First investment property with negative cashflow - FHA 203k?

Question

Hey BiggerPockets!

My name is Matt and I am new to real estate investing. My goal is to achieve financial freedom through real estate investing. My first step towards this goal to buy and househack a multifamily property by November 2020, taking advantage of the FHA 203k Loan for a lower down payment and being able to make improvements to the property.

I've read a few books (Financial Freedom with Real Estate Investing - Michael Blank; The Book on Rental Property Investing - Brandon Turner; Rich Dad, Poor Dad - Robert Kiyosaki; and Quit Your Day Job by Oliver Trojahn), and listen to the BiggerPockets podcasts and webinars, as well as various YouTube channels. I feel like I have a pretty solid understanding of what to look for in a property and have some specific steps to reach my goal of financial freedom.

I was targeting three-family homes because I am fairly certain by all the analyses I've done that I could start cash flowing immediately with two units, while occupying the third. I planned on staying there for a year, then my girlfriend and I would take out another FHA loan in her name to househack another multi-family property, building up our portfolio of rental properties.

I've been focused on finding a good deal on a 3 or 4 family building until I just found this duplex. I did an analysis using the BP Rental Property calculator and found that after one year I could be bringing in just over $200/month, and have a 10% CoCROI (including the 5% maintenance and vacancy, 5% CAPEX, 10% management fees). This property after we move out would meet my goal numbers which I arbitrarily made up (10% CoCROI, and $100/unit/month). BUT the downside is that during our first year of occupancy and loss of 50% of the rental income, it would be negative cashflow about -$380/month.

That $380 is still substantially less from what my girlfriend and I are paying in rent now, but I'd be building equity and experience. My brain says that I should keep looking (which I will be) for a potentially positive cashflowing property, but my gut says to get that first deal to gain some momentum.

I am curious as to what some more experienced people think about this and if it's something they might recommend to a new investor, or if they would opt to find a property that would be postively cashflowing to as their first investment.

Thanks!

Matt

David Wolber · Answer

@Matt Bouthet , House hacking, in my opinion is all about gaining equity and living mortgage free.  $380 is pretty damn close to mortgage free in my world.  We own a duplex (a very LARGE duplex) in New London and when we lived there it costed us $85 a month after the crazy NL taxes, water bill, insurance and debt service (and we still pay PMI!) to live there.  However, now that we've moved out and it's rented, we cash flow almost $1700 a month... that's $850 a door... yup. So a duplex can work.  I know an investor that duplexes is all he buys.  Especially the side by side ones that were actually built as a duplex and not converted SFHs.

Holding out is like the grass is greener idea.  Just rock it and pull the trigger.  Once it's 5 years down the road and you have a well oiled machine and everything is just pulling in cash you'll not even remember that the "numbers" weren't perfect.  You'll just know you have an asset working for you.

As I've been told many times on this site, don't get analysis paralysis and don't spend dollars to save nickles.  Concentrate on getting the next deal and acquiring your next asset. Get after it!

Cheers!

-Dave

Jaysen Medhurst · Answer

@Matt Bouthet, if a duplex gets you to a monthly housing expense of $380, I'd call that a win. I am a bit skeptical, though. I've analyzed a lot of properties and I find that duplexes rarely pencil out. Share all of your numbers here and the community will double check your math. To start, I recommend 15% combined for repairs and CapEx. Remember, that's 15% of total GSR, which includes your unit, not just the tenant's.

If you don't need extensive renovations, I would recommend looking into other low-down payment mortgage options. There are plenty offered at local banks and CUs. That way you don't need to refi to get out from under the PMI, like you do with FHA.

Bottom line: if the numbers do work on this duplex, pull the trigger. Better to take action on an okay first deal than wait around and hope for an amazing deal.

Matt Bouthet · Answer

@Manny Cirino I'm looking all over Hartford County. I think there are opportunities especially in New Britain, Manchester, and East Hartford.

Michael Doherty · Answer

@Matt Bouthet Run the numbers as if you aren't living there because some day you wont. If it seems like a good investment from a cash flow standpoint after running the numbers with your unit 'rented out' then pull the trigger. If it still does not cash flow even with you not living there, keep looking.

My gf and I went through a similar situation. I bought a duplex with an FHA loan and house hacked 2017-2019. Then last year my gf bought a 3 fam with an FHA loan and we are  currently house hacking her property. If I could go back and do it all over I would have bought a 3-4 unit building to really take advantage of the low down loan first time home buyer program.

Congrats on getting started and educating yourself, sounds like you are on the right track.

Philip Ganz · Answer

@Matt Bouthet on 3-4 Units FHA loans the properties cash flow needs to be self sufficient.  This means you take the rent of all the units (including the one you would occupy) X 75% which has to be equal or greater than the Principle + Interest + taxes + Insurance  (PITI).

Michael Noto · Answer

@Matt Bouthet Welcome to the forums. Always great seeing others from CT active on BP.

Those local markets you mentioned are competitive for house hack/203k type deals, but there are still deals out there to be had from what I am seeing. Best of luck as you continue your search and if there is anywhere I can fill in the gaps for you feel free to reach out anytime.

Manny Cirino · Answer

Those are all good areas to buy in. New Britain definitely has the most options out of the 3 for triplex.

Manny Cirino · Answer

What area/cities are you looking in?

Matt Bouthet · Answer

@Manny Cirino Thanks for your input. I agree that it's a better choice to keep looking. I just found out that the current tenant is only paying $450/month in rent so that makes this one a no-brainer now.

Manny Cirino · Answer

Negative cashflow almost defeats the purpose of house hacking, but unlike most I'm a fan of it. If you can reduce your rent from $1,200 a month to $380 then why not. However; I would recommend continuing your search for a triplex and you can find one to keep you in the green.

First investment property with negative cashflow - FHA 203k?

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