FHA 203K House Hack: Break Even Price May be Above Actual Value

[Stefan Gray]

Hello Bigger Pockets Community,

I'm curious as to what you all think about this deal breakdown.

Summary

This is my first rental property purchase and I am using FHA 203K. It's low money down and it's what I qualified for. The Income/Expense/Cashflow report is assuming the property is fixed up. I plan on living in one unit for a year or so before moving and/or purchasing another property. I plan to buy and hold.

The Deal Breakdown

I have found a distressed duplex in Southern Indiana (Jeffersonville, IN). The seller is asking $115K but my realtor thinks the property will sell for $95K-$100K. My realtor estimated the ARV to be between $182K-$195K. My contractor estimates the work to get this 1924 (year built) duplex up to standard (new roof, new siding, central air, new kitchen, new bath, foundation repair, etc.) to be about $80K-$90K for both units.

Doing simple math, $100K(Purchase) + $90K(Repairs) = $190K all in. This would put my PITI at roughly $1,540. The rents in the area will go for roughly $850 per unit, putting me at $1,700 in overall income. After subtracting PITI from rents, my gross income is $160. After factoring in additional reserves (Cap Ex, Vacancy, Repairs, etc.) I come out negative. Rentals in my area increase at an average rate of 4% a year. After 10 years I project the property to have a pure cash flow of approximately $300.

Seller Breakdown

The seller bought the property back in december of last year (2021) for $88K. As far as I know, it was fully occupied. After a few months, one of the tenants left and that unit was in shambles. It looks like it hasnt been improved in atleast 10-15 years. The other unit is occupied however, their renting below market at $500. After doing some research I discovered that the seller is an out of state LLC who buys properties all over the U.S. The price listed seems not to be what its worth but what the seller needs in order to break even.

Given the fact that interest rates are higher than what they were in December and real estate prices are falling, I think it's distress price is worth less than the it was bought for back in December-$88K. 

Property Breakdown Per Unit

Seperately Metered: Water, Electic

Sqft Per: 840

Bed: 2

Bath: 1

Washer Dryer Hookups: Yes

Heating/Cooling: Forced Air/ Window Units (Plan on adding central air for rehab)

Parking: Off Street

Income/Expense/Cash Flow