Posted by Alex on June 11, 2006 at 20:28:58:
Hi Ray,
Much, much thanks for excellent advice. To answer step by step. My gross rent roll calculation also included a $400/month basement tenant, but because he is not a “steady” type of tenant, I wasn’t sure he should or should not be counted. The basement area has a full bathroom and kitchen and is finished, but it is not an apartment that can be rented for much more than $400/month and the tenant seems like a day laborer that is transitional to this area. I logically assume that for such a small rent I can always easily attract a college student to live there, and there are 2 universities nearby.
In terms of financing, my numbers were like this: 5 year ARM on 80% of 460k, or 386k at 7% with 1pt to buy down the interest rate. An additional 10% as a second mortgage, to avoid PMI, or 46k at 8% as a conventional 30yr, and my own 10%, or 46k at prime, currently 7%, but I have a one time option to lock.
My figuring of the math suggests that my own downpayment money, of about $65k as a LOC is 6.5 years at $880/month. So I can take the $400/month of the basement tenant and apply it toward my LOC and take $480/month from my own salary and apply it as well. That way, at $880/month toward the LOC, I in about 7 years have paid off my LOC that got me into the deal in the first place. That means my exit strategy is a minimum of 7 years. I also figure at that point, the property will have appreciated at 4% per year, conservatively, and I will have paid down my initial LOC, if little of the original property itself, since this is essentially a 100% financing deal.
I know I"m probably under-estimating repair/upkeep costs. My goal was to take the $800 per month,the positive cash flow, and apply $400 of it toward my LOC and take the remainging $400 left over to act as a “repair escrow” and bank the money,not touch it. In one year, that will be $4,800, more than enough to act as an emergency repair reserve. In the second year, I was planning to take the $800/month positive cash flow, and apply ALL of it to my LOC, instead of $400 from my paycheck and $400 from the property.
So in other words, my gameplan was to start paying toward principal of the LOC starting the second year of ownership and additionally create an emergency repair/vacancy repair reserve in the first year. My holding period is a min of 7 years, and my goal is to cash out at that point via selling. Is my plan solid or has holes? I’m not starting out with much cash, so I thought this is an option for me.
Input is highly appreciated. (By the way, I can get a 6 family, with smaller rents, but 6 units instead of 4) for roughly the same price. THe deal with the 6 family is that the oil heat makes the landlord pay the heat and not the tenants and it kills the cash flow. The cost of converting to 6 separate boilers and 6 separate water heaters, units and labor and sheetrock work was estimated by a contractor at $30k.
Help appreciated. What’s better choice, this 4 family, with separate heat and so forth, two high tenants at $1250 or so each, and two “$800” tenants, or one big 6 family, with all 6 at $900/month but higher operating expenses, initially. Price very close.