn't worry that "the banks don't like me buying another primary residence and buying "down in square footage"", UNLESS they they forbid you to follow that path. If they do, there's another reason to just sell, and start again with your new improved knowledge. All the best...

Jennifer Slaughter · Answer

Hi @Melissa Harris, so I might have missed this but what did you factor in to get your "monthly expenses", and what is the "cash needed" for?

Is your target market UNC students or a family, etc?  We have a rental in Greeley and our numbers are similar.  Ours is a student rental so we set more aside for maintenance and repairs, however, because of the location our vacancy is really low.

Would YOU consider this a great buy and hold deal????

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