First investment - Which multifamily seems like a better deal?

Question

I am currently comparing 2 multifamily homes to buy as a potential house hack. Both are located near UNCG (a local university) in Greensboro, NC (less than a mile away from one another) and are great for student housing/young professionals. I ran them as rentals (once I've moved out after 1 year). I would like to get some other opinions on these before I take the plunge.

Property #1

Property #2

Some things to keep in mind:

Property 1 is a SFH that is being used as a triplex. Unit A is 2 bed/2 bath with kitchen and den (rent for $1000). Unit B is 2 bed/1 bath with kitchen (rent for $700). Unit C is the basement and its 1 bed/1 bath with kitchen (rent for $600). It was built in 1925. The roof is around 20 years old, the furnace is out so the house does not have heat. The interior is very outdated and is in need of quite a bit of cosmetic work (paint, carpet, etc.). Upon looking in the crawlspace, it appears some materials were used that could have asbestos. All utilities are currently being paid by the owner and he said they are around $400 in the summer and $500 in the winter. Obviously if I were to pay utilities, there would be negative cash flow. If I buy this property, I plan to have them split or bill them the cost of utilities. It has been on the market for quite a while and has been marked down ~5k. It is currently listed at $215,000. Other renovated triplexes around the university are in the low $300,000 price range and command about the same amount in rent. The ARV would likely be in the upper $200s.

Property 2 is in a more upscale area. The surrounding houses are around half a million. It is a SFH that is being used as a duplex. It was built in 1962. It needs less major repairs than Property 1. It is in need of cosmetic work (paint, flooring, kitchen reno - approx. $15,000 - $20,000). The lower unit has 3 bed/1 bath with a kitchen and the upper unit has 3 bed/1 bath with a kitchen as well. It is currently being rented out per room for $350/each but would increase to at least $400 per room after renovations. It is currently off-market and the owner would take around $310,000 for it. According to my realtor (who is functioning as my realtor and the seller's realtor) it would easily sell for $340,000 if it goes on market (and has an ARV of ~$375,000). I have the opportunity to get in on the deal while its off-market but I want to make sure I am not buying something that will end up costing me per month. This property has a deck on the second floor and a mini-parking lot behind it which is more than enough to accommodate all 6 tenants.

For both of these properties, I did not include utilities because I plan to find a way to bill the tenants for utilities or run separate meters to each unit. I also did not include PMI which would likely be in the $200-300 range. With how the market is appreciating in this area (10-15% in the past year, and 3-5% in the past month), and given I would be performing renovations, I believe the PMI could be taken off with in the first 1-2 years. I plan to use conventional financing with somewhere between 5-20% down payment. My parents offered to partner with me to be able to qualify for the mortgage and then offered to lend me enough to do a 20% down payment to avoid the PMI, however, would it be better to maybe do 10-15% down and then use the other 5-10% for renovations? With reno + the rapid appreciation in the area, I do not think it would be hard to reach 20% equity in the house in a short amount of time.

Sean Rooks · Answer

I would do 2 analysis, one while you are living there, and one once you leave. Just establish your goals (ROI, Cashflow) and if it meets those goals, then do it. As for utilities, it depends. Rent by the room is tough since there is common lighting, I wold have to defer to others that rent by the room in NC for best practices.

As for PMI, I would include it if you are using the 5% down payment, then re-analyze in about 5 years with a refinanance, removing PMI and see how it does!

Tchaka Owen · Answer

@John Doss - I can't say I like either deal.

My biggest problem with #1 is that you'd put in $50k of updating for an ARV increase of $75k. That's not enough (for me); I like to double input, so $50k in means an ARV of $310k when finished.

Deal #2 looks like a nice home and it's great that you have considerably less work, however the rents don't seem to justify the price. You haven't added MI (to either) and your Cap Rate is already under 5%.

Questions:

1. How much do home prices drop if you venture away from UNCG?2. If you're planning on house-hacking, what's the reason you have management fees? Wouldn't you manage?

Kristopher Kyzar · Answer

@John Doss I agree with @Sean Rooks about your numbers.  I typically run my expenditure numbers like this: CAPEX 5%, Maintenance 5%, Management 10%, Vacancy 8.5% (1 month).  Your property taxes on #2 look high too, but I don't know what the going rate is in your area.

Sean Rooks · Answer

If its better than your current situation, then do it! Small moves up will equal a great portfolio one day.

Only thing I saw on your numbers was the high Capex, and R&M especially after you have renovated. Usually with a big renovation like you are planning (BRRRR), the Capex and R&M go down to about 5% of rents. Especially when you are renting out by the room.

Personnally I would run the numbers with a low DP (5%) And use the rest of the cash for the renovation or next deal. With the off market property (#2) and a renovation, you should have enough equity gain after a couple of years to refi into a loan that doesnt have PMI. As for cashflow, even breaking even = living for free, and less the rent you would be paying. So think of it as adding +$700-900 to your income each month. A dollar saved is more than a dollar earned (no taxes).

John Doss · Answer

@Tchaka Owen

I put the management fees in there with the assumption that I won’t be managing forever (after I am no longer house hacking). And house prices vary - going west they increase or are about the same, East/south they decrease. But the reason why I really like the UNCG area is because that is where all the multi-family homes are. In my city, you’ll be lucky to find a single family home for cheaper than $220,000 that can rent for more than $1600-1700 in a good area. So the rent to price ratios appear really thin across the board (less-so with the multi-family, I believe). I put the $50k rehab in there as a very rough estimate given what it needs, but it could be more or less. I plan to do a lot of the paint and cosmetic work myself which would cut down on costs.

@Sean Rooks

That’s a good point. And currently, my living expenses are zero because I’m living with my parents (recently out of college) but I’m looking to build equity, cash flow and start investing. So I think any house hack I do would cause me to have greater expenses than I currently have. And that’s a good point about the R&M, capex, and 5% down. I will play with the numbers today and I’ll upload the results. I intentionally kept the numbers high on property #1 because it’s so old and I am assuming there are other things that will need fixing in the near future. Also, all of the appliances are extremely dated (they could almost be collectibles), so those are some other reasons for the high capex.

Something to take into account is that both of these analyses were ran after I’ve moved out of the property. So with my occupying 1 room (or unit) it would definitely be a negative cash flow situation.

John Doss · Answer

@Kristopher Kyzar

Thanks. Yea the tax is pretty high on that house, its coming in at $3856 per year.

Do you guys think its wise to not include utilities in these analyses? I know with a SFH its easy to just have your tenants pay for the utilities. But in the case where people are renting by room, how is the best way to do that? Would the landlord pay for it then divide it up by the number of rooms and bill the tenants each month?

First investment - Which multifamily seems like a better deal?

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