Is this a good investment?

Question

I am new here so please let me know if I've left something important out.

I am looking at a 3 family in Framingham MA that is listed for 410K. First and second floors are in good shape and already rented at $1500 each for a total of 3K/ month till April of 2021. Electrical has been done for both these units and one of the heating systems. The other one is 5 yrs old. The third floor needs some work (~20K). The roof is 15 yrs old and some work on the exterior is needed. The floors are all hardwood throughout and in good shape. Principal, interest, mortgage insurance, house insurance, and taxes amount to about $2600/ month (getting this through FHA). If I fix up the third floor in the next few months and rent it out for 1000-1200, I'd have 4000-4200 of rental income. Minus 2600-2800 of expenses (or even 3K) I am left with well over 1000/ month. Does this sound like a good investment? What am I missing? Any help would be very much appreciated. This is my first real estate investment

Jonathan Bombaci · Answer

Yeah that sounds like a good deal from a ARV perspective to me. Heck I'd buy that or place a buyer if it's off market if you don't want it. I know the Framingham market well, I went to FSU for college and even if this is in the worst neighborhood at that price I think I could find a buyer for it.

A 3 family at that price will definitely has some upside. How many bedrooms are in these units? Unless they're all 1 beds I think you have the ability to move the rents up over time, assuming the rent restriction gets lifted... someday... Below are the HUD Fair housing rents for Framingham MA by bedroom count. Now these are the maximum hud allowances (section 8) including all utilities but as you can see the rents are quite a bit higher then what you're projecting assuming these apartments aren't all 1 beds.

Without knowing more about the deal I can't give you the best advice but on the surface it definitely feels like it has some potential. Feel free to PM me if you want to get more specific. If it makes you nervous I'll sign and NDA but for those that know me on this site I'm always willing to set aside time to help newer investors in MA and I don't steal deals :)

Best, Jon

Shawn L. · Answer

You mention its listed, but unless I'm missing something (I might be) I don't see it on the MLS. I see 3 multifamily listings in Framingham under $750k, all are duplexes listed between $520k and $615k. Knowing nothing else about the property other than your post, and the fact that there are currently three duplexes listed between $110k and $205k higher than this triplex, I'd say its absolutely worth a look, but in reality I'd expect that there are bigger issues with it than $20k worth of work.

Regarding FHA, are you planning to occupy one of the units?

Jaysen Medhurst · Answer

This could have legs, @Erion Ni, but you have a bit more due diligence in front of you.

First question, what's the ARV? Ideally, you're getting a discount due to the work that needs to be done. That discount should be more than just the reno costs. If this place will be worth $430k after the reno is done, why bother taking on the work, time, and risk of a renovation? You should just buy a renovated property for $430k. The discount may not be huge, since that's not a ton of work and Boston is a very hot market right now.

Next you are leaving out a number of expenses. Analyzing a property is not simply Rent - PITI = Cash flow. You need to breakdown all of your expenses and consider:

• Vacancy (5-8%)
• Repairs and CapEx (15% Combined)
• Management (10%); always include Management, even if you plan to self-manage at first
• Water/Sewer: $30-40/unit/month. Call the local water authority for recent bills.
• Lawn care and snow removal.
• May also have Trash, Pest Control, House Utilities (e.g hallway lights), and admin/professional costs.
• I'd like to see the breakdown of your PITI/PMI. I'm calculating at least $2002 for Debt Service + PMI (3.5% down, 3.25% for 30-years, on-going PMI of 0.85%). That leaves less than $600 for taxes and insurance in your calculation. I don't know your market, but MA taxes ain't cheap.

Next thing to talk about is FHA.

• FHA-backed mortgages are only for owner-occupied properties and require that you take occupancy within 60 days of closing and live there for at least 1 year. So, when you write, "...fix up the third floor in the next few months and rent it out..." that won't be possible, unless you're planning to live in one of the other units that are currently rented out.
• If you qualify for a low-down payment conventional loan, use that instead of a FHA. There will be less paperwork, no up-front PMI, and monthly PMI drops when you hit 78-80% LTV.

Bottom line: depending on the other property expenses you might break even on this after moving out...or you may be in the red. The high leverage makes it difficult to turn a profit on a deal that's right around 1%. That doesn't mean this won't make a great house-hack, though. If you can lower your living expenses, build equity, and gain experience as a landlord, this could be a very smart move. Just know that it may not make a great long-term hold after you move out.

Is this a good investment?

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