My First Multi-Family

[John M.]

Hey guys, I'm working on my first multi-family investment, and I'm hoping you all might have some advice. I am currently renting an apartment with a lease that expires at the end of January, so I'm in a bit of a time crunch, especially with the holidays, trying to find a deal. 

I came across a near-fully remodeled duplex here in Orlando, 2/1 on each side, total of 1390 sqft. It was recently renovated: (plumbing, electrical, appliances, kitchen/bath). I couldn't see the roof as it was flat, but it was not indicated as having been replaced.The property is lacking privacy fencing and is covered by trees that are in need of some major trimming or removal ($10k+ to remove the big guys).

I'm planning to owner occupy this property for at least a year, but for investment purposes, I'm looking at it from the perspective of me not living in it (I think this is fair).

I expect I can rent each unit out for $875. Rentometer confirms. Electric is metered separately, and water is not. I figured I'd charge a flat rate of $25/per unit for water to offset this.

Asking price is $190,000. I plan to do FHA 3.5% or Conventional 5% down. My bank quoted me an interest rate of 3.8%, however my mortgage broker quoted me a rate of 4.75% on the conventional. I was told this higher rate includes some lender credits to reduce my cash at close and to compensate the mortgage broker. I expect with the conventional loan my payment will be $937 (I think this includes PMI of $200). I was still told I would need around $14k cash to close.

So here are the numbers I am working with:

Income: Rent $1.750

Expenses: Pmt $937 - Taxes $135 - Insurance $100 (don't know where to get this number) Vacancy $140 - Repairs $87.50, CapEx 87.50

TOTAL Expenses : $1,487

This leaves me with $263 (not factoring in property management). 

Am I missing something? Do my numbers fall short somewhere? I plan to write my offer with contingency on the roof inspection showing it has 5+ years of usable life left. Once I determine the highest price I can pay for this property (hopefully with some help from here) I plan for my first offer to be 8% less than that price to leave negotiation room. I will likely offer close to $170-175k. Anything else I should be doing?

[Raj Gandhi]

@John M. I think the deal is a no-go if PMI is for the life of the loan. The drag on profit is just too terrible. Save for a year and then try again.

To increase your available funds, can your roommate pay 1 year up-front for a discount? Do you have a Roth IRA or 401k from which you can borrow medium-term funds? (Borrowing from your retirement isn't a very good suggestion.)

Regarding your offer, maybe initially I'd try $165k with buyer paying all closing costs, seller provides 24 months @ $10k warranty for the roof (funds held in escrow at title company), buyer puts 5% down, seller takes 15% 2nd mortgage (rate 5% @ 5 year term). This offer will not be accepted but hopefully will garner a response. Hopefully they bite on the 2nd mortgage which would allow you to avoid PMI.

For the 2nd offer, dump the roof warranty.  Increase offer to $172.5k with seller providing $5k towards closing costs.  Note the switch from buyer paid closing costs in the first offer to seller paid closing costs in the 2nd offer.  The specifics of the offers can probably use some tweaking but the point is to start with enough variables in the first offer(s) so that you have room to negotiate later.

One last tip.  Before you are serious with your offer, set a max amount for yourself.  If this is business then there must be a point where the deal doesn't make sense.  If you don't have that preset price then, invariably, their "final" offer will be $5k yours.  Then you'll capitulate because you're emotionally invested in the deal.