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