Would love your help analyzing first duplex, Massachusetts

Question

Market: "Urban" area in Berkshires, MA. Area is projected to be in population decline, however, I see rentals as a better option for people moving to the area because they, like me, aren't sure they want to stay and houses stay on the market at a much higher rate than elsewhere in MA. Great location for families, next to the largest park in town, safe, nice area with easy main road access. Eventually will rent both sides out. 3bed/1 bath each. Current rents are 875 and 900. Average rents in area go for 1000-1100.

List price: 125,000

FHA 4% down

As-is income: 1775/mo; projected income: 2000-2200/mo

Annual expenses:

Taxes: 2800

Insurance: 1200

Water/Sewer: 1600

Cap ex: 2000

PMI: 1250

Repairs/Maintenance: 1000

Utilities(?): 500

Snow removal/lawn: 500

Property Management: 12%

Questions:

-What am I missing?

-Why are current rents lower than the average?

-An alternative could be to get a rehab loan @ ~150-160k, updating some things and creating a 4th attic bedroom in each. 4 bedrooms are rare but average I could find is about 1300/mo. However, there is limited data about the rentability for 4 bedrooms, though a local property manager told me 3's and 4's have lower vacancy rates than 2brs.

-There is a slim chance I could avoid PMI via bank of mom by getting a locally offered 10.5% down with no MI. I couldn't roll renovations in if that was the case. Which is better?

-I don't imagine living in the area forever. Who do I need on my team, other than a property manager, to handle any situation that could come up?

-If I'm cutting it this close with trying to dance around PMI, should I maybe just suck it up and rent for another year until I can afford a proper down payment?

Raymond M Dalida · Answer

Hey Kevin,Where you at in KC? Just moved from there and know that area well. Plan on investing there as well.I came up with that number by adding all his expenses together including his mortgage and subtracting that from what he would make in rents.Annual Expenses: $13,406Annual Mortgage: $6,972 =$20,378Annual Rents Collected: $21,300$21,300-$20,378=$922$922/12months=$76.83/month net income$76.83/2 units =$38.41/month net income per doorI'm pretty sure that's how to do it. Again. I'm a newbie and just practicing running numbers. Someone with more experience may have it differently. When in doubt you can always try the BP calculators @ www.biggerpockets.com/buy-and-hold-calculatorAccording the Brandon Turner's webinar you can use it up to 5 times free without a pro membership. It's unlimited after you upgrade to pro. It's pretty sweet.

Patrick Wheeler · Answer

@Brendan Longe If you're going to have minimal cash flow when you move out, either make an offer that makes the cash flow meet your criteria, or move on to the next one. Especially in an area that does not see much appreciation. I personally could borderline care less about appreciation, but if you're not getting that or cash flow, then it's not worth it.Also, in my opinion people get carried away with house hacking right now. I don't know what your thought is, but cash flowing on a house hack, in this market, is so unlikely. Focus more on living as close to free as possible, but just because you aren't cash flowing, doesn't make it a bad deal.

Brendan L. · Answer

@Cosmo Iannopollo Interesting, I'll think about that, thanks. The thought behind the duplex would be to finish the attic (hopefully) to get 4 bedrooms in there and bank on families wanting to rent. It would make sense to just do that same thing with a SFH which I'm guessing would be more desirable to a family than a duplex. Its a bit of a gamble with this market out here, for sure. Questionable if the risk is matched by the reward.

Cosmo Iannopollo · Answer

@Brendan LongeHmmm...if you don't plan on being there long, have you considered getting a far cheaper SFH and fixing that up as you live there? Once you fix that up, you can refinance and possibly take out some equity in that sense, and possibly charge a higher rent going forward. I don't think your numbers are all that bad, it's the market that has me worried.

Brendan L. · Answer

@Cosmo Iannopollo Naw I'd rather blow the deal apart before I get wrapped up in it. The only reason I'm looking at places here is because I currently live here, to be honest. Its simply where my job is right now and where I'm able to house hack. Not strategic. The "official" vacancy rates I've seen are 8%-12%. I'm worried about vacancy, too.Appreciation is 1% if you're lucky. If you're REALLY lucky, you'll sell at the inflation rate. Of course, that's after the property has been on the market for 180+ days. This county is significantly higher time on market than everywhere else in MA, the graphs are stark. :\

Cosmo Iannopollo · Answer

Why are you interested in a declining neighborhood? $125K for a multi- in Mass is insanely cheap, which has me insanely worried. You speak of this area as if it is very transient. One characteristic of transient areas is vacancies, and you don't have a vacancy rate in your projections. I'm also concerned that you won't enjoy much appreciation. If you decide it's not working out or cash flowing as you'd hoped, how will you offload it? Sorry for the Debbie Downer post, haha, just some things to think about.

Rob L. · Answer

Your Property management fees seem high but maybe that's the norm in your market. Low rents could be a lot of things, lazy landlord, long term tenants, etc. What's your goal with the property? Looks like you will be house hacking short term? And then renting out at some point thereafter? PMI isn't a huge deal. I think of it as being taxed extra for the ability to put so little down. You can always refinance in a couple years once you have enough equity into a loan with no PMI.

Brendan L. · Answer

@Steve Bracero Why is that so common? I've seen it in a couple places now. My guess is that the owners don't know how to run it like a business and haven't raised rates since they bought the place 10-15 years ago, and are making less and less now and so want to sell.I should call and see what they say about the water/sewer. It depends whether its metered or flat rate. Flat rate tends to be more expensive. I also got some inside knowledge that they'll be doubling rates soon do to an EPA mandated project.I was looking into refinancing FHA's last night. Are there typically additional closing costs when I refinance?

Steve Bracero · Answer

@Brendan LongeYour tenants seem to be paying way below market which is common. Did you call the city/town to get an accurate number for water/sewer? TD bank offers a program i think its called right step, 10% down no PMI.... There are income limits though. I would look at your ROI with 4% down and 10% down.. PMI is just an expense, so I would reccomend putting as little money down as possible, so then once you buy, you have the loan being payed down and could eventually refinance out of the FHA loan. I would also run the numbers with the current rents it is receiving since those are actuals. If you buy to live in... the first year you will not be paying a PM, and will learn the ma tenant landlord law very well. Also inheriting tenants...

Kevin McConnell · Answer

Raymond M Dalida Can you please explain how you got $38/month cash flow from that deal? Much appreciated