Is this multifamily house hack a good deal?

Question

Hi BP!

Newbie here trying to analyze a deal. It seems like what constitutes a good investment ranges widely depending on where the property is and what your goals are. I have a good friend who bought a fourplex multifamily property a couple years ago in New Jersey. She was telling me the numbers, and I can't honestly say if I understood how good (or not good) her investment was.

Purchase Price: 650,000

Loan: FHA

Rate: 3.75%

Down payment plus closing costs: 55,000

Renovation costs: 200,000

Rental Income per month: 8700

She's currently living in one unit (house hack), and renovations are not done yet. So these numbers are what it's going to be once the renos are done and she moves out. According to her, the mortgage and expenses are about 4900. It's high because there is MIP mortgage insurance and taxes are high in NJ. She's planning to refinance into a conventional once the property has appreciated, but I don't understand how this helps because doesn't it make her mortgage payment bigger and eat into her cash flow?

To me it seems like the price for the house was pretty high, and she's had to wait several years to do the renovations (to save up money, and also wait for tenant turnover). But then again after all is said and done almost 46k a year in profit seems pretty great.

So, is this a good deal?

Any thoughts would be really appreciated. I'm eager to start investing, but I want to make sure I get some valuable thoughts first.

Thank you!

Shawn Mcenteer · Answer

@Josephine Breign you can go as low as 5% with conventional. There are also renovation loans with conventional that work in a similar fashion as a 203k loan that FHA offers. Deals can be a challenge to find but from what I have notice there are a lot of properties that are over looked that have tremendous potential with some creativity.

Shawn Mcenteer · Answer

For Sure @Josephine Breign. Good News is if you have the right team in place it becomes very simple.

Josephine Breign · Answer

@Shawn M. I'll look into some renovation loans that go with conventional 5% down, thanks for the advice! There's definitely some creativity needed on some of these properties lol!

Josephine Breign · Answer

@Ryan B. Interesting! I'm not exactly sure how much she's getting right now per unit, but she says it covers the expenses and has a bit of cash flow at the moment, so I'm guessing upper 5000, maybe 6000. And yes, the utilities are all on the tenants, so there's that. She's asked me not to share the location of the property, suffice to say its in Northern NJ, near the NJ transit lines. The area is full of people who commute to NY for work. I remember when she first bought it, she had to pay much more over asking because it was hard to be competitive with an FHA loan against cash offers. So that made me think maybe she overpaid and it wasn't a good deal. Which bring me to what @Shawn M. is saying, would it be better to go with conventional financing instead? What is the lowest I would be able to put for a down payment? I liked the FHA loan because the low down payment would allow me to save my capital for renovations. Nothing I've looked at so far would be a good deal unless I made considerable improvements to justify a higher rent. Yes, I was thinking a multifam if I can find one! Thank you for your thoughts!

Shawn Mcenteer · Answer

@Josephine Breign High Taxes, High rent! You may want to look into conventional mortgages if you are planning a BRRRR strategy yourself. Conventional mortgage you do not need to refi, once house appraises under 80% PMI drops off. Are you considering MFR investing?

Ryan B. · Answer

Seems like quite a good deal to me, if her numbers are actually accurate. Her rent number is suspiciously high. I assume that's an estimate of what she'll be getting after the $200k in renovations...? If so, what's she getting in rent currently? I don't know where this property is located, and that's gonna be a huge factor, but I'd question if she's actually going to be getting $2,175 per unit in rent for a fourplex she got for $650k in NJ. I guess it's definitely possible if the units are fully updated and in a nice area.$4,900/mo. in expenses seems reasonable; her P&I is probably around $3,000, so that sounds about right if she's not paying for electricity and anticipating low-ish CapEx since she's renovating the entire building.Refinancing will presumably lower her mortgage payment (unless she's trying to cash out) because if the building has appreciated, she will hopefully have >20% equity in the property and therefore will not need to pay the MIP anymore. All she will pay are the closing costs for the refinance.