First Philly Rental Property - Single to Multi Fam

[Matt Ogden]

I've been on a search over the past couple years to finally dive in to the world of Real Estate! Today, I think I finally found a place which is perfect for the gameplan I want to use: BRRR

The Philly market has been pretty hot recently and we're always waiting for the immanent market downturn, but I think that this property may be able to withstand the test of time.

Here's the breakdown:

Asking price: $135k

(Lets say I offer the full price, although I will ask ~$95k)

Monthly payments: $1,016

Estimated cash @ purchase: $15,700

Estimated repairs: $150k-200k

Potential Final ARV: $275k-300k

Rent per unit: $900-1000

This property is currently zoned as a single family, but I'm sure can be switched to a tri-plex as there is already 2 electric meters and 3 kitchens.  I'm hoping to buy it for say $90k, put 200k into it and then rent out the other two units while I live inside of the first unit.  These units are evenly spaced, but I'm wondering if getting a 200k loan is very unrealistic?  I have enough to pay for the purchase costs, but nothing to put into the house.

I can use a hard money lender, but what are the risks in that?  If it doesn't appreciate to 300k, then I lose money or break even?  I think a property cash flowing ~1800/mo would be a good gamble.

Any other suggestions on creative financing?  I currently rent, so I cannot take out a home equity line.

Thanks!

[Jamie Rose]

Hi Matt,

You're considering biting off a serious project with a fair amount of exposure/risk for your first at bat. I'd encourage you to find something that is a less risky. 

However:

1) Make sure before you offer anything that the property can be zoned towards multi-family. Getting zoning changes as part of your fundamental game plan is too much risk for a first transaction in my opinion. Verify it is a slam dunk at least before moving forward.

2) To buy for 100, put in 200, and have it worth 300 - you've made no money. You should have a 25% or 30% forced equity in a project like this. So buy for 100k, but in 100k, and have it worth 300k, - now it's worth all the stress, energy, time, and money this will require... you're anticipated margin is too small to make this a good deal - unless the area is so hot you see the value appreciating significantly in all the next few years. 

Best of luck in your investments, this or any other!

Jamie