Calculations with Owner Occupied

[Ben Volkman]

Hey BPers,

My wife and I are looking to settle down in the Sugar Land/Stafford/Missouri City area of Houston this fall.  We have no real estate experience but I've been all over the podcasts for the last 8 months and reading the forums as much as possible.  My goal is to get into some small multifamily property where we don't have to pay rent/mortgage every month. 

Our goal would be to do owner occupied for 1 year and house hack each of the units as each tenant moved out and then raise the rents after mini renovation.   After the 1 year, move to a house and rent all the multifam units.

Currently, looking at duplex, triplex and 4-plex.  We both will have pretty busy jobs with the hospital and I don't want to manage more than that on our first deal.

I've been working on analyzing deals lately and getting my numbers down and I came across a few issues/questions, going to start with one here and then post more as they come up.

Example Scenario

145K Duplex on a conventional loan with rent at $700/unit.

1) With my wife and I as 1 occupant it negative cash flows like -$300 per month.  Once we move out and have 2 units rented it cash flows +$400.  Is this still considered a good/decent investment long term? or what if it was -100 with us living there and +600 after we moved out and placed a tenant.   Paying $100 per month sounds better than $1000 or $1200 for apartment rent in my head for 1 year only.

2) In a 4-plex that is fully occupied, how do most buyers deal with the current tenants?  Do they evict them or do I put them through my own screening?  Can I make a contract contingent upon tenants being evicted?

3) Is cash on cash a poor calculator for buying a multi fam when using an FHA loan? Because such little money is used as down payment that any positive return looks like an enormous percentage compared to the 3.5%.

This got much longer than expected so I'm going to stop there.  Thanks for all the input, much appreciated and super excited to jump into real estate investing!

[Cody L.]

Someone buying a multifamily isn't going to want it empty, or to kick everyone out.  A strong rent roll is what they're buying.

Cash on Cash is an awesome way to think about things.  It's why if I had $1m, I wouldn't buy a $1m property -- I'd buy a $5m property with 20% down (and later try to get it refinanced with a $6m+ valuation to get my $1m back to RWR (Rince Wash Repeat -- can I trademark that?).   Preserving cash to do more deals is the name of the game if your goal is to grow as big as possible.

Most of my properties have been refinanced well above my purchase price so I have $0 in and I'm cash flowing.  Infinite returns!