Please help -- question on financing my first rental property

I’m looking for some advice on financing my first rental property.

I’ve gotten a bid accepted on an REO for $94,000, on a property that has an ARV of around $125,000. Closing costs are going to be around $3,500, and repairs should be no more than $6,000.

This property should rent for $875, based on talking to some nearby landlords.

Now – I’m applying for a 80% loan on the property at 6.125%, 30 year. ($457/month). The balance will be obtained by a home equity loan on my primary residence for $25,000 at 8.125%, 30 year. (any lower than that results in a 9% interest rate). Payments on this are obviously $186.

So – based on a rent of $875, subtracting $115/month for taxes $50/month for insurance, and $643/month for debt service, I’m left with $67 income per month from the property.

That’s lower than I’d like, but my goal is to limit my out-of-pocket cash for the property. With $3,500 closing costs, and my estimates of a maximum of $6,000 in repairs needed, this deal requires $9,500 cash. But my $25,000 home equity loan, after providing $18,800 for the rest of the purchase price, offsets my downpayment expenses, and I only need to come up with $3,300 out of pocket.

The $6,200 I save in cash, I will instead reserve in CD’s bearing 5.5%. This is approximately $28/month, so my real cash flow is about $95/month.

I’m figuring about 5% vacancy and 5% repair costs, so based on my rental rate of $875, I’m slightly ahead on my cashflow each month ($95-$87.50 = $7.50).

Annually, I’m expecting my after-tax cash-on-cash return on the first year to be around $2920 when I consider expected monthly cashflow, depreciation, and interest payments. On $3,300 cash down, thats a 89% cash-on-cash return.

This is my first real estate deal. Am I cutting things too close in trying to limit cash required? Ideally I’d like to have a better cashflow than this, but does the expected breakeven cashflow raise any red flags?

I’d really appreciate any advice from more seasoned investors. Thanks!

Chris Heekin


Your way low on your vacancy and repair percentages. How did yu arrive at these numbers? I use 25% for vacancy and 10% for repairs on my investment property estimates.

Vacancy rate and repair percentages should be determined by location and condition of the property. On Vacancy I use a range from 8% to 16% depending on the location, rental need in area and desirability of my property. My Repair percentages are dependant on the condition of my property if I have just gone through the property and rehabed it then it will be lower at 5% if they are older properties then I use 10%.

Remeber to keep repair money aside for larger repairs like roof and heating system.

Good Luck

Before I start know that I’m very knew to REI and I might not be correct. But I’m almost positive I’m right.

I don’t like your cash flow. Real world operating expenses range from 45% to 50%. (thanks propertymanager) Therefore you take your $875 rent, divide it by 2, giving you around $438, plus you have to pay your mortgage which is $457.

$438 - $457 = -$20 a month in cash flow, doesn’t look like a good deal to me!

Serio is exactly right. This is a very poor deal. It is a negative cash flow deal and you will have 83% of market value in the property IN A DECLINING MARKET. I would not do this deal.

It is silly and pointless to try to guess at individual expenses like vacancy, repair, etc. The truth is that it is the expenses that the gurus never mention are the expenses that kill most new rental property businesses. How many evictions will you have this year? Will you be sued? Will an angry tenant do extensive damage? Will any captial expenses come up? How about advertising? Fuel for your vehicle? Management? Office Supplies? Legal Fees? Court Costs? ETC, ETC, ETC. You can’t predict what will happen with a particular property in a particular year. The only way to be accurate is to use a number that anticipates all of the real world expenses.