Home Mortgage for a Duplex, Triplex or Fourplex

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Hello BP community! My wife and I want to acquire a multifamily property either a duplex, triplex or fourplex. We are considering finance it through an FHA Loan but we are open to any suggestions. Any recommendations regarding a good mortgage company in the Austin area?

[Zachary Barton]

Hey @Eric Guerra I’d be happy to explain. However, this is a rule of thumb for the Austin market. I am not familiar enough with the Houston market to say what kind of down payment will be required to achieve cash flow.

I’ll give an example property. 13357 Water Oak LN is on the market for 325K. It’s a duplex in Round Rock ISD (one of the best in the region) and is priced appropriately for our market as well as the neighborhood. There are 3, nearly identical, properties in the neighborhood that have rented units in the past year giving us an OK amount of rental data to run our analysis. They were all similarly priced and rented for an average of $1,270/month. So let’s run the numbers.....

Property Price = 325k = Monthly Mortgage Payment of $2,850; $2,800/month comes from the principle and interest on the note, taxes, insurance, and private mortgage insurance (required on all Fannie/Freddie loans that are funded with less than 20% down).

Monthly Rent = $2,540/both sides or $1,270/one side

So, if you intend to live in one half for the first year you will be coming out of pocket $1,530/month and if you move out while the teams of your loan remain the same. You will be negatively cash-flowing $300/month BEFORE you factor in the other parts of the rental property equation, vacancy (6% in Austin), capital expenses (water heater goes out, need a new roof, etc. usually 5%), repairs and maintenance (usually 5%), and for now we will assume you will self-manage....

Vacancy = $150/month, CapEx = $127/month, Repairs and Vacancies = $127/month + Monthly Mortgage of $2,850 give you a total overhead of $3,240/month. At that rate you will be losing around $700/monthly.

Just for fun, I ran the math to figure out your "break evendown payment" for this property and you would need to put down around 25% to not loose money (using the math above). It goes up from there if you want to hire a management company. PLEASE KNOW, some of my clients are perfectly fine putting 25% down. In the long run they know that the home will likely appreciate, someone else is paying for their equity, and they are getting tax benefits. But the house hack method of, putting down a small amount, living there for a year, then moving to another property and repeating the process, doesn’t work in this area with only 3% down.

There are some properties, some rare gems, that break the mold and offer great returns for less than 20% down but they are few and far between. And if you are willing to put in the elbow grease its possible to find a dump property and really boost the value to make the numbers work.  This example isn't every property, but it does represent the majority of 1-4 MF properties for sale (on and off market) in the Austin area. 

Also, don't not buy real estate because 3.5% doesn't give you the returns you expected, just know that its going to be a little harder to find the right property, and you may have to come to terms with making less off your deal. Real Estate is an incredible investment tool, you just want to be sure you know your numbers! 

P.S. I ran reports for both scenarios above. Anyone who wants a copy, feel free to PM me.