Just starting out- Is this even possible?

Question

Hello!

My wife and I are just working on building up some equity. We have a little bit of a suicide-run plan to try to buy a multi-family, and looking for a reality-check if we're going to hard, or perhaps into something that isn't possible for us. I totally welcome all opinions, positive or negative!

On the north shore of MA, we currently own a ~1500 Sqft Condo with about $70k of equity, but the value of our home has increased from about $500k to $630k via local comps & my realtor's estimate.

We are looking to purchase a multi-family local to us. The numbers seem to be in our favor, as well as some changes to local zoning. The home is listed at $720k, but we think we could get in at $680k. There are two units, currently TAW- rented below market value. The units are in tough shape and we'd like to finance additional money for reno & an ADU addition- I assume that we could refresh the interior and convert the attached garage space (200sqft) into a 350-400sqft rent-controlled ADU. I am pretty well locally connected and am not overly concerned about permitting/zoning.

Once complete- even with zero down I estimate- $5092 monthly mortgage (including financed rehab). Both units would potentially rent for 2600/unit. The ADU would additionally add $1500 (set by local ordinance) of potential rental income. Totaling $6738 monthly rent collected. Even budgeting for $1600 of monthly expenses (including vacancy and repairs) we still end up in the clear.

-We aren't overly concerned about turning a huge profit. I figure, in time, as rent increases & we are able to refinance, our profit margin will grow.

-Average yearly increase in property value of a little over 6% makes this feel like a small risk as we could cash out.

-We have just enough income to float the second mortgage in case hell lets loose. Renting our current home in an emergency scenario would help too.

-We have some cash on hand, but I'd prefer to hold it as it's our emergency fund.

Am I insane? If not, would a lender ever agree to do this with me? There is risk there, but plenty of escape plans.

Randall Alan · Answer

@Phillip Dixon

There are probably other issues with your numbers (sorry).  You likely will not get a 6% loan in today’s current rate environment on an investment property.  You are probably at least a percent low.

You will also have issues financing rehab costs as well unless you do a special program like a  FHA 203k loan… that will really limit your options on financing to just a few programs which you can Google more on.

Also, right now we are in a depreciating market (ie. Housing prices are falling in general)… so I don’t think you will see a 6% increase in values in the short term.  Plus, costs are going up significantly… like property insurance, and maintenance expenses.

My gut says you could find deals with better numbers and less risk - even if it meant investing  remotely - even though I’m not a huge fan of the additional expenses that remote investing entails.

I wish you the best, but would encourage you to do some comparisons on other properties that are straight rentals without major renovations to see if they are easier / more straight forward avenues to get into real estate.  We pivoted to single family rentals after starting out in multi-family - mostly because they are just so much more common and easier to find compared to multi-family.  That’s not to say that multi-family isn’t great - it just seems far harder to find one that is a good deal compared to single family.

Randy

Randall Alan · Answer

@Phillip Dixon

As soon as you say your next purchase is "not my primary house" - most every (typical) lender is going to say "You need 20-25% down to make this purchase happen."   They want investors to have 'skin in the game'.  They won't be left holding the bag if your investment fails.  So I see the "zero down payment" line in your chart as a non-starter.  There is more to these calculations, like your income as to qualifying for the loan for one -but a better approach might be to buy the house as a new personal house of your own - even if it meant selling your current house.  It would definitely lower your down payment requirement for starters.  Then you could renovate one side while living in the other, and make the ADU addition as well.  After six months or so, you could move out of your Current house, buy a new house, and then rent out the remaining units in your rental.  The selling your old house isn't so much required - but might make it easier as far as qualifying goes.  Also, I would want to know that your ADU will definitely happen - otherwise your numbers would really stink as to profit versus expense.  I'm not a fan of a deal where you are potentially upside down if you can't get through all the changes required (ie. adding the ADU).  Like, what if you run out of money, or it takes a year to get through permitting, etc.  Now you are carrying the house upside down for an extended period of time. Could get ugly.  We had 6 months of setbacks when we went to update windows in a 1925 house.  Had to bring the house to 2022 building code for everything we were changing.  Cost us $50,000 we weren't expecting.  We still came out ahead because our deal had plenty of profit in it, but it was definitely disappointing and frustrating.  We missed the peak of the market to sell (as a flip) and ended up making it into a rental.  Food for thought!

All the best!

Randy

Phillip Dixon · Answer

Thank you for this Randy! Frankly I was waiting for someone to say that- my numbers are fine, but with it being my first shot, I wasn't sure what to expect. My neighborhood is really, really, tough to break into- and this property is only a block from mine. So I figured it may be wishful thinking =) Thank you!

Phillip Dixon · Answer

Thank you so much for this Randy! These are excellent thoughts! I know financing could be tricky, we'll see what that hits! You've also convinced me that I'd like to add some ADU permitting contingencies to a potential offer. Even if it took us a year to float- I think we'd be okay. Its so hard to break into this when you don't have a bunch of cash to put down!

Just starting out- Is this even possible?

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