Help analayzing my house hack deal!

[Ben Cohen]

Hi everyone!

After a lot of learning & reading I've made my first offer on a 4 family building in Brooklyn, here are the numbers:

Price: 1.28M (FHA 3.5% downpayment = 44.8k, closing costs = 32k -> total money down: 76.8k). Very little rehab needed, around 5k from what I can tell. New roof and water heater.

Mortgage: 5042 (P&I) + 1100 (FHA insurance) = 6142

Operating Expenses: Property Taxes (10,390) + Water/sewer (1442) + Gas/electric (3253) + Insurance (3803) = 18,888/year = 1574/month

Total Expenses: 6142 (Mortgage) + 1574 (Operating Expenses) = 7716

Rents are currently (month-to-month tenants, presumably because of Covid):

2/1 (1800) + 2/1 (1800) + 2/1 (1750) + 1/1 (1600) = 6950 total rent

However, considering the location (Brooklyn) + the fact that each unit has parking, rents should actually be:

2/1 (2400) + 2/1 (2400) + 2/1 (2400) + 1/1 (1800) = 9000 total rent

So, monthly:

Rent (9000) - Total Expenses (7716) = 1284 cash flow, this is for the case that I am not living there. While I am living there I would live in one of the 2/1s and bring in a roommate to pay 1200, so rent would be (2400+2400+1200+1800) = 7800. So cash flow is 7800 - 7716 = $84 per month, so I basically break even.

Of course, I did not account for vacancies and maintenance. But even so, on a monthly basis my housing cost would be < $500 while I'm building equity in a 1.28M property. And, once I refinance at 15% or 20% equity, I can get rid of the FHA insurance, right? Doing so would increase my cash flow by 1.1k a month.

Other potential sources of income: tenants currently go to a laundromat near the building. I could put in a coin-operated laundry machine in the basement and charge 2.50 for wash and 1.50-2.50 for dry, doing so would make a few thousand a year. Obviously not a make or break thing though.

My main concern is raising the rent up to the market rate. The tenants have been there for a long time, so that might get pushback, and I'm concerned about getting market rate rents during Covid. Is this a valid concern?

Would really appreciate any insight here as this would be my first deal ever. Thanks!

[Aaron Montague]

@Ben Cohen have you thought about looking at a conventional loan with 5% down? That should drop your closing costs by a fair amount. Starting calling around and see if anyone is doing "jumbo" mortgages with 5% down, conventional financing. FHA is a great tool, though only if you REALLY need it. Your closing costs might go down with a conventional mortgage.

A new water heater in greater NYC is going to cost you $1000.  That leaves you with 4k for a roof.  Is the roof small?  4k generally doesn't get too many roofs done unless you are doing the work yourself.  I'd budget at least 9k.

You need to account for both vacancy, repairs and Cap Ex(that roof again) to make these numbers make sense long term. 

Vacancy in NYC should be less than 5%.  

Repairs and operations accounts for the small fixes and ongoing expenses like snow removal.  Plowing in NYC is not cheap.  Nor is the labor to shovel out 4 parking spots each time it snows.

Cap Ex is the big expense you are missing.  Remember that over the next 30 years you are going to need:

• At least one more roof (10-12k)
• 2 Water Heaters (I assume this based on the fact that you pay a large gas bill) This is 8 water heaters if they are separate
• 4 parking spots and a driveway repaved
• At least 1 new furnace (again, assuming there is only 1 for the whole building)
• 8 Stoves/Ovens
• 8 Dishwashers?
• 8 Refrigerators

Add the costs of all that up and divide by 360.  That'll give you the amount you want to save each month to make these large scale replacements.