Hey all and thank you in advance for viewing and responding to my post!
Like the title days I’m looking for my first rental property, which I would like to be 1 of many.
here are the specifics on the property
10 unit building
Purchase price $450,000
(2) 2/1
(8) 1/1
Laundry facility on sight-1 parking space per unit
Current rents
(2) $650 for each 2/1 1300 per month
(8) $550 for each 1/1 4400 per month
Gross rent with these numbers is $68,440
Operating expenses with management $26,677
25% down would be $112,500.
I would be carrying a note for $337,500. (450k-112,500)
At 4.5% for 30 years PI would be $1710.
If my monthly gross income is 5,703 then 50% of that would be 2851.50, thus covering PI (2851.50 - 1710) and giving me 1141.00 in cash flow the other 50% for expenses. …
Does this sounds right?
Second point of my question. …
I need an exit strategy for the $112,500 down payment.
This money would come from a HELOC from another property which is my primary residence. I can do a 10 year interest only for this HELCO. At 5.5% my HELCO payment would be $527.00. I would still be cash flowing off my monthly net cash flow as well. 1141 - 527 = 613.
What I was thinking is that I would maintain this path for just about 10 years, then refi the 10 unit building as I would have a good amount of equity(in assuming there is no appreciation or deprecation)and pay off the 10 arm HELOC.
What are your thoughts? ANY insight would be greatly appreciated.
If it matters im in California.
I’m impressed that you’re going multifamily on your first venture…
For some this is about as brave as it gets.
I like this deal very much, not knowing anything more about your market, the location, condition, economy and demographics.
If it’s all been stable, it’s a good bet it will continue to be stable.
Confirm the seller’s numbers. If you’re paying the utilities, the expenses will be more than 50%. Just saying. Also “flat roof” is a two-word phrase for “leaks.”
Your rent/price ratios are good, too at 1.2% and 1.4% respectively.
Thank you for the Reply. I much appreciate it and I find a wealth of knowledge through reading your posts.
That being said, I am a little apprehensive about going multi family for my first rental, but I find it attractive because the gross rent is spread over 10 paying tenants vs. one paying tenant for one SFH.
This property is in a rougher part of town, but the owner has had the property for over 25 years.
Javipa, what are your thoughts about my exit strategy to get my down back out and pay off the HELOC?
Frankly, I didn’t pay attention to your exit strategy, because those can change with the weather conditions, health, catastrophes, need to send grandma to a rest home, etc.
In your case,the assumption is that this project will be worth at least 25% more than it is today, and so you would expect to finance out your down payment.
That, and you’ll be reducing your principal on the first by a small amount, depending on the amortization schedule.
Never mind you’re assuming that you’ll be able to get a 30/yr, fixed first. If this is in an older neighborhood, this is probably considered at best a “C” grade property. Each grade has different terms and interest rates available conventionally.
More likely, you’re gonna qualify for a 15/yr, high-interest, ARM loan, that’s due in 10/yrs, or something less attractive and profitable than a 30/yr, fixed, fully amortized loan.
This is yet another reason why we consult with our extremely competent commercial loan brokers, who’ve been in this business for at least 15 years. No newbies for us. He can tell us what’s available today, for our project, based on our credit, experience, and financials, etc. He’s probably our most valuable financing resource.
Never mind in 10 years, when Obama returns as president for the fourth time, and his executive orders require you to personally apply for a loan from Valerie Jarret, and since you’re a rich, white guy, you’re screwed, like a rich white guy would be screwed in a situation like this. Or you could donate 18% to the IRS, and they might approve a loan for 50% of the value, as long as you only rent to the minorities of Ms. Jarret’s choosing.
I’m only half-kidding. Financing availability changes from year to year, and the older your project becomes the more expensive the financing will necessarily become, too. Just saying.
BTW, this lack of ‘good’ financing, is EXACTLY what you should be using against the seller.
If this were me I would be saying something along the line of…
Mr. Seller, I just love the green shag you’ve left in all the units, and the Avocado appliances that are still here from the Nixon Administration. And evidently the tenants love it, too, because you’re getting a whopping $650/unit for these fugly little 2-bed hell holes in green. However, the problem is I can’t get financing like I need to make this investment work for me.
My interest rate is “x” for only “x” years, and that means I’ve got to increase the rents like CRUH-HAZY in order to increase values and beat the balloon note that would come due in 20XX.
As a result of the age, and lack of decent financing, I either need a break in the price, or I need you to carry my down payment at zero percent for ten years, and then I’ll give you the balance after I secure the high-rate, short-term financing I find.
Or Mr. Seller, I can do the deal if you knock $75,000 off the price, to overcome the bad financing I’m finding on your green, fugly cash-flowing behemoth.
So, which is it Grandpa? Price or terms? I need one or the other, to bake this cake.
Thank you again did the 3rd party insight. It’s obvious that I have alot to learn and consider.
I’ve asked the seller for additional info on rents/maintaince/eviction % as he’s owned the property for 3 decades.
I’m looking for a good commercial lender also. I have a residential lender, but your thoughts on commercial lending and experience makes sense… I didn’t even consider not being able to get a30 year fixed or the lending terms are dictated by age of building, ‘grade’, ect… I need to do some reading. .