First deal househacking a 3plex. How does it look?

Question

I have been lurking on the forums and looking a real estate near me (Davenport, IA) for a few months now. I have a steady job(60-70k yearly) and a good credit score(730). I barely spend any time at my apartment currently, because I am always at work. However, I have experience with basic home repair have ties to construction companies near me and can easily work flexible hours if required to deal with landlording issues. I found a deal I am interested in, but would like some advice.

It is a triplex conversion with one 2 bedroom unit and two 1 bedrooms. The current rents are reported as Unit 1 $ Rent: $695 Unit 2 $ Rent: $550 Unit 3 $ Rent: $440. This puts the home very near the 2% especially after negotiation.

My concerns:

It will rent primarily to college students. That is particular hard on the property, and the possibility for noise if I occupy a unit is not appealing. Upside here is it is in a rentable location near the college
The owner pays for ALL utilities. This worries me and prompted me to run expenses at 60% of income instead of the standard 50%. This also hurts resale but could also be a place for me to add value splitting utilities.
I have heard horror stories about multifamily conversion properties. Is there extra risk involved in assuming work was done correctly?
Everything has been redone "Inside and out" I am concerned that this could cover up issues with the property and make the seller inflexible with price.

I have asked for pro forma number and tenant profile to see what they are claiming and who I could be inheriting. If those still look good I will do a walk through and see about writing an offer, depending on the community's advice.

Thank you in advance for any input.

Michael Pease · Answer

It will be difficult to find a property that both cash flows and allows you to live there. I always tried to have my total expenses covered and basically run a break even because then I was building equity, paying less than an apartment, and learning valuable skills. If you can find a property that allows you to live in and earn extra money that's hard to beat. Tough market around here right now and good properties don't last long though, there are a lot of buyers.I'd run the projection both ways. Sort of an "as is" with you living in it, not paying management fees, and then an "investment" projection with more of a traditional approach.

Jared Stroebele · Answer

I am planning on checking with the local utility companies to get actual numbers after I get the pro forma numbers. If there are serious discrepancies I can either see that at leverage to lower the price or encouragement to walk away.I am interested in house hacking mostly because I have taken the time to prequalify for an FHA loan. This makes any cash on cash returns look great with only 3.5% down. It also increases the mortgage payment when compared to the standard 20% down decreasing cash flow so there is give and take. I am having difficulty finding any properties that cash flow significantly once I factor in losing a unit to my occupancy. Do you have any advice on finding better properties? Is it okay to put my allocation to property management into cash flow projections while I am living there and managing? I would of course run a second set of numbers projecting cash flow with management for when I move out.

Michael Pease · Answer

I've done a few deals like this in my time investing. My first property was very similar. I bought a duplex near Augustana and lived in one side while renting out 3 other rooms in that unit and 4 bedrooms on the other side. It's hard to compare numbers with a deal like this to most other investments because the return has to be much higher to compensate for you living there.My recommendations would be to get accurate utility numbers, factor in the cost of you living in the unit and losing out on one month's rent and focus on a cash on cash return. Chances are since you are living in the property you'll get better financing terms so you can really generate a great cash on cash return.Also think about when you don't live there and make sure that the property still looks good under normal circumstances as in a sale to a pure passive investor. This will help you know that the resale value will stay strong.To address your questions in more detail:Just depends on what you can handle, college can be great, can also be terrible... I've found it really depends on your communication level with tenants and honestly just varies year to year based on the kids.Splitting utilities could change the NOI pretty easily especially if you live there it would be easy to allocate utilities to tenants. Personally, I usually just increase rents for it. The duplex I mentioned above when I lived in it I allocated utilities per kid and now I just do a flat $75 per student (started at $300 a student and now I charge $375 and pay all utilities, not bad for 8 students)I have one property that I own that is a chop. I've not seen a lot done very well and usually the big concerns for me are poorly done electrical additions or plumbing. This can be mitigated by getting a property inspection and I STRONGLY recommend this. I have good contacts if you need an inspector.A lot of structural issues would be caught by a good inspector. As far as water leakages in ceilings or other things, you can certainly "cover" those things up but overall just make sure you have an inspection, do a solid walk through or 3 and check for things like outside grading around the foundation, cracks in exterior foundation, roof issues and gutter issues and you cover a lot of the major issues you can encounter.Hope that helps you! If you ever need assistance in analyzing the deal further I've got a pretty handy spreadsheet I've developed to help analyze a property like this and determine a price to offer and also see what your cash flow may be under various scenarios!