Crazy potential equity!Can this be done? (long) - Posted by dknj23

Posted by dknj23 on July 12, 2003 at 08:38:55:

thanks James for your response. here’s my story. i make 52k yr doc, fico 720, monthly debt payment of $220 only for a credit card THATS ALL and two investment properties that have positive cash flow of $220 and $340. But for the purpose of lenders 75% of rental income I guess I have a monthly debt of -$35 and -$91. So total monthly debt is $346.

Would I be able to bring absolutely nothing to the table at closing and use the equity in the property to pay closing cost and cash out some equity like $50,000 in total for other properties?

Crazy potential equity!Can this be done? (long) - Posted by dknj23

Posted by dknj23 on July 12, 2003 at 01:16:31:

Hi All,
Here is the situation. I have come across a seller that would like to sell 3 units in an apartment building of 66. The sale is contingent upon all three units being sold together for 100k whereas individually they would go for a total of 230k.

Now here’s the kicker. The three units are all rent controlled and are being rented out to the elderly. Various ages late 50’s, late 60’s and 80’s.

If i purchased this unit for 100k i would have a negative cash flow of about -$200 a month after all expenses and piti.

Obviously this seller knows that he is selling at a steep discount because rent can not be raised hence fewer buyers. Unless these tenants break the term of their lease by paying consistently late or pass away, there is no way rent be increased to market level.

If all three units were vacated and rent was raised to market level than I would have a cash flow of around $600 a month which is substantial.

So here is my question. I do not want to wish that the current tenant pass away because that is bad karma even though that would be the quickest way to raise rent. So with that in mind, if the current market comp for all three units combined is 230k and I buy it for 100K will the mortgage company instantly give me equity of 130K?

Being that I will have negative cash flow on these units can I cash out some of this equity so I can continue to buy other units that can offset this negative cash flow?

What mortgage lenders would allow me to cash out of a investment property? do they do this? i know if its owner occupied you can refi cash out but i’m not sure about rental props.


Not gonna happen - Posted by DaveD(WI)

Posted by DaveD(WI) on July 14, 2003 at 09:18:55:

This is a great deal. . . for your tenents! I’ll admit up front I’m not involved in rent controlled areas, so I don’t have specific expertise here. What I can see though is you won’t have very much control of your property. Without examining your numbers it appears you get to buy a loser that might exceed your own lifetime. You can’t ever get them out! Trust me, these tenents know a good deal when they have one, and betcha they know all their rights and how to hire lawyers to enforce them.

I wouldn’t touch it with a ten foot pole. At the end of the day, an income property value is determined by its INCOME! As long as it’s potential income stays cut down by law to a miserable level, so will its value, regardless of what others will tell you. On the other hand, in addition to the “great” price, can you also get them to seller finance, lets say 100 payments at $1000 per month. With straight equity build-up, then it may be worthwile to nurse a loser.

All the best. . .

BTW, you bank won’t give you diddly for your equitible interest in this one. Not gonna happen.

Re: Crazy potential equity!Can this be done? - Posted by James Strange

Posted by James Strange on July 12, 2003 at 06:30:42:

Yes it is posible to get a loan on negative cash flow properties. But this negative cash flow will count against your debt to income. Depending upon your income and other debts this negative cashflow could prevent you from obtaining other loans.