Deal Analysis on our first House-Hack

[Alexander Rowland Marshall]

We have found a 4-unit multi-family property built in 1984 listed at $499,000. Each unit is 2BR/1.5Bth and they currently have tenants in each, though one is moving out at the end of the month. Our thought is that we would occupy the newly vacant unit and maintain the other tenants to live as cheaply as we can to start building our wealth. First I want to share our analysis and then we have a few questions that we are pondering as well.

The Analysis

We are planning to do a 5% down conventional loan (we looked at FHA but for this area we can't get a FHA loan for more than $414,000). That gets us to a down payment of $24,950 and we're assuming 1.5% for closing costs which is $7,485. So our total cash invested up front is $32,435. We used our lender's app and his recommended 3.5% interest rate to calculate the monthly mortgage and PMI payments which would be $2,129 and $161 respectively. We assumed $1,000 per year for insurance. We pulled the latest tax bill for the property which was paid in full at $1,496 for 2019. (Oddly, the tax bill for 2018 was $2,362...is this a red flag or something we should consider more closely?) For our analysis we used the latest bill as our annual tax expense. We are visiting the property later this week but for now we don't know the exact condition of the property. The limited photos provided show at least one of the units has been renovated. New kitchen, bath, floors and paint from the looks of it. Can't tell about the other units. Until further notice we're assuming 5% each for vacancy, repairs and CapEx. The agent we've been working with also runs a property management business in this area and recommended we use 9% for property management expenses. If we assume rental income stays the same (listed below) those monthly expenses would be $188.50, $188.50, $188.50, and $339.30 respectively. That brings our total monthly expenses to $3,402.80.

The four units are currently renting at $800, $990, $990, and $990. All but one of the leases were signed in the spring of 2019. The $800 lease was signed in the fall of 2018. Our plan is to live in one of the units for a year or so and then move on. For that reason, we wanted to look at this deal as if we'd have paying tenants in all four units to see if it would cashflow after we move out. To be conservative we’re assuming that when we move out we'll be able to charge the exact same rent that each unit is currently bringing in. Total monthly income in that case is $3,770. On the face of it this looks like it could easily cashflow. Conservatively we could be getting $367.20 per month but realistically we think we could increase rents in 2021 to at least $1000 per unit. It wouldn't cashflow while we are living there but it would substantially minimize our housing expense which is our primary goal as we get started. We’d effectively be building equity in the property and living in a unit valued at $800+ for $240

Questions:

First of all, does the analysis we've done make sense? Are we missing anything?

At the time of this writing the property has been on the market for 81 days. Are they asking too much? Should we be wary of other issues?

If this property is already cashflowing, why are they selling it? Is this a question we should always ask ourselves?

Is it worth buying this property if it won’t cashflow while we live there or should we be looking for house-hacks that will pay us to live there?

Thanks so much for reading! We look forward to the feedback!

Cheers!

[Oscar Cardenas]

A few mistakes/ suggestions. Speak to a lender, it doesn't hurt to ask a knowledgeable one.

1.) Conventional financing down payment goes up if it is a small multifamily property. 15% I believe.

2.) FHA limits go up depending on the amount of units so it might still qualify.

3.) the tax bill reduction could be temporary. Perhaps for a veteran credit or something. Ask seller.

4.) I would personally be careful of an agent with two jobs that require a lot of time and practice to do well.

5.) Such a high number of days on market EASILY calls for negotiation of price. In my market depending on the seller and listing agent, I wouldve called for a 18k price redux and have seller pay 7k or so in Buyer's Closing costs. I would try an oral offer first with good reasoning behind the reduction. (below market rents, corona, economy, etc)

6.) There was no mention of who pays what utilities. Since the cash flow potential initially is so low, this could make or break the deal.

7.) You are correct on thinking about current market rent. The current rents play a role in your decision, but market rents should also play a large role. Of course depending on the condition of all the units.

8.) Ask listing agent for seller reasoning. It could be anything. retirement, tired of being a landlord, inheritance, just wants cash, etc. you never know but it can be used for negotiations.

9.) Depending on your area, buying a property that doesn't cash flow while you live in it is completely fine. Especially if the negative cash flow is temporary due to lower than market rents. The purpose of a house hack is to have other people pay all or a portion of your mortgage. Since you did the math and figured you would live in an $800+ unit for a bit over $200, all while controlling a $400k asset with tax benefits means it still accomplishes the house hacking goal.