Ok so I rent and am looking for my first rental property. Right now I see a nice deal on a 3 fam unit ok location completely redone. It cash flows to the point of I would be living for free (even after taxes, sewer, garbage, insurance) Its a nice multi at a good price that has been updated, the problem is the only $$ from it would be cash (if rented) and appreciation, there will be no equity and no room for improvements. OR should I buy a cheaper 3 fam and fix each unit up while im living in it. Meaning move in a unit fix it up and rent, move to other unit and repeat till all 3 are done. This would give me revalue equity and money each month. Any suggestions? If need more info please let me know, thanks!!
Hugh,
You left out the most important consideration for rentals - THE NUMBERS! What are the gross rents, purchase price, and total repairs needed. Normally, properties purchased at retail (with no equity) will NOT cash flow.
Post the numbers and we’ll take a look. Additionally, you must consider the carrying costs if you’ll be rehabbing a vacant building.
Good Luck,
Mike
Gross rents are 2100 total monthly
Purchase Price is 155K
Repairs needed 0
Current owner lives on 3rd floor which I would move into.
As far as the multi fams that need the work the numbers are a huge range depending on area.
75-100K each needed about 5-8K per unit so around 24K
Outside usually requires new paint maybe siding repair 6K
Most of the 3 fams will require 30K invested, probably will only get a construction loan for them too.
This is really more of a general question. The underlying question I have is for a person who doesnt want to rent anymore and it was your first property would you buy a safer rental that you could live in ( i know most dont want to live with tenants but pretend) or a multi that needed the work and would not generate any cash for at least 6 months? Some of these multi fams I can live in for free and then purchase a fixer while I have that cushion. I just want to get out of renting quickly as I know it eats up my money… Thanks guys!
My father had rental property all the time I was growing up. One thing he told me about real estate and I have found serves me well is that you don’t want to buy the other man’s paint. That means that if a place is nice new and shiny and another property just like it needs paint carpet and general cosmetic repairs but otherwise the properties are the same, you will get the one that needs paint a lot cheaper than the new shiny one.
In real estate you have only 3 types of deals. #1 is the emotional deal. You buy it because you are in love with it. Just like any relation ship built on emotions only you usually end up with a broker heart. #2 is the yield pay. This is when you buy a totally fixed up property that cash flows. You are buying a stream of income so you pay more for it but as long as it cash flows it is a way to go. You buy it for the yield. #3 is the value play. This is when a property has been mismanaged. It has deferred maintenance it looks bad and because of that it doesn’t bring in the proper amount of rent. These can be bought for a fraction of its ultimate worth and with skill sets of contracting out and upgrading the tenant’s rents is where the most money can be made. This ends up with a greater yield and a bunch of equity.
I always prefer the value play. In my opinion that is what real estate is all about.
very good reply for sure. I have to look around and see what else is out there for 3 fams in a descent area. Trust me there are many in areas that you would not park your car overnight. Lots of drug areas around. I see these people when I am driving home from the bar, we call them zombies. I will take a step back and re-evaluate my options. Its confusing because I would love to by a single fam fixer to sell for a profit in a year (first deal) but I know I want to get in the buy and hold (rentals) to create wealth. Ultimatly I should get a 3 fam fixer to rent and sell but just worried that maybe too much to handle alone and for my first deal.
Gross rents are 2100 total monthly Purchase Price is 155K Repairs needed 0
Here’s how I see this deal:
Gross Rents: $2,100
Operating Expenses: $1,050
NOI: $1,050
Mortgage (30 yr, $155K, 6.25%): $954
Cash flow: $96 per month, which is low for a 3 unit
Good Luck,
Mike
Ok makes sense. Actually this also brings up a great question. What would be acceptable cash flow for a 3 unit property? How about a duplex? This will really help me calculate while looking at deals, thanks!!
I like $100 per unit per month (so, $200 for a duplex, $300 for a 3-unit).
Mike
Mike,
Yes, this is a three-plex, but Hugh wants to live in one of the units as his primary residence. The rental income he cites is generated by just two units.
Hugh’s immediate goal is to live rent free and have all of his personal housing expense is covered by his tenant’s rents. In this scenario where the numbers do work out to a small positive cash flow, and Hugh has no direct housing cost, would you relax your cash flow standard for this deal?
The answer to the question is a question which is what is YOUR acceptable cash flow.
The scenario lay out is by property manager is just a quick, rule of thumb calculation that seems to show that this property may be worth a closer look. That calculation is based upon the AVERAGE expense for all units across the country. It is quite easy to image that living on-site, you will catch many problems far quick er than an absense landlord (and thus lower expenses).
Let’s assume 10% down, that would roughly mean about $900/mn for the mortgage and probably another $200/mn for taxes and insurance (could be lower). In average, you might easily have a $2000-3000 per yr in repairs and expenses (let say $300/mn). So, if both units are full at $700/mn, you are at break even. But, what its better as you have eliminated your personal housing cost and your are working on paying off a building. Have a unit empty?, well then you are probably out of pocket what you are already spending each month as a renter already(month going to pay off someone else building).
A good start would be to ask the current owner for his expenses per SchE of his tax forms.
It is worth to look around and see what other properties are selling for, but there probably won’t be much to compare to as 3 unit are not that common.
As for buying fixed up or not, it depends on your situation and objectives. Got a fullt-ime job and little or not handyman experience?, then something closer to turn key might be better.
Also, I would ask the current owner to carryback at least 10% so you could minimize cash out of pocket and maybe just get a 80% LTV loan (which will have a very good rate).
Good luck
Look at your cashflow as a return on investment (ROI). If you divide your yearly casflow by the amount of your down pmt. and rehab costs(if any). That will give you you ROI. For example"
If you put down $10,000 on a property and that property gets $200/mo. positive cashflow. Here;s how it looks.
$2400/yr. / $10,000 = .24 or 24% ROI.
Persoanlly, I’d like to get at least 15% ROI for it to be even worth considering. Hope that helps.
this all helps allot. There are LOTS of 3 fams in my area to look at. Lots of 2 fams as well but the numbers never seem to work on those. I would have to say that after operation expenses and mort. $200 for a 3 fam sounds acceptable to me. Eventually I think would like to purchase a sfo to live and rehab then eventually sell. Im thinking that picking up a multi fam unit to rent and live will let me put aside some more money and give me some rental experience with less risk. Im gonna do some number crunching and keep you guys updated, thanks for the great info!!
I did not see if he mentioned if the rent listed was for 2 units or all three? If it was for all three, then he would definitely be negative.
Also when occupying a property like this (your main residence, but also an investment property), would there still be the same tax benefits(or a portion of them) you see from owning your own single family residence?
Hugh said
Gross rents are 2100 total monthly
Purchase Price is 155K
Repairs needed 0
Current owner lives on 3rd floor which I would move into.
Since the current owner is using one unit as his personal residence, and Hugh will also use one unit as his personal residence, I simply concluded that the gross rental income Hugh cited is generated by only two rental units.
Also when occupying a property like this (your main residence, but also an investment property), would there still be the same tax benefits(or a portion of them) you see from owning your own single family residence?
For the big expenses such as property taxes and mortgage interest, there is no difference in the amount of deductions allowed.
Repairs, maintenance, hazard insurance, and other ownership and operating costs directly attributed to the rental units are deductible to include depreciation, but not deductible for a primary residence.
So are you saying that (if you live in your mulitfamily) 100% of the mortgage interest and the property taxes can be wrote off, even though they are being paid for by tenants?
Also would this very state to state?