FHA and Cashflow

[Gary Thao]

I am looking at purchasing a fourplex with an FHA loan as my first investment. Fourplexes in my area run for $350k+. I am doing my anlysis right now on several and don't see how purchasing a fourplex can cashflow (other than raising the rents or putting a 25% down payment). I feel that this is an opportunity to get into a fourplex and later down the road be able to use tax deductions, appreciation or equity to buy down the loan (of course it also beats paying someones rent). I know this is not the way I should be doing things from reading on the forums (1% rule comes to mind), but I need some feedback as I may not of thoroughly thought of all the variables involved.

Sale Price $350,000.00
Down Payment % 0.0361
Loan to Value/Interest rate 96.5%
Down Payment (3.5%) $12,565.00
Closing Cost $2,945.20
Loan Amount $343,660.63
APR (Annual Interest Rate) 3.125%
Life of Loan (in years) 30
Payments Per Year 12
Total number of payments 360
Property Tax/Year $5,297.00
Payment per Month $1,472.16
Property Tax/Month $441.42
Hazard Insurance 41.67
Mortgage Insurance 351.82
Total Monthly Payment $2,307.06

Rent Monthly
Unit 1 (13341) - 2 Bed/1.1 Bath $700.00
Unit 2 (13349) - 2 Bed/1.1 Bath $700.00
Unit 3 (13365) - 3 Bed/1.1 Bath $850.00
Unit 4 (13357) - 1Bed/1 Bath $625.00
Total Rents: $2,875.00
Expenses to Owner Monthly
Property Management (8%) $230.00
Sewer/Water $200.00
Garbage $95.00
Landscaping
Insurance $63.00
Property Tax $-
Repair and Maintenance
Vacancy Rate (10%) $287.50
Total Expenses to Owner $875.50

Capitalization Rate (CAP) 6.86%
Market Capitalization Rate (MCAP) $350,000.00
Estimated Property Value $350,000.00
Debt Service $191,952
Return on Investment (ROI) -29.37%
Gross Rate Margin (GRM) 10.14
Market GRM 10.76
Cash on Cash -24%
Net Operating Income - Monthly $1,999.50
Net Operating Income - Annually $23,994.00
Net Profit - Monthly $-307.56
Net Profit - Yearly $-3,690.77

[Mark H.]

Originally posted by John Mireles:

Jon Holdman - Thanks for working through the numbers and explaining your thought process. It's definitely got me thinking about my own investing approach.

Now that said, my question here is if not this deal (or one similar given the market conditions in Portland), what other options are there for investing his $12,500?

- He could put it into stocks and all that that entails.

- He could buy a SF house for himself to live in. Then he has no rent income coming in and a larger monthly payment. Should he decide to move, the rent he'll be able to collect won't cover his mortgage - not even close.

- He could sit on the money, continue to pay rent and save up to a larger pot of money for investing. But let's say he continues to rent for a year and pay $1,000 per month. There's his $12,000 investment right there. Plus there's no tax savings when renting.

I'm not asking to be argumentative, just interested to know what I might be missing.

If he only has $12k to invest, he is in serious danger of getting run-over by this property - what if he gets a deadbeat tenant that requires a lawyer's help to remove? What if the sewer clogs the day after he closes and he needs $5k *today* to dig a new line?

The only valid reason to be a landlord is to make money - this deal doesn't do that. The model posted above is basically "forced savings", and it is hypothetical savings at that - if youre hiring a pm to manage the property, its quite possible for the repair & maintenance costs to get out of control. Completely, totally off-the-rails out of control. It's especially likely to happen with an inexperienced owner who doesnt know what things *should* cost.

You *need* profit to survive.

If the Portland market is priced above the point where you can make a profit, and priced high relative to wages, it's topped out - it cant appreciate in value, absent a return of liar loans or lower interest rates, or - an increase in wages..

There's absolutely nothing wrong with choosing to *not* invest in an overheated market.

If you're surrounded by a frenzied market it's easy to forget that not everyone makes money in real estate. Some people lose everything, those people are usually the people that skip the math.