Analysis of a 4-plex rehab with FHA 203k

[Alex M.]

All,

I'm in the process of purchasing my first property - to both live in and use as an investment. I'm a newbie to this forum - and to investing - and was recommended to post the numbers here. Any assistance with determining if I should move forward or walk away is very much appreciated. I should state that I started down this road prior to ever knowing about BiggerPockets. I found this site while trying to research if I was getting into a good deal or not, and am sooooo thankful I did. Concepts such as cap rate, cash-on-cash, etc are all new to me, as you will see if you read on.

The Property:

Description: Brick Row Home in quickly transitioning (artists, boutiques, cool restaurants, coffee shops, etc all moving in) neighborhood. Good location next to a large city park and public transportation (train), with street to street lot.

Zoning: Currently zoned and used as 5 units.

The Units: 1st floor front studio; 1st floor rear studio; 2nd floor 1-bed; 2nd floor efficiency; 3rd floor 1-bed. In addition, there is a 36x14 large brick garage that could be renovated into a really cool loft-style apartment, or rented out as garage or artist space.

Condition: Poor. New roofs needed for house and garage. All new electric, plumbing, drywall, windows, HVAC systems, etc. Estimated total costs of rehab: ~$150k.

The Price: Original listing price: $224,900. Initial offer: $200,000 w/ 5% seller assist SA). Following inspections and exploration of rehab costs, I revised the offer to $170,000 w/ 5% SA. Seller countered with $190,000 w/ 5% SA, and stated this is firm. My response of $180,000 w/ 5% was rejected, leaving $190,000 w/ 5% as the price to take or walk from.

The Plan:

Use FHA 203k financing to put 3.5% down (cost of purchase and cost of improvements rolled into one loan). Rehab entire property to make 4 very nice newly-finished apartments: 3 very open attractive studios (1 with a deck), and 1 bi-level 1-bedroom in the back (FHA financing requires reducing the property to 4 units max). Refinance property on completion and reduce mortgage costs, and/or extract a little equity to apply to next property. Down the road, restore the garage into a loft-style apartment and add that to the rent roll.

The Numbers:

Cost Assumptions

As can be seen above, there are a lot of add-on costs for financing with FHA. In particular, it assumes a 6-month rehab period with mortgage payments rolled into the loan, as well as a 10% contingency reserve for cost overruns. If I can manage these (time and overruns) then I get to roll these fees back into the principal.

Finance Assumptions

In looking at some of the investment criteria I've found on BP, I needed to make an estimate of ARV - I've used a little over 110% of the total property cost (purchase plus rehab) to approximate this. Also important to note is that I have taxes and insurance included in mortgage payment so as to keep the calcs simple - these values came from lender GFE.

Rental Income

I'm estimating potential rental income from my girlfriend who works for a property management firm and rents similar properties on a daily basis. I've currently assumed a 10% vacancy rate. I've also assumed an equal cost for unit #4 as my current rent, as I am going to move into this - if I rented it out externally, I would predict $1200 -$1250 in rent based on comps.

Expenses

I'm assuming all other expenses are in the mortgage. I'd like to save approximately 10% to cover unforeseen repairs, etc. Given the new floors, new electric, new kitchens, new bathrooms, new windows, new HVAC, new roof, etc, I do not anticipate too much for this, but prefer to be safe than sorry.

The Financials

So... upon first glance, things look "ok". I'm cash flow positive (assuming I account for me own cost of living, or rent all 4 units). I've got a cap rate of 9.23%, which is not too bad, and a cash-on-cash of 23%. As a complete newbie to this (I've been reading BiggerPockets for about 1 week), this sounds like a green light for the project. Could I be missing something? ...what scares me the most is that I created this spreadsheet based on reading a post on BP linked to the beginner's guide. I am not 100% sure that this is correctly calculating everything. Also, the numbers change dramatically if my assumptions change about the project. What if I get higher vacancy rates? ...what about having to reduce rent? What if my common space utilities end up costing more than $100? ...are there costs I am not calculating? ...and so many more questions!?!?!

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