Posted by John on March 07, 2006 at 05:30:16:
Try posting this on the commercial board.
The thing I see here is it appears you are streaching to get into this. Consider the “What if’s” Where are your reserves?
need advice for potential rental property - Posted by Alex
Posted by Alex on March 06, 2006 at 23:22:38:
Hi Folks,
I’m a newbie and I really need advice to how to both structure the deal to my advantage and hear people’s opinion on the deal. Will see the property on Sat. Didn’t have a chance to pre-screen the owner by phone. Property is a FSBO but is listed with a local mortgage broker that lists various FSBO for a negligible fee and it doesn’t put it on MLS, but does send the seller pre-qualified buyers.
It’s a 6 family in Union City, NJ, and has an asking price of $545k, and I’m assuming it needs work, because most 6 family houses in the North East have been pushing over $600k from all the listings I’ve seen and in this hot seller’s market, I’ve even seen 4 family houses at a ridicolous $535 price. Property is very well located, in a good shopping area and near public transportation. Local rents are $858 for a 2 bedroom to $1,400 for a very high end 2 bedroom in pristine condition. The avg rent is $1,100/month typically.
The numbers below are very preliminary and I"ll know exact numbers shortly. The property taxes are $8,000/yr, insurance is $4,000 per year, and water and sewer is about $1,500/yr. The heat and power is fully segmented across all apartments, so tenants pay their own utils. The total operating expense on the property is about $20-$23k per year assuming a $5,000 cash reserve for repair related expenses. So, without mortgage expenses, property has about $1,600/month in fixed expenses.
The rent roll is unknown at this time, but is assumed to be $6,000/month if fully rented, or better, or about $72,000 in gross rents and at 75% of full occupancy, or 4 out of 6 rented, is about $57,000/yr. I’m using a line of credit on my own home at 7% to borrow 55,000 for a downpayment or about 10% of the required 20% for a commercial property. I hope to get the remaining 10% from seller financing. At about 7.5% in a primary mortgage on the remaining $435k (545k-110k=$435k) is about $2800/month. So, these are all rough numbers and my combined expenses of mortgage and fixed expenses is about $4,400/month, and an income of about $6,000 per month, or slighly higher, for a positive NOI of $1600/month. However, because my interest only downpayment money is costing me money, and if I get seller financing on the remaining 10%, I figure at least $500/month or more is taken away from my $1600 to produce an effective positive cash flow of $1,100 per month.
On paper, with the numbers I have it looks like a winner with positive cash flow. Have to see condition and learn if the tenancy has been stable.
Basically, I have enough money to cover 10% not 20% down and can cover closing costs, and I hope that the seller will carry the remaining 10% in the form of a 5 year note of interest only, with a baloon at the end of 5 years for the full balance. I then hope to sell the property in 5 years and cash out all loans and pocket the equity increase.
Is this a good deal? Good location to gaurantee steady tenants, and a price of $545? What can I do to induce seller to give me some seller financing? Is my newbie analysis too far off the mark? This is going to be my first deal and first time as a lanlord. Any advice appreciated.
Re: need advice for potential rental property - Posted by speednxs
Posted by speednxs on March 18, 2006 at 09:03:52:
Essentially you are aking for 100% financing. You have none of your own money in the purchase price. All the money is borrowed one way or another. This is quite ambitious. You did a pretty good job of analysing this for a newbie, but I am a bit concerned about your actual calculations. You just need to continue to improve your analytic skills. Let’s look at the mortgages.
$318/month = $54,500, 7% interest only HELOC (almost certainly adjustable)
$340/month = $54,500, 7.5% interest only seller financing
$3512/month = $436,000, 7.5% fixed, 20 years (commercial mortgage)
$4,170/month total mortgage payments.
Even if you get a 30 year fixed that would be $3,048/month on the $436,000
100% financing is a tough nut to crack.
Good Luck