All Forum Posts by: Luke Franklin

I’m considering buying a multi-family unit as my first investment property. I will be living in one of the units initially, but I’m running the numbers as if the property will be a full rental property. I don’t plan on living there more than 1-2 years max and my analysis is for the long term. I need help double checking my analysis. Here’s what I have so far…

Asking Price: $140,000. 4 Units- $550 per unit (3 of them are currently rented, I’d live in the 4th). Monthly Gross Rental Income: $2200

This would be an FHA loan. 3.5% down ($4900). Interest Rate of 4.25%

2% Rule: Clearly, not 2%. It’s 1.54%. I’ve been looking for several months and nothing in my price range gets 2%. The only way to hit 2% is for large apartment complexes in some run down parts of town. I’m relatively happy with 1.54%.

50% Rule: $2200 gross would mean $1100 for NOI. Here's the $1100 in monthly expenses.

• $151 MIP (PMI)
• $210 taxes (it’s about $2500 annual)
• $66 insurance
• $673 vacancy, repairs, utilities (does this seem too low?)

Cash Flow: According to the 50% rule I'm at $1100 NOI. NOI ($1100) - Principle and Interest ($676) = $424 monthly. That's $106 per door per month. Annual Cash Flow = $5088

Cap Rate: Annual NOI / Property Price

Annual NOI ($13,200) / 140,000 = Cap Rate (9.4%)

Cash on Cash Return: This is very high because I’m only putting 3.5% down. Cash Flow ($5088) / Down Payment ($4900) = 103.8%. (Am I doing this right?)

Any thoughts or comments? I'm concerned that $1100 for NOI is too high (ie my expenses will be higher than I anticipate). Thanks!

Thank you to all. Great to have someone to bounce ideas off who have more experience. Let me attempt to address each and give some more insight to my situation.

@Stephen Underhill

Thanks for the input. It is kinda scary that it doesn't meet the 50% rule. And yeah I learned about the FHA 10% down means the PMI drops after 78% equity, but lasts the entire loan if I only put 3.5% down. It sucks because it hurts cash flow in the present AND the future, but at the same time I'm hesitant to take such a huge chunk of my savings when I wonder what else I could use that $10,075 for (fixing up property, my next purchase, etc).

@Elizabeth S.

Thank you. Let me address some of your insightful questions.

• How long do you want to live in a duplex? At least 2 years so I can be counted as a seasoned renter and the lender will credit the income from the other side.

• If you bought a single family home, how long would you live there? Probably at least 3 years. That's part of the reason I want a duplex, it will force me to stay vigilant and in the real estate seen as I look to get OUT of the duplex. If start with a SFH I'm afraid I won't be able to find time or $ for an investment property.
• Are you planning on staying in the area you are buying in? For at least 3+ years. I also have family in the area who could manage a property for me (assuming cash flow is high enough to justify a manager...)
• Do you have a cash reserve or make enough money to develop one for emergencies? Yes, but my reserves will take a hit when I buy. My wife and I live pretty far below our income levels. At current levels can save 20 - 30 thousand each year.
• Have you ever lived in a duplex? No, but currently rent in a 3 plex house.

@Troy Sheets

I would love to grab exactly what you have, multi with more than two units. However, you nailed it. Nothing in my price range where I would want to live. And I've never land-lorded before and an established duplex is less intimidating!

@Lucas Pfaff

Thanks for the encouragement. I've been thinking along the lines you laid out. Is this property going to cash flow fantastically or be a keeper for 30+ years. Perhaps not, but can it be a starting point? I hope so. We currently rent for $600 a month, but that's about to go up to $750. If it's close to a wash, I'd rather do the duplex and learn the renting trade while building equity in something.

I realize it's not the best possible opportunity, but that's ok. I need a starting point. I'm not terribly afraid of the cashflow because I don't need to live on it. What I am afraid of is this property becoming an albatross around my neck for future opportunities. If I buy the property and fix it up as I live there and am able to increase rent, will I be able to either create a positive cashflow or sell the property to buy another? Or will this be a property I'm stuck managing, making almost nothing and can't unload? Of course you all can't answer these questions, but they are rattling around in my head! Thanks everyone.

After two unsuccessful attempts to buy a SFH (outbid on short sale and HUD home), I'm looking at a duplex to live in half and rent half. I know nothing about real estate and was directed to BP by a friend. I like the idea of the duplex because compared to SFH it actually has value beyond appreciation, but after hearing the rules and seeing #s on BP i'm questioning my decision to pursue this duplex. It will have to be 3.5% and FHA because I don't have 20% for a multifamily.

The Numbers

Price: $155,000

Rental income is only $800 per month on one side right now. I'll be living in the other. I'm confident I can get this to $1000 as I research the area. The current tenet is month to month and hasn't had a rent increase since November 2009. The location is very good. Mostly residential in a area close enough to Chicago to grab commuters who feel they're getting a steal by coming south.

I want to live there for a 2-3 years and then move on and rent both sides. I thought it was a good opportunity compared to just buying a home to live in with no investment strategy, but wow I think I'm gonna get raked over the coals compared to the deals I'm seeing on BP.

Is this a good idea? Keep in mind I can cover the mortgage, insurances and taxes fairly comfortably on my salary if necessary. There are NO other duplexes selling in the area (rents are high now). I want to make a smart decision, but am afraid I'm making a buy for the sake of making a buy.