Multifamily House Hack Deal Analysis - Reality Check

[Mike S.]

Hello all and thanks for taking the time to read about my ongoing deal.  I started reading BP about a month ago and I am starting to put it's methods into action.  I have the property under contract and inspection is 6/13.  The property passed the 2% & 50% Rule initially with conservative rental comps having to interpolate a little.  Only a couple days on the market.  I've only started looking recently and still have quite a bit to learn about estimating renovation costs.  J. Scott's book will be here Monday.

I am reaching out today for a Sanity/Reality Check so as you read through keep these questions in mind.  Feel free to ask any questions.  I am open to sharing my actual analysis but only through PM.

1. Am I over/Under estimating expenses and headaches, with multiple roof types, age of home, and desired alterations of the property.

2. What am I not considering?

3. Am I targeting the right things first?

4. Is the plan realistic?

5. What about this deal would make you move forward, walk away?

Goals: Ease myself into REI by house hacking, eventually this property would become full rental.

Deal: Under contract with Seller renting back MTM until they get off waiting list for retirement community. Rent includes average utilities for unit. Rent covers (Mortgage, PMI, Taxes, Unit 2 utilities).

House Info: 2 Unit house on 1/4 acre. Easy access to interstate and a short drive/Bike ride to city center.  Plenty of off street parking.  It's green based on trulia's crime map.  Original house built in early 1900's and Assume it was originally brick (foundation and properties on both sides are brick 1 story) wood floor over basement appear original and has remnants of knob and tube.  Possibly rebuilt sometime in the 1950's to make it a 2 story.  Lath & Plaster in attic.  Addition added in early 70's to make it two units (seller info). Wrap around concrete porch with roof.  Asbestos Siding per seller disclosure.

Unit 1 (Top): 3 Bedroom/1 Bath large master bedroom, separate entrance at front and rear of the property 1500 sqft not including attic.  Access to the attic for additional storage.  1 window A/C unit, No W/D.  Two breakers (Bath/Kitchen).

Unit 2 (Bottom): Same as Unit 1, except access to basement where w/d located. dropped ceiling with tile in living room.

Property Condition:

Unit 1: Vacant 1 year.  Needs paint, cosmetics. everything works.  I am ok with living in it as is.

Unit 2: Currently occupied by owner and very well kept, outdated, walls need some work in corners, paint, carpet. everything works.

Attic: Lath & Plaster has major cracking and is missing in some places.

Basement: Owner mentioned it's damp during summer & keeps a dehumidifier running down there.  Front basement wall part is brick and transitions into concrete where the addition is.  There are what appear to be insulated tiles attached to the cement wall.  Electric meters in basement.

Front Porch Concrete is cracked and a large part has settled on the right side of the house.  it is unknown if it affects the foundation, but it certainly is pulling down the roof over the porch and will need to be fixed.  I'll know more after inspection.

Grass and driveway well maintained.

Short Term Plan (Year 1-2): House Hack, Save up money for buffer and capital improvements. Rent out lower unit, and turn attic into Airbnb for extra income.  Add Washer and dryer hookups into 3rd room at the back of the house with intention of dividing it further into a utility closet (central air/water heater if it makes sense financially).  gas & water meter for second unit and possibly separate water heater for second unit.  Attic insulation.

Long term Plan (Year 3-5): Convert to 3 Unit by making the attic an efficiency apt (bath, stand up shower, mini fridge, microwave).  Renovations for Safety, Longevity, and other upgrades attract quality tenants. Safety (Wiring, dedicated circuits, interior asbestos/lead paint removal if found) This requires some major renovation to get electric/plumbing up to 3rd floor.  I am currently searching for contractors to assess feasibility.  These renovations and costs are beyond my current knowledge and will have to be justified by increased cash flow/return.

Analysis 1:  2 unit property with property management contracted out, excluding AirBnB Income.

55% Rule for expenses because it is an older house and assuming lower end for rent. (Includes Property Taxes, 7% vacancy, 10% Property Management, $1.2K Property Insurance Best Est., Owner Paid Water/Sewer/Trash, 8% CapEx, 7% Maint. & Rep)

Cap Rate: 5.6%, CoC: 2.3 , Tot ROI; 15.3, DSCR: 113

Analysis 2 (actual situation): 2 Unit Property, Assuming I "pay rent", manage the property at 3% vs 10%, and include 1 day/ month AirBnb income.

Cap Rate: 6.4%, CoC: 8.2%, Tot ROI; 22%, DSCR: 145%

Concerns:

1. Starting CapEx - I have included about 10K for improvements over the first year (paint, carpet, Gfci outlets, W/D hookups, prep Attic for AirBnB) but I didn't include roof.

2. Roof is old, probably end of life or near to it.  Seller reports no current leaks and has repair documentation for a couple spots in between 2006-20014. I'll know more after inspection.

3. Concrete Porch Settling - I'll know more after inspection

4. The possibility of Asbestos/lead paint inside the house and the increase cost of renovation for the long term plan.

Let me know what you think!