$1750 Cash flow - Financing First Deal?

Question

Hi all,

This is my first post on bigger pockets! I am looking at a muti-family in my hometown, an old mill town that is finally starting to see some appreciation (6% this year).

Asking price is $200,000- 4 units. It was purchased in '07 for $150,000 and renovated to high level- top of the rental market in my area. According to the seller, gross rental income is $3350 per month, and the building is fully occupied. Landlord pays heat and water.

My questions is: I have two financing options: FHA loan, or, with a partner who has a big cash reserve- 130k, and we would split the conventional 20% down. They have no real estate experience either, but I believe we would make a good team working together in the future. I can comfortably invest $15,000, enough to cover the FHA.

Appreciate your insights- Quinn

Ryan Taylor · Answer

Hi Quinn, if you have the opportunity to house hack and acquire it on your own, I'd recommend that option.  This would allow you to save your cash. 2021 may be a year where RE investors who capitalize are the ones who are waiting on opportunities with some cash in the bank.  I'd say partner IF that partner will help you learn, but if he/she knows no more than you, try to take it down by yourself.

Ed Morris · Answer

I would agree with Bob, you should verify costs through receipts or by checking with the city and fuel supplier.

If you can afford, and qualify, to purchase on your own, you will make the most money.  It may be nice to have a good partner that has some extra funds, for the unexpected expenses prior to you being able to save up a contingency. It all comes down to what you are comfortable with.

Do your homework, and if the numbers work make an offer before someone else does.

Bob Metry · Answer

I would make sure to get verified receipts of water and heat costs. I would also see what it would see what it would take to separately meter gas- I am sure heat costs in new hampshire can be quite costly.

Andrew Powers · Answer

If there's opportunity to house hack, I recommend this to get the low DP loan and also reduce/ eliminate your housing expenses. Check the lease end dates to confirm if you can move in one of the units within 60 days (typical per owner occupied loan requirements). Or maybe negotiate one of the units be vacated upon closing.

Get an estoppel and rent rolls for the units to confirm numbers from the seller are real.  Good luck!

Troy Zsofka · Answer

I think everyone is giving solid advice regarding partnering or not, but I'm going to offer an additional perspective.

If you are looking to house hack this, and then another in a couple years, and then grow from there, then yes, do it yourself with a minimal down payment on an FHA loan if you can.

On the other hand, if you plan to get deeper into REI more quickly than that, then you should not only consider this particular deal, but future ones as well. What I mean here is, let's say that you can take this one down yourself, and don't need your capital partner. Can you take the next one down, or will you have exhausted your personal capital? Is this potential partner going to be receptive to working with you on the next one if they feel that you cut them out of this one in the 11th hour?

I invest a lot in PERE, and if someone brought me a deal and asked me to be an equity partner, but then changed their mind in order to make more money after I had already spent time on due diligence for that particular deal, I'm not sure how receptive I'd be if they then came back to me for the next one.

I guess it all depends how much you've involved this potential partner in the deal to date, and therefore whether they feel like you reneged on a commitment to work together.

There's the adage that half of a deal is better than no deal. That can be extrapolated further to say that half of 5 deals is better than all of 1 deal.

Just something to consider.

Happy investing,

Troy

Troy Zsofka · Answer

@Quinn Morrissette -

Is that $1,750 cash flow monthly? Is it NOI or actual Cash Flow after Debt Service?

If the gross rent is $3,350, and the NOI is $1,750, that means the expenses are $1,600; which indicates an OER of 47.8%. That's reasonable, but that's BEFORE P&I.

If you are thinking that it cash flows $1,750 AFTER P&I, you may want to take closer look at your expense assumptions.

If this old mill town is Claremont, take an even closer look because RE taxes there are astronomical.

Happy investing,

Troy

Stephanie P. · Answer

@Quinn Morrissette

House hack, house hack, house hack.

There is not better way to begin building your real estate empire than house hacking.  The money is cheap, the terms are favorable and it helps you learn how to  be a landlord.

As others have said, get the heat and water split into separate meters to improve your cash flow, even it it costs a few thousand dollars.

Now is the time to start building your team (insurance, title, contractor and especially your lender).  Have a strategy to lay out your path forward when it comes to financing. Get with someone that knows Fannie and Freddie guidelines so you can maximize your use of cheap money.

Stephanie

$1750 Cash flow - Financing First Deal?

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