Re: newbie needs advice very badly! - Posted by Alex
Posted by Alex on June 05, 2006 at 10:31:38:
Thank you very, very much for your reply. I very much appreciate the answer. Yes, you are correct, I shouldn’t complain since this is a no-money down deal.
In terms of the numbers, I did the math initially counting the $400/month illegal basement tenant that helps with the cash flow. You see, the property is legally a 4 family, but the 5th tenant is a bonus. However, he may or may not be a long term tenant.
At the rent he is paying, he can’t find such rent anywhere in this city, so he should be happy, be if the building inspector comes when I get a green card for the building, I don’t know what to do with him,
except maybe ask him to go for a long day at the mall and put his stuff temporarily under lock and key in a storage room in the basement that is separate from the living space. Just kidding.
In terms of the actual tenants, the two highest grossing tenants have 3 bedroom apartments that are in excellent shape, but the two lower grossing tenants have one bedroom apartments. The vacancy factor hurts me differently depending upon which of the 4 of these tenants move out. If either of the two higher grossing tenants move out, I have $880/month negative cash flow, but if one of the lower cost tenants move out, I have only $200 per month positive cash flow instead of $700, so it’s not that big of a deal. Overall, since I’m covering all debt service from rental income,
I’m not truly complaining, just very, very nervous to take such a big step. I also realize that I need a “buy-and-hold” strategy to be a landlord and I know my MINIMUM time frame is at least 6 years and 10 years is more realistic.
I likewise know, that if I don’t take the leap now, prices will be higher and interest rates also higher, so rents will not keep up in relationship to increasing prices, so this will be even harder to do later.
There are a couple of main concerns that I have and I hope you can help me with this a bit:
a) My $404/month payment on my LOC is covering interest only. I need to pay at least $880 per month to truly retire the debt of $65000 in 80 months, or roughly 6.5 years. (7%-8% variable interest).
Do I add income from salary to recover this debt, or simply wait 6 years and wait for the equity of this property to grow enough, so if I should sell, I can recover my initial $65k at that time, plus put some money in my pocket at that time? Or do I retire the
debt faster on my own?
b) I don’t have any applications on existing tenants and they are all month-to-month. I’m inheriting the current landlord’s tenants and I have no knowlege of their payment history, employment verification and so forth. Legally, am I allowed to request “application” from
each tenant, which I could get their permission for credit check, employment verification and so forth, if they are already in the property? In other words,
it’s not really a rental application, since they are there already. Also, I can’t afford to take the property vacant, so I need to keep who ever is
there, and at least feel them out as their new landlord. How would go about collecting this important info?
c) I intend to have each tenant sign fresh leases with me, drawn up by my attorney, no matter what leases they already have, since they are all on month to month leases anyhow right now.
d) Finally, I work full time and will manage the property only part time. I will glady do all the repairs, if any are needed to keep the tenants happy,
but I don’t have enough cash flow to cover a property management company,so I plan to be “hands-on” landlord. I know many handy men that have worked for me. Is this sound?
(As a side note, I plan to bank all the positive cash flow received for the first year as a reserve and not touch it and only plan to put the cash