Home Equity - Posted by Chuck - OH

Posted by Tom on November 05, 2000 at 09:31:27:

you have to check them out, how do you know you can raise the rent? What are the rents in the area? Do the tenents have leases? $3200 isn’t enough for taxes, Insurance and maintainance and a cash flow. Have you ever been a landlord? Eight units is alot of work to start with.

You don’t have to use your home, use your other assets, or do you just want the benefits with NO risk?

Home Equity - Posted by Chuck - OH

Posted by Chuck - OH on November 05, 2000 at 08:20:36:

Im talking to my first realtor. He is telling me about an eight units that sounds really good. ( But then he is a realtor, he has to make them sound good). He is telling me that I will need to come up with 20% down - in this case about 40,000. The properties bring in good money about $3200, but the rents are low and I would raise them immediately. My concern is that he wants me to use the equity in my own home by doing a 2nd mortgage. He is saying the seller would carry 10%. The Pricetag is 359,900, but I would offer around $300,000.

Im a little uncomfortable with using my house in the deal. What do you think? Is this normal? Also- is is 100% occupied and in excellent condition (so he says) and the neighborhood is in a good area.

Re: Home Equity - Posted by Steve (OH)

Posted by Steve (OH) on November 06, 2000 at 05:31:02:

Chuck, Dave is absolutely correct. These numbers are not in line. Plus an eight-plex is a heck of a way to start your RE career. I am not being negative, I just believe you should jump in with a SFH or duplex to see if landlording is for you.

Call me if you want to chat!


Re: Home Equity - Posted by dewCO

Posted by dewCO on November 05, 2000 at 19:01:24:

Yes it is normal, if the deal makes sense (see Dave’s response), IF you do traditional RE investing. This forum is about CREATIVE RE investing. You don’t have to take that kind of money out of your house if you focus on creative RE purchasing and controlling the property. HINT: Real estate agents are not “into” creative usually.

Re: Home Equity - Posted by Dave T

Posted by Dave T on November 05, 2000 at 14:49:51:

Before you ask about funding sources for the down payment, look at the deal itself. If all the units stay rented at $800 per month, you DO have $3200 in gross rental income. You can’t raise those rents immediately because you will have to honor all current leases. It may take a year or more to realize a rent increase across the board.

Now consider how you have to spend that money. Maintenance, taxes, and insurance will each take a bite. You did not mention how you are going to manage the property, but a property manager will cost you too. What about trash removal, water/sewer, electric, and cable TV? Unless each unit is separately metered, these will be provided by the landlord as well. If each unit is separately metered, is the landlord providing some or all of these utilities? Since you are in Ohio, if you have a parking lot you should also budget for snow removal. Is there a homeowners association fee to include in your monthly expenses?

Don’t forget your monthly contribution to a reserve fund for future capital maintenance items (new roof, heating system, major unit rehab, parking lot repair, etc.). And finally, remember that eventually these tenants will move. Each time this happens, you have a vacancy that must be advertised (and as needed: cleaned, painted, carpeted, repaired) – all expenses with no income.

As a general rule, you should anticipate that about 50% of your gross scheduled rents will go to day-to-day operating expenses and your reserve fund. This leaves you with about $1600 per month for debt service.

If you are seeking 80% bank financing for this deal, expect the debt service to be somewhere around $2500 on a $240K mortgage (15-year term, commercial mortgage at 9.5%). Just the numbers alone, suggest that this property at a $300K purchase price will cost you around $900 out of pocket each month.

I would think that this large negative cash flow would discourage you from considering not only this deal, but also a home equity loan to finance it. To much risk of losing your house if you get a couple of vacancies and can’t make the monthly payments.

There may be deals where it is right to pledge the equity in your home to finance the deal. In my humble opinion, this is not one of them.