Fourplex Analysis Help

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Hello BP, 25-year old from Texas here and I'm itching to get into the game. Here's the first property that I've come across that seemed actually worth my time to crunch the numbers on, help me see if this is a good deal or not. Note: I plan on living in one of the units, self-managing, and renting out the other 3. My goal for a property is to live rent free, so additional income beyond that is not essential.

All units 2/1.5 townhome style, 1050 sq ft. New water heaters installed in March. Currently 100% occupied. College town and within 4 miles of two major universities, but appears to be in better condition than many of the other local college rental properties (based on pictures, have not seen in person). Neighborhood is ok, lots of similar type properties, but is not in a bad part of town. Each unit individually metered for electric and water.

Asking Price: $229,000

Gross Rents (3 units): $2150 per month

Expenses:
Taxes: -$543 (actual 2012 taxes)
Insurance: -$100
Vacancy (6%): -$129
Repairs (8%): -$172

Total: -$944

Mortgage: -$1,055 (3.5% down with FHA. 30-year fixed at 4%)
PMI: ??? How much should I estimate for this?

NOI: $2150 - 944 = $1206

Cash Flow: $1206 - 1055 = $151 - PMI per month

On first glance, it seems like a pretty break even / live rent-free deal, which is my goal. What am I forgetting or leaving out?

[Joel Owens]

Hi Aaron,

Let me explain things so you can get a better picture of things.

In the last 10 years a loan cycle has occurred. When the boom happened many years ago conventional loans came out with 80/20 loans. There were two loans created an 80% and a 20% and this allowed there to be no mortgage insurance. It kept payments lower and buyers loved it. There was no money down loans and you could fog a mirror and get a house. Some people didn't even have a job or income! They were called NO DOC loans. Needless to say there were not hardly any loans going FHA and conventional stole the market share.

After about 3 years or so the boom went bust and conventional loans took an absolute beating on these 80/20's as most seconds were wiped out. Conventional got much more strict on lending requirements and upped the percentage of down payment.

Here comes in FHA to save the day before the market totally drops as it is cooling off some before the collapse. FHA says we will do loans at only 3% down and the mortgage insurance is at a cheap .5 of the loan amount. So tons of buyers did FHA loans and FHA stole back the market share from conventional. Then that's when the economy took a dive and FHA had billions in losses from foreclosures and insurance claims from lenders. In the past year the government has been on FHA to boost their reserves from the losses on the mortgage insurance.

How did FHA put a plan in motion?? FHA has been raising the mortgage insurance premium that is part of the loan. It has gone from .5 to 1 at the beginning of the year then about 1.2 and now just recently 1.35 for most borrowers ( the change went up just about 1 week ago).

The other change FHA is implementing is the mortgage insurance WILL NOT go away starting in June. You will be stuck with it for the life of the loan. Now according to my loan guy (verify on your own) that as long as you get a case number assigned before June on a property you buy then you won't get stuck with mortgage insurance forever. It's only if you start the case number beginning June 1st or later. If that falls close to the weekend you want to get your address in for the case number as they shut down on the weekend and you would miss the deadline. One benefit to FHA is when you sell the mortgage will be assignable at the low interest rates in the future to a qualified borrower for a 1% assumption fee according to my loan friend. Also with FHA you can get a gift from family for the down payment 3.5% without nothing down and FHA is more forgiving on credit issues.

After June many people will be using conventional. You can get a gift but also must put some of your own money down to get a loan and amount down is much greater than FHA. A benefit is the mortgage insurance is cheaper.

FHA also has an upfront portion of the mortgage insurance premium at 1.75% that you can add to your loan amount or bring the cash to closing. Most everyone adds it to the loan and saves their cash.

Hope this helps explain things more.