New to the site, and I am learning alot. I’m from Massachusetts and I have owned a 3 family for 8 yrs. I lived there for several years, renting out 2 apts (now I rent all three) before I built a home 2 years ago. I am looking to get back into purchasing more MF houses during the bust. I am looking at REOs in the 120-140k range that 3 years ago were going for $300k. My goal is to use a heloc on my old 3fam to put down payment on next 3fam. Most of the MF REOs need new plumbing and other repairs in the 30-40k (over-estimated)range. Once repaired and rented out, these houses should appraise out at approx $200k. With approx. 50k in instant equity, I plan on repeating the process and buying one after another. I only plan on buying 3 fam, 3br per unit, homes to maximize rental cash potential, which should be aroung $850.mo each unit, which is lowballed based on me using sec.8 tenants for this area. Two rents will more than cover the mort,ins,taxes and with the third rent, I plan on putting half of it in my pocket and half into an expense acct. Does this sound right or am I missing something. For now, if things work out right, I would purchase 5-8 properties over the next several years and wait for the market to turn upward again and sell, sell, sell if all these properties turn out to be more work than their worth. By the way, I have no intention of quitting my job, I just want to secure my future up with some cash, as well as pad my pocket now with some extra cash.
Well I can tell you that when you’re talking rentals, it’s the financial operations of the property that will dictate the value of the property. The appraised value is meaningless if the rents don’t produce positive cashflow. Baicsically ( as Propertymanager will tell you) you’re operating expenses will add up to about 50% of the gross rents. The rest goes to your debt service and cashflow (profit). The key figure here is the rents. You have to KNOW what the rents will be. If Section 8 decides to give you less than you thought, you could be in a negative cashflow situation.
You need to post more specific numbers if you want to know if you’re on the right track.
For example, if you’re buying a property for $140K; spending $40K on the repairs; and the property is only worth $200K, that is not a good deal in my book. You would be buying at 90% of the appraised value. UGH!
Let’s look at the cash flow situation:
Gross rents (3 X $850) = $2,550
Operating Expenses: $1,275
Debt ($180K, 30 yr, 7%): $1,200
Cash flow: $75 or $25 per unit per month
While that’s better than losing money, $25 per unit per month is VERY LOW.
Now, if you were buying at $120K and had $30K in repairs, this would be a better deal.
thank you for your detailed response. Since I first posted, I have recalculated the numbers, thanks to your - and other’s posts, and I am now looking for final prices in the $150 to $160k price range. Potential properties would comprise of fixer-uppers in the $100k + 40/50k repairs range or turn-key properties for $150-160k. I think this will give me the right #s to make it work. Profit #s of at least $100. per unit will make it worth it for all the hassle of MF rentals. I am so glad I found this site before I made any bad investments.
MFs are forclosing at alarming rates, and price changes (lower) are the norm as I watch the MLS listings every day. As soon as my pre-approval paperwork is ready, I am going to start putting in offers that stick to the “rules” set forth here in this forum. It’s time to start investing!!!
To break down part of my initial question in this thread, can someone give me a reason not to use the equity (HELOC) in a 3-unit MF that I already own, to put a down payment on another 3family MF? If I did this, I would then refiance the new MF and take the money and pay down the HELOC, and use HELOC again to get another property and so on. I will also add to my scenario, that I own and live in, a SF that I had built in 2005 (ouch- right at the market peak, needless to say I am backwards on my home approx. 35k).