Help Me Analyze My First Deal

[Michael Vu]

I am looking to purchase my first rental property (fourplex with four 1 bed/1 bath units) using an FHA loan and house hacking. At first, I thought it was a great deal, but the more closely I look at the numbers, I am beginning to think otherwise. I'm not sure if this is just analysis paralysis and fear of your first deal. I have run the numbers with two scenarios: house hacking one unit and fully rented.

Currently, one of the units is a long term tenant on month-to-month who's rent is low. She is a very elderly woman and I don't know if I would want to raise her rents. The units that would be rented not including the one I will be living in are rented for $725/$725/$600. Owner pays for heat and water.

House Hacking One Unit

PURCHASE		DEAL ANALYSIS
Purchase Price	$250,500.00			Net Operating Income	$971.50
Down Payment	$8,767.50	3.50%		Monthly Cash Flow	-$306.50
Closing Costs	$3,000.00			Cap Rate	4.65%
Mortgage	$1,278.00			Cash on Cash Return	-31.26%
INCOME
Monthly Rent	$2,050.00
EXPENSES
Property Tax	$426.00
Home Insurance	$85.00
Vacancy	$102.50	5.00%
Maintenance & Repairs	$102.50	5.00%
CapEx	$102.50	5.00%
Heat & Water	$200.00
Electricity	$60.00
Total Expenses	$1,078.50

Fully Rented

My assumptions with fully rented are rents for $725/$725/$725/$600.

PURCHASE		DEAL ANALYSIS
Purchase Price	$250,500.00			Net Operating Income	$1,647.75
Down Payment	$8,767.50	3.50%		Monthly Cash Flow	$369.75
Closing Costs	$3,000.00			Cap Rate	7.89%
Mortgage	$1,278.00			Cash on Cash Return	37.71%
INCOME
Monthly Rent	$2,775.00
EXPENSES
Property Tax	$426.00
Home Insurance	$85.00
Vacancy	$138.75	5.00%
Maintenance & Repairs	$138.75	5.00%
CapEx	$138.75	5.00%
Heat & Water	$200.00
Electricity	$0.00
Total Expenses	$1,127.25

While house hacking, the numbers say I will be -$306.50/month. While fully rented, the numbers say I will be at $369.75/month. I find these numbers lower than I had originally anticipated and was hoping to make more closer to $200/door when fully rented. Is this just the nature of using an FHA on a property and the fact that cash flow for FHA loans won't be as attractive as conventional?

Would you consider this a good deal for my first property? How are my calculations?

Thanks for the feedback!

[Steve Milford]

@Michael Vu I look at this a little differently: #1, I use a variation of debt-service-ratio, easier eval. I want coverage over my "must pays" based on ratio and has same effect as considering other expenses. My eval is worst case, 1.4. Better, 1.6 or more. So in your case, for FHA, you rent/house hack 1 and must pays (mort, taxes, ins, utilities) per month are $2,078. 1.4x = $2,909 / 3 = Rents must be $970 per month. 1.6x = $3,324 / 3 = $1,108 per month rent. Can you get those numbers out of your rentals? Yes, you need to increase rents.

#2, are you in the charity business or in the making money business? Why would you not increase rent on everyone? Once other tenants find out elderly woman pays less and receives charity, your other tenant sob stories will come, why they can't pay on time, yada yada. Does the bank care about excuses?

So if your doing this to make money, and you can get the rents needed to cash flow properly, then its a go in my opinion. If not, go find another one. Being a landlord is a long-term thing, things break, tenants get squeaky, tenants move out allowing you to rehab into better for more rent, but #1, its a business, so treat it as such.