All Forum Posts by: Dan Rivera

Hi, I'm a value add, buy and hold, real estate investor from NJ. I own a cash-flowing 3-family as my primary residence, and am under contract for another 3-family. I have a private investor (family member) willing to get financing and contribute 100%. I'll take a slice of cashflows, expenses, and appreciation.

Question: If we have the opportunity to put down virtually nothing to acquire the property and fix it up by use of leverage, should we do it? It would require the use of an ARM, and a variable rate loan for renovations. Purchase price is 489,000.

Riskier option: 

$489,000 loan amount (30-yr 10/1 ARM @ 3.25% initial rate) (100% of purchase price)

$0 down payment

$3020 closing costs (12,800 - seller contribution of 2% of purchase price)

$100k variable rate loan at 3.6% (100% secured by cash already in account w/ lender). 

Cash flow: 6,750/year, or 563/month

Cash-on cash return = 223%

Safer option: 

$366,750 loan amount (30-year fixed @ 4.7% rate) (75% purchase price)

$122,250 down payment (25% purchase price)

$3,020 closing costs

$100k cash towards renovation (budgeted)

Cash flow: 17,667/yr, or 1472/month

Cash-on-cash return = 7.8%

The riskier option sounds like a steal to me, however, it does come with added risk. It is an ARM, so if we keep the property past 10 years, our rate could increase significantly. The 100k loan for renovations is also variable, so fluctuations will be felt immediately, as it is adjusted daily. Any recommendations on which to go with, or alternative strategies? I'd like to get my partner/investor a decent return, but I don't want to leave ourselves bleeding money 10 years down the road.

The formatting for my post got messed up. The total monthly expenses of $3093.79 includes every line listed under "Monthly expenses". Raising the rents to $3,650 would yield a $550/month cashflow according to my calculations.

@Luis Rowe - P&I + PMI = 1,552/month

@Jacob Sampson - Thanks for the response. Max possible rent would be $3650 if we turn Unit 2 into a 2 bedroom. Unit 2 and Unit 3 would be able to get $1350 each, conservatively. I may have not been super clear on that part.

I do feel that 30% is rather high for vacancy and expenses. Vacancy in my area is very low as most of the population are renters. Rentals don't usually sit vacant for more than 1-2 weeks. Even if we bump the vacancy up to 10%..... 20% (or $8,520/year) for maintenance seems excessive. Are you including CapEx in this number? I still think it would be a high estimate. Am I missing something? Any advice is appreciated.

I am in the process of buying two 3-family properties. The first, I'll post here and provide updates along the way.

Property Info:

Unit 1: Studio basement apartment that is in good condition and was "somewhat" renovated. Kitchen is a little outdated, same with bathroom, but it commands a rent of $950.

Unit 2: Ground floor 1 bed/1 bath apartment. It has a very outdated, but spacious kitchen. It'll need about $12,000 to renovate. Bathroom is a little outdated (blue everything, yuck!) but is in good condition. It commands a rent of $1000 as is, but can get $1200-1250 if we pump $15,000 into renovations.

Unit 3: 2nd floor 2 bed/1 bath apartment. Well maintained and recently renovated, with the exception of the kitchen, which is outdated. It commands a rent of $1350 as is.

70% of population are renters and there is a steady demand for rentals.

Typical cap rate in the area is 5-7%. The property's current cap rate is 5.4%.

 The numbers:

Purchase price: 315,000

Closing Costs: 12,500

Down payment: 3.5% or 11,025

Monthly (current) Income: $3,100 (900, 1000, 1200)

Monthly Expenses:  $3,093.79

Water/sewer - $300

Insurance - $123

Taxes - $582

Electricity - $0 (separate, tenant pays)

Vacancy - $155 (5%)

Repairs and maintenance - $155 (5%)

CapEx - $155 (5%)

Property Mgmt - $0 (I will be managing the units, otherwise $217 or 7%)

The plan:

I'm considering this property because I see a lot of potential here. I will be moving into Unit 2, the 1 bedroom, in order to renovate w/o issues with tenants (then I'll probably move out after a year). In terms of renovations, I have two options: 1) renovate the unit with the current floor plan. It'll command a rent of $1200. Or, 2) renovate the unit and convert it to a 2 bedroom like Unit 3 (same sq footage). The spacious kitchen would be made a tad smaller and turned into a bedroom. The hallway that runs from the living room to the kitchen has a long, deep closet on one side and the bathroom on the other. The closet would be removed and the kitchen would take its place. There is ample room in the hallway for the kitchen. This would command a rent of $1350.

I believe the costs to convert Unit 2 to the new floor plan would be higher--however--not by much. I anticipate 50% of the labor will come from myself, my dad, and my uncle (who is a general contractor). Both of them have considerable experience taking down/ putting up walls, installing cabinets/fixtures. Plumbing and electricity will be handled by the pros. I have about $15,000 to spend on this reno project, and according to my calculations, this should be sufficient. Of course, my renovation calculations are based on research and not from any professional knowledge, so they could be wrong.

What do you all think? As guidance or advice is much appreciated. It seems to work because of my financing (i.e. FHA loan with 3.5% down, low interest rate). It's a bit risky in the beginning (CoC return of ~0.30%) but it provides the opportunity for a double digit cash-on-cash return after the first year if I raise the rent (10.78% w/ Unit 2 as a 1 bedroom, 14.76% w/ Unit 2 as a 2 bedroom).

@Ronald Green Also, something to note... If you're looking at 3-4 family properties with FHA financing, you have to qualify for the loan and so does the property. The property must pass the self-sufficiency test, whereby 75% of the appraised monthly rental income must be greater than the monthly payments on the house (principal, interest, insurance, taxes).

For the property I'm purchasing now, the monthly payments would be around 2,500. The income for the studio, 1 bedroom, and 2 bedroom units were appraised at 850, 1000, and 1200 respectively (or 3050/month). 3050 x 75% = 2,288. In this case, the payments were greater than 75% of the rental income (i.e. It fails).

Currently in the market for 3-4 unit multifamilies that may need minor renovations or cosmetic fixes. I prefer properties in Hudson, Bergen, and Morris counties; but will consider others.

Thanks!

Hi Everyone,

I'm a newbie investor from Hudson County, NJ with an interest in multifamily properties. I am teaming up with my parents on my first deal. We put in an offer (which was accepted) for a property advertised as a legal 3-unit.

2nd floor: 2 bed, 1 bath

1st floor: 1 bed, 1 bath

Ground floor: studio apartment

Including rent from the 3 units, and an FHA loan with 3.5% down, yields an NOI of 24,200 and monthly cashflow of ~$550. The 1st floor will need around 10k in rehab.

We are currently in attorney review. It was revealed that this property is actually a legal 2 family "w/ bonus apartment". It was registered with the tax assessor as a 3 family, but not with the building department. The seller claims to have a certificate of occupancy for the studio apartment. I believe the property lot's zoning will allow for a 3 family, but again, it's not registered. 

In our mind, we have two options. 1) The seller will have to submit a zoning request with the town to determine whether the ground floor studio is legal, or 2) we will have to renegotiate the price based on the property being a 2-family, collecting two rents. Does anyone have any advice or suggestions on what we can do? Should we have the seller verify the legality of the basement studio before going out of attorney review? Or is this deal a bust?