[Calc Review] Help me analyze this deal

[Israel MarQuez]

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*This link comes directly from our calculators, based on information input by the member who posted.

Hi Everyone,

Here's what I got. This is a large 2 family in the New Britain CT area. Not the most desirable neighborhood but I moved up to New Britain 2 years ago and have a good pace on where to stay away from generally speaking. This home has approximately an additional 2bed 1000+ sqft available on the third level to finish and two current tenants in place on Level 1 and  2. There is also a 4 car garage in which 3 are currently rented out. 

My plan is to finish the 3rd level which was partially completed at one point and then live as a 3rd level roommate to the second floor tenant due to this being a Low Money Down Loan.

I will most likely be doing a FHA 203k Streamline for the repairs. The tenants are both long term Section 8 tenants in place for more than 2 years and more than 3 years and do have a portion on top of what Section 8 covers that they pay monthly. I have checked with Section 8 and was told that as long as the repairs are done to code there will be no issue with me as the owner being the 3rd level roommate to the 2nd Level tenant as long as I pay for the 2nd levels utilities while I live there and also spoke with FHA representatives and they saw no issue as long as I would be residing in the property and only adding additional sqft to the 2nd level and not converting to a 3 family to start.

My plan is to remain for one year and then after moving out rent the 2nd and third level combined for additional rental income or complete the conversion at that point to a 3 family and rent out the third unit individually as well! I will be managing the property myself for the time being but I have budgeted for management as well. Please let me know if my estimates for vacancy, repairs, cap ex, etc. are to low I would rather be on the safe side!

The rents are as follows:

Floor 1: 1350

Floor 2: 1350

Laundry Use:

Floor 1: 50.00

Floor 2: 50.00

Garage Rents

Garage A: 125

Garage B: 125

Garage C: 125

Garage D:  (Vacant) 

(There is room in the basement for storage but no current charge or use of the basement from the tenants for storage)

Please comment with thoughts, questions, or any concerns you see that I may be encountering and if I finally have something worth pursuing or should I rock out in my current living situation for another month...lol

Thanks,

Israel

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*This link comes directly from our calculators, based on information input by the member who posted.

[Michael Noto]

@Israel MarQuez Congrats on taking the first steps towards landing your first deal. I am very familiar with New Britain, CT. We purchase homes in the city and I have quite a few clients who purchase there as well. 

Just some comments based on the info you provided:

• When you say the neighborhood is "not the most desirable" that could mean many things as far as New Britain goes.  Without knowing the street it is difficult to let you know what you can expect, but when you are owner occupying be sure not to sacrifice the quality of neighborhood to much in search of cash flow. There is a delicate balance there that you want to try to achieve. Most areas in the city are great for a owner occupied multi family house hack and a couple not so much.

• $190k all in for a 2-family in a not so desirable neighborhood in New Britain is at best paying market value and at worst wildly overpaying. Again, this depends on specifically where in the city the property is. An ARV of $220 in an area like this sounds very high to me also for a 2-family.

• I know your plan is to finish the third floor space (I am assuming with your rehab loan money), but have you checked with the city on what you would have to do to the space in order to make it livable square footage and/or a completely seprarate apartment? In my experience getting a variance (changing the zoning) on a property is very difficult to execute if the city will even allow it, it ends up being very cost prohibitive. Making it livable square footage to add to the current 2nd floor apartment may be achievable, but again this is something you will want to touch base with the city on to get a clear picture on what your contractor will have to do in order to get that space livable and up to code.

• How big are the apartments where they rent out for $1350 a month? I am assuming 3 or 4 bedrooms. If this is the case and you end up going forward with any house that has 3 or 4 bed units make sure you get the current water/sewer bills from the seller during your due diligence because the $160 you budgeted per month may not be enough.

• The garages are a nice little bonus to rent out. Just make sure the tenants are not running full blown businesses out of the garages and on site at th property and are just using them for storage.

• As far as your management fees go, you will probably want to plan for 10% when the time comes. In order to get a good PM to deal with managing 3-4 bedroom units and multiple garage tenants in a less than desirable area they will want to be compensated accordingly in my experience. Can you get someone to do it for 8%? Probably, but the quality of management may suffer.

• Without knowing the current state of the cap ex in terms of life span, I would still recommend bumping your cap ex and repairs up to 10%. What you are gaining in cash flow with the section 8 tenant class you are normally giving back at least a portion of that in the form of increased maintenance/repairs and more costly turnovers when they move out.

• Plan on using a straight 203k loan and not the streamline option. If there is one thing I see on 203k deals it is that the budget always comes in a lot higher than my clients think it will. If it ends up meeting the budget threshold for a streamline great, but do not plan on it.

If you have any follow up questions at all do not hesitate reaching out via PM. Hope this helps you.