First Deal Analysis and Professional Opinion needed!

[Bridger L Logan]

Hello, I am closing in on my first real estate deal in Butte, Montana and would love any input! I am graduating May 2020 with a degree in civil engineering. I have gone over 50+ multifamily properties that could be an owner occupant scenario and have decided a certain 5-plex. My questions are: Is starting with a 5 unit building too large? (What was your first deal size?) The of the property is 325,000 has a monthly expense (Mortgage, Operating costs) of 2200, but has a monthly rent of 3500. It was built in 1900 and has had an incredibly strong rental history considering its location to campus and the hospital. What type of things should be checked for due diligence? I am leaning towards a VA loan as well instead of FHA. Any thoughts or opinions would be greatly appreciated.

[Michael Gebremichael]

@Bridger L Logan 5 unit is considered a commercial property so House hacking might not work to your benefit. Also, $42k a year for an over 100 year old property that cost $325k is NOT going to cash flow.

1. A rough estimate of the NOI at half of the income is $21k.

Cap rate on $21k is 6.4%

Is the property in a decent area where it will appreciate higher than inflation rate? If not, it’s not a good investment.

2. $21k is not going to cover your debt service of $26k ($2200 * 12). You can make it work by significantly increasing your down payment, but again this suggests that it’s not a good investment specially if you are starting out.

3. If you have never owned a property before, I suggest starting out with a single family property ( 1 or 2 units) that’s cheaper. $325k seems like a lot of money to start out with.

You have to assume that you are going to make mistake. Most people, if not all, make a mistake on their first investment so it’s better to start small and grow slowly. Even if you mess up, you can come back and fight another day.

Good luck!