Help with deal analysis on house hacking into a fourplex

[Steven DeMarco]

Hello everyone - wanted some help fleshing out my thoughts on this deal analysis for a fourplex in Utah. I'd be owner occupying one of the four units and using an FHA 3.5% down loan. Also, I may have the option to get a rate buydown from the seller, as that is mentioned in the agent remarks. Currently, I rent a 3BD/2.5BA apartment for $2,150/mo. This would be my second real estate investment. I currently own and operate a STR in Pittsburgh, PA.

Property Details:

- Current list price: $750K

- There are 4 units (3 1BD/1BA units and 1 2BD/1BA unit); I would owner occupy the 2BD/1BA unit

- There are leases in place for the 3 1BD/1BA units, total monthly rents: $3,185 (a bit under current market rents)

Year 1: House Hack

I would owner occupy the 2BD/1BA unit and keep the other renters in place.

- Loan Details: Up front Mortgage Insurance Premium would be 1.75% and Monthly Mortgage Insurance would be 0.55%

- Loan Amount: $736K @ 5.625% making my monthly mortgage payment: $4,853/mo.

- Annual Rent Avoidance: $5,784

Year 2: Rent all Four Units

I would adjust rent for all units to current market rents. In that area, Rentometer average rents are 1BD/1BA: $1,350/mo. and 2BD/1BA: $1,650. That brings total rental income to $5,700.

- Monthly Rental Income: $5,700

- Monthly Debt Service: $4,853

- Expenses: $1,143 (includes: Vacancy (3%) $171/mo., PM Fee (9%) $497/mo., Maintenance + Capex (8%) $475/mo.)

- Monthly Cash Flow: -$486

Using this free Rental Property Calculator, it shows that I would be negative cash flow from Year 2 - Year 5. If I sum up all the negative cash flow across these years, it would be about $14K in total. If you look into the details of that rental property calculator, I had to add the MIP (I would have to borrow $736K because there is a 1.75% tacked on to my loan amount) and PMI (added the monthly mortgage insurance to the "Insurance" field). I recognize that in these calculations, I'm not considering the loan paydown, appreciation or tax savings. I currently have strong W2 income and although the -$400/mo. figure is not terrifying, I'd like the property to float itself and not get in the way of future investments (negatively impacting DTI ratio for years to come).

So, is this a good deal? What else am I missing? Blow holes in this! Any and all advice/guidance would be very much appreciated.

[Denver McClure]

Hey @Steven DeMarco, I would agree with @Chris Davidson on the need for you to occupy a 1/1 unit and rent out the 2/1 to improve you revenue in the first 5 years. You may be able to offer the existing tenants the opportunity to upgrade their unit to the 2/1 without having to pay any application fees or early termination fees. Have you also considered turning the 1/1s into MTRs? Obviously you don't have to convert all to a MTR or STR at one time, but it wouldn't be a bad idea to evaluate that market to see if adding that strategy would improve your situation.