Boston refuses to cash flow

[Rob Ferdinand]

Hey, everybody,

I'm not quite sure if there are problems with my calcs, or if everything I find on market are simply bad deals. Please let me know if I'm doing anything wrong here? Here's the details...

I plan to use FHA loan on a multi. Initially, I will house hack, but I'm running numbers to see what it will do once I leave and it becomes solely an income property. I'm analyzing North shore homes, 2 & 3 families, on the outskirts of the city. I've worked out some kinks and THINK I am as accurate as I can get.

I'm using list prices from MLS and estimating rents from craigslist. I'm including closing costs into the mortgage ($7,500 generically, is there a good percentage to use?). 5% (each) for vacancies, repairs, and cap-ex. 10% for management. Local utilities have been estimated, and of course, PITI and PMI using a mortgage calculator.

With 2 families -($500k-$525k range)
What I'm finding is that they refuse to cash flow with 5% down. At 20% down they will cash flow but the COC ROI is under 4%, and also falls shy of the 1% rule. (I've also included a 1% "clean-up" cost for minor repairs/paint as a one-time cash expense, into the COC ROI)

With 3 families -($600k range)
At 5% down payment, they seem to cash flow nicely, over $200/door, although the 50% rule is pretty negative and I just meet the 1% rule. In this scenario, the COC ROI is suspiciously inflated at over 20%. (Also included the 1% clean-up fee).

3 fam- ($650k range)
The numbers are much more realistic. Cashflow just over $100/door. COC ROI 11%, but 50% rule is WAY negative (About $1k) and falls under 1% rule.

I'm aware the 20% vs. 5% down payment makes a world of difference, plus saving the PMI. I can't afford 20% on a 3 family, and the 20% on 2-family scenario just seems off to me at 4% COC ROI.

So...Is anything glaringly off with my numbers, or is this expected for the current market?

Thanks for reading!


 

[Natalie Schanne]

@Rob Ferdinand - if you’re living in it, 40-50% expense ratio is too high. Out of of $48,000/year of gross income I maybe spend $2000 on repairs and capex combined. So 5% vs 10%. I also don’t spend anything on a property manager and everyone pays on time with zelle with less than 2 hours a month of checking in with people, so that’s 10% off. In high high demand areas you’ll see very low vacancy akin to 2 weeks every 2 years, but that depends on how good you are at marketing and maintenance. Ideally pass through all water and sewage with prorata or rubs and you only have left insurance, property taxes, and minor common area maintenance like landscaping.

- My favorite strategy to build wealth is to buy a huge house 5+ bedrooms 2400+ sf and have professional roommates- the busier/ more workaholic, the better- you barely see these ones. People spend money for bedrooms, especially near jobs. The extra space wasted on extra living rooms and kitchens doesn’t really pay off. Some places have rules about rooming houses and how many unrelated people can live together. Often you have exceptions for owner occupied housing. Example numbers - $4000/mo rent on a $400k asset in Washington dc suburbs close to many office buildings. Mortgage is 2400ish. Cash flow is approx $1000/mo because highly occupied (98%+) and BTW you live for FREE. Neighbors rent their homes for 2400ish. There arent any duplexes to buy and professionals grouping up is very common. STRs only recently got a bad rap because of excessive use of police resources (kicking out smokers, parties, etc.) and now require fees and a license.

- Back to your 2-3-4 unit dilemma. Investigate appreciation in various areas you are considering. Appreciation is highest in good school districts near high paying jobs where additional housing isn’t being built due to restrictive zoning. Where do you or would you rent and can you find somewhere nearby there? The purpose of the house hack is to live cheaper than you would just renting and you get a cheap loan and appreciation.

- You could try to buy a foreclosure fixer upper with a Fannie home style or fha 203k rehab loan where they build the construction $$ into the cost. Unknown if they will give you income credit for the other units though so you can buy a bigger asset. Often with normal fha you will pay top of market prices or you won’t get your offer accepted.

- In addition to being on a real estate agent’s auto-email list for multifamily, consider sending direct mail or driving for dollars to try to buy something off market from a motivated seller. You can still get normal loans on off market properties.

- Lastly — good luck and go do it!