Calculating Expenses as a First Time Investor

[Desiny Smith]

I've recently been pre-approved for an FHA mortgage. Right now I am looking for a foreclosed or vacant multi to fix in the city of Albany, NY using the 203K product as well as city grants and then refinance (aka the BRRRR method).

As a first time investor, I want to make sure that I am not only accounting for all of my expenses, but using the right numbers. Below is a list of expenses I have so far. Have I left anything out and more importantly, are the numbers that I am using reasonable?

Expenses:

Electricity: (Tenant will pay)

Gas: (Tenant will pay

Water and Sewer: (Not sure what the laws are for Albany but will be billed to the tenant if possible)

Garbage: $180 per unit / 12 months = $15 x 3 units = $45 per month

Hazard Insurance: $41.67

Mortgage Insurance: $64.66

Property Taxes up to $5,000 annually: $416.67

Property Management (Will be managed myself but will still account for it): $150

Maintenance and Repairs (5% of monthly income) : $150

Lawn/Snow Removal (Without property management): $50

Total Expenses: $918.00

Operating Expense Percentage = 36.7%

Other Expenses:

Principal and Interest: $433.81

Capex: $300

Total Other Expenses: $733.81

Note: I ran the numbers like the house was a 3 unit but it is a 4 unit. Since I will be living in one unit I did not include it.

Thanks!

[John Leavelle]

Howdy @Desiny Smith

Nice job taking actionable steps.  Here are a few observations and questions.

Are there any common area utilities?  Exterior lighting or water for landscape for example.

Did they provide a maximum loan amount?  Rehab expense amount?  Will you do the work yourself or have a contractor complete it?

Are you only putting the 3.5% minimum down payment? If so you need to add Private Mortgage Insurance (PMI) to your expenses.

What are the other grants you spoke of?

Now you need to break you analysis into 3 separate evaluations. 1. Cash Flow fully rented (after you move out) to determine if it will be positive. If it does not then there is no need to go any further. 2. Cash Flow while House Hacking (this is the one you have done). 3. Cash Flow after Refinancing (BRRRR). Not sure you will be able to accomplish this. Combining these two strategies is a popular idea. However, in reality it will be very difficult to accomplish. Let me explain.

The basic idea behind the BRRRR strategy is to purchase a distressed property, Renovating it to like new condition and force appreciation, get it rented, then refinance to payoff the acquisition loan and pull any cash invested back out to do it again. Your plan (as with many other new investors) is the same. The problem comes with the refinance numbers and the FHA numbers. When you go to refinance an investment property the Lender will provide a loan amount that is 75% LTV base don a current appraisal. That means you will have to leave 25% of the Value (equity) in the property. In a typical purchase you are required to put 20% - 25% as a down payment. So the 25% refi requirement is already there. With the FHA program your are only putting a 3.5% down payment. That means you need an additional 21.5% to meet the refi requirement. Where will that additional 21.5% come from? Some say through forced appreciation via the Rehab. What would are you trying to accomplish? Get your Cash invested out? You will have very little in the deal (3.5%). Depending on the FHA loan amount that may be $5,000 to $8,000. Closing costs associated with the Refinance loan will eat up most of that. Why refinance out of a low interest FHA loan? What will be the results? A larger loan, with higher interest rate, and a bigger mortgage payment. To me it would not be worth the effort.

To be successful completing the BRRRR strategy your all-in cost basis must be 70% of the expected ARV. That means purchase price, rehab costs, holding and closing (2 closings) costs. Why 70%? Rehabs have exceeded budgets and appraisals have been lower than expected. So I like a 5% buffer.

I would need more specific details on all your financial estimates to really know if it could work.  Stick with the House Hack plan.  That is a good plan.