Need help on my first MF! (Also my first home!!!)

[Account Closed]

Since I am a new investor and also a first time buyer you will most likely need to probe me for more information than I give here...

(Within a day or two) I will have the option of being under contract on this tri-plex in Ann Arbor, MI. Good neighborhood with plenty of renters, down the road is the University of Michigan campus and I'm steps off the bus-line and 10 minute walk to thriving downtown.

Duplex comps in the area are currently $140k - $190k on average (and sometimes more when they are fully rented in great shape).

The MF is a cape cod home consisting of a 2/1 on the main floor (where I'll be living to start out) a 1 bedroom on the upper and, presently, an efficiency in the LL with enough space to be converted to another 2/1. The home is a foreclosure and presently vacant and needs some work to get to code. My plan is to rehad the upper floor 1 bedroom and make it stand out in the market. I'd like to eventually gut out and convert the LL efficiency to a 2 bedroom but will probably just rent as an efficiency for the first year or so...

Total estimated work to get the home to code, do some misc repairs and update the upper unit is 10k. The purchase price I've negotiated after quite a few counters with the bank is $120k and they'll bring $3k for closing. I've been told my my mortgage broker that my only option is to put 20% down so my total out of pocket including the down payment and closing is like $37k approximately. 1 bdrms in the area rent from $550 - $700mo. Efficiencies from $450 - $600mo and 2 bdrms from $800-$1200mo.

This information is not very organized but I'm basically trying to find out if I was purchasing this property as an investment right off the bat (not living in it) would it make sense.

Triplex:
Purchase-$120k
EST. Repair/rehab - $10k
Property tax - $7k yr
Total PITI = $1175mo

EST. Gross rents (me not living there) = $1800mo conservatively but potentially few hundred higher.

My monthly payment while living there (w/no vacancies) would be approximately $200mo.

A side note is that none of the units are separately metered so I will be needing to include heat in the rents, i guess. If anyone wants to help me organize this information and see if it works from an investment standpoint...

[Account Closed]

Here is an excerpt from the quote I have on financing. Please note this is prior to getting the price down to $120k. I trust my broker but it is also our first loan so I need advice on this as well...

"""Below find an estimate for your mortgage. Please note it is based on a 30 day lock and has
no pre-payment penalty. It assumes a purchase transaction with escrows on conventional non-owner occupied program.
Seller can pay some of your out of pocket expenses in these estimates, but that must be
negotiated in sales agreement. Purchase price 124,900 with 20% down. Souce of funds must be documented. No gift funds allowed.
-------------------------------------------------------------------------------
STANDARD CLOSING COSTS
Closing Costs
Origination Fee $2000
Appraisal 500
Title Insurance 390
Title company closing fee 500
Underwriting Fee 700
Processing Fee
240
Recording fees 88
TOTAL 4418

Tax Escrows & Prorations (e) 7000*
First year of homeowners ins (e) 700
Prepaid interest (e) 300
Purchase Price 124900
TOTAL COST 137318
Minus Loan Amount 99920
Total Cash -37398

*Tax escrows and prorations may vary.

30 Years Fixed no points option- 5.375% (APR 5.62%)-Loan amount $99,920
principal & interest payment $559.52 plus taxes and insurance (estimated at $645 per month) for total payment of $1204.52 per month. """

Is this competitive???

[Rich Schroeder]

a couple of issues I see here....
1) I would never buy any property where I pay for any utilities. What happens when the tenant cranks up the heat to 95 and opens the windows?
2) if you are living there, you should be able to get an owner-occupied loan, not a NOO loan

Also, it doesn't seem to be a great deal from the numbers. I would buy this for $50k (putting an additional $10k in repairs) minus the amount to separate utilities.

-Rich

[Account Closed]

I definitely will be looking into the cost of separating utilities... In terms of the market... $50k in Ann Arbor, MI just doesn't happen...I could drive about 20 minutes out to the slums where you can pickup properties for $20-70k but not here. The price for this area is outstanding but I think the utility issue is a definite concern of mine.

After converting my LL into a 2bdrm and bringing my rent from $150/door to $250/door, refinancing to take my 20% down payment back out and 1031 it...does anyone see a problem with that logic?

[Account Closed]

Also, I have a co-borrower who WILL NOT be a primary resident (which is the reason my lender said we cannot do an FHA owner-occupant loan...) Does anyone know of any other loan programs that would forgo putting up the 20% in this situation???

