Thanks for your response Keith. Now I will try to answer your questions.
I actually write alot of financial analysis in my job (I work for the US treas Depart). In our writing upper case M reprents 000’s; therefore, $42M would mean $42,000.00. Sorry for the confusion.
Why do we need to know the ARV if I’m not re-financing after rehab is completd? My idea was to get a credit facility that has an advance period for rehab expense and then start a re-payment period (12-yrs). Maybe a financial institution will need an appraised valued after rehab to lend against, but I don’t think I will have much trouble getting financing with 20% down, a conservative debt service coverage ratio on the project of 1.46x (1,040/714), an aggressive amortization of 12-yrs, and my personal credit score north of 800.
But if we look at the income approach of an appraisal; 1) NOI of $1,040 X 12-months equals $12,480, 2) cap rates almost always come in about 10%. The income approach would support a value of about $124,800 ($12,480/10%).
Why 12-yrs? This is an arbitrary number, but the idea is to get the property paid off as quick as possible while still maintaining a decent positive cash flow. I don’t need the cash flow to live. You say I could save myself over $9,000 in payments with a 30-yr mortgage if I pay an additional $170/month. Are you saying that this is $9,000 less than the 12-yr mortgage I had originally listed in my scenario or is this $9,000 less than the 30-yrs mortgage? Also, why put this on a 30-yr mortgage and pay ahead versus going ahead and putting on a 12-yr mortgage, when there is positive cash flow even with a high vacancy rate at the 12-yr.
The high vacancy rate is just caution. I like to try an think of a worse case scenario and if I can live with that anything above that is gravy. Now I know this is not the worse possible case but if I truely looked at the worse possible case I would never do anyting. In fact, I would probably only invest in Cains & Mason, Inc. You know, Cains coffee cans and Mason fruit jars.
What needs to be rehabed? Exterior is fine. Interior will be new flooring (carpet and linoleum) and paint. My $5,000 per unit maybe high, but again I would rather be conservative.
How long to rehab? I was roughly figuring 6-months ($66,000 @ 7% X 0.5 or 1/2 a year is approximately $2,000).
What are the actual taxes and insurance? At this point I don’t know the actual numbers but I think $200 per month is going to be pretty close. If taxes and insurance is higher, I can alway increase my amortization or reduce my vacancy rate. Its amazing how erasers can make real estate projects work.