Is this a good deal?

Question

I'm looking at a buy and hold property. It's a 1900 sqft. 4 bedroom 2 bath house (built in the 50's) with an attached mother-in-law suite that has one bedroom, a kitchen (converted garage), and a bathroom. I think the mother-in-law suite could either be a short term rental or serve as a fully furnished rental. Here are my options:
1. Rent out the whole thing to a very large family.

2. Rent out the House part and the mother-in-law suite separately (could also be a short term rental).

3. Live in one part of it as a house hack and rent out the other side depending on demand.

In the absolute best-case scenario, I think I could potentially get up to $2400 a month in rent because this is a college town. I think I could rent each room for up to $450 as a student rental + $600 for the fully furnished mother-in-law suite / short term rental. I think the house portion would rent for around $950 - $1000 to a family. At worst, I think I could make $800 a month on some sort of house hacking strategy - live in the main part with a roommate and rent out the MIL suite, or rent out the main house while living the MIL suite. So in the worst case, I'm living for free.

Other variables: It's a 1-acre lot that's zoned for multi-family and has enough leftover space that I could use someday for a triplex or just divide it and sell.

New roof in 2019, new hot water heater and HVAC within the last 3 years.

The utilities are combined so I'd either have to include it in the rent or work out another solution.

I think I can get it at $120,000 with either 15% down on an investor loan or 5% down on a conventional mortgage.

Taxes: $950
Insurance: $1200
I would manage it myself for now.
In my various scenarios, I either run $1000 a year for expenses for living in the main house and renting out the MIL suite or up to $3000 a year in expenses for the student rental scenario. (keep in mind new roof, water heater, and HVAC)

Michael Tucker · Answer

I agree on the property management thought. Thanks for your input - It's great to get another perspective!

Andres A. · Answer

Since it is located in a college town, I think you should rent to students per room, that will give you the highest return.

Charlotte Dunford · Answer

@Michael Tucker another option for you: Airbnb it. WIth the number of bedrooms you have, you can house lots of people. If the market rent is low, Airbnb might be an alternative route.

Michael Tucker · Answer

That's what the tax records website says. I don't know how that compares to the rest of the country, but that's pretty average here.

Kevin Zolea · Answer

@Michael Tucker No problem. Good luck and keep us posted!

Wyatt Franta · Answer

Hey Michael,

Just saw something I'd like to double-check with you. The $950 in taxes, is that accurate? @ $120k assessed value, you're currently projecting a 0.79% property tax rate. Your other numbers look realistic, $3,000 in operating expenses did seem low at first, but I saw your follow-up response to @Kevin Zolea and that does seem like a fair assessment.

Kevin Zolea · Answer

@Michael Tucker Gotcha. I think it's still a good idea to include property management in your numbers because I'm sure one day you won't want to manage it yourself. But that makes sense. I don't know anything about your market but if the numbers work and they meet your criteria, I think you should go for it. Like you said, even at your worst-case scenario you can still make it work by house hacking.

Michael Tucker · Answer

@Kevin Zolea I'll manage it myself for now. Vacancy isn't included in my expenses because it's its own separate thing in my calculator. The $3000 is CAPEX and repairs. I'm expecting a slightly lower CAPEX because it's got a new roof, water heater, and HVAC. I went ahead and ran the numbers with a $4000 and a $5000 expenses scenario, and both versions still cash flow over $100 a month. My main concerns are can I keep both sides occupied at the same time or is an attached short term rental/apartment going to be a deterrent for some families or college kids? And, are the utilities going to be a huge issue? This thing could cash flow at upwards of $700 a month if some of my higher projections for rent prove true. Like I said, worst-case scenario appears to be that I use it to house hack, break even on the cash flow, and live for free while renting out my current residence for a small cash flow.

Kevin Zolea · Answer

@Michael Tucker Are you including property management, CAPEX, repairs, & vacancy in your monthly expenses? I feel like $3,000 a year in expenses seems a little low IMO.

Is this a good deal?

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