[Rich Schroeder]

Sorry Joshua, I didn't know that there was a co-borrower.

At any rate, the comp prices don't effect your cash flow. Meaning that just because it's a good deal compared to other properties, the bottom line is total acquisition cost vs rents received. You living there changes things a little, but in this market I personally wouldn't pay more than the $50k. The actual cost does, which will run around 50% of gross rents.

This is the reason why I packed up my family and moved closer to a better cash flowing area. When you can't find properties that meet the 2-3% rule, it's time to move or use another strategy.

Thanks,
Rich

[Account Closed]

Got it. I'm still in a 9-5 and my family wants to live in Ann Arbor... The great thing about this being a MF is that it allows me to do my first investment property and purchase a place to live in Ann Arbor for less than SFH's are even going for! I realize it might sound a little like I'm talking myself into the idea but...I am....

So how about this... lets say that, based on CURRENT rents in this University/downtown area, I was to convert this efficiency in the walkout basement of the home into a 2 unit that would put me over the 2% rule.... Am I now getting into the realm of a safe investment?

I'm really trying to make this one work for us as this is a hard market to find a deal in...hardly anything is even for sale...

Thanks for input so far rich23s!

[Account Closed]

Quick update for anyone interested...

I negotiated and put this multi-family under contract for $110k with the seller paying $3k towards closing costs... I'm having an appraisal ordered today to make sure that financing goes well and , of course, to make sure I'm not crazy.

I ended up with a 20% down investment loan around 5.875% for 30 years because one of the co-borrowers isn't an occupant). Our plans on this particular unit have shifted from total investment to investment/personal home... See we have always wanted to own our personal residence in Ann Arbor but it didn't seem possible until we could get ourselves quite established. Decent single family homes in our favorite neighborhoods run $200k ++ easily and I'm only 24 so...

The nice thing about this property is that it is a SFH Cape Cod that was converted so it can still be a nice home WITH an apartment in the basement. We jumped on it right when it went into foreclosure and ended up at $110k (when the SEV is $123k!)

As long as closing goes smooth we will move into the main floor and rent out the basement apartment and the upstairs apartment for the first couple years. I'll pay the full mortgage and put the collected rents towards principal (which according to amortization should payoff the loan in like 5 years!) We will eventually convert the upstairs apartment back into a part of the SFH and keep the basement apartment (and probably further renovate that to make up for the loss of the small 1bdrm upstairs).

Basically I should be able to end up with a paid off house in a couple short years that pays for its taxes and gives me a couple hundred bucks a month in the end!

SOUNDS like a good plan and its definitely my first time but we'll see how it goes : )

[Jon Holdman]

Didn't realize this was a converted SFR. Are you sure the conversion was legal? I've seen more than a few houses that had a second unit in the basement. But it wasn't allowed by zoning and there were no permits. Further, the lower level unit wasn't in conformance with current egress code requirements. I'm sure these get rented as two separate units, but you can end up in hot water if something goes wrong.

Have you checked with planning and zonning on the zoning, and the building department on permits?

[John Kollhoff]

Are you eligible for first-time homebuyer credit? I don't know who your Co-Borrower is, but I don't think that alone excludes you from FHA eligibility. Is the co-borrower a blood relative? Will the co-borrower be living in the property?

The bank might tell you that YOU don't qualify, because THEY don't offer them. Find a mortgage broker and see what they can offer you. Also look at Bankrate.com to compare rates.

As far as evaluating your Closing costs, a couple of things jump out at me: Origination Fee - Tell them you won't pay it. Underwriting Fee - Tell them you won't pay it. Both of these are just "junk" fees from the bank to increase their up-front profit. (I just verified this with my friend who is a loan officer who does a lot of loans to sell to Freddie Mac) The appraisal and title company closing fee seem high to me also... These run about $300 in my area, but may be right for yours. Call a couple of appraisers and title companies and see what they charge. They GFE says "title co closing fee"... You might clarify if this is the fee for the title search, or for closing at the title company. You will obviously want to do a title search, but you can close at a bank or another location instead of the title company. YOU get to choose your title company, so shop around and choose whichever YOU want.

It sounds like you have a pretty good deal on your hands, but I would have some misgivings about your bank/lender.
This link will allow you to search FHA approved lenders in your area. http://www.hud.gov/ll/code/llslcrit.cfm

I have had to find another lender in the middle of a deal, and as long as you have 20-30 days before you have to close, it shouldn't be too much of a hassle.

Best of luck, please keep us posted on your progress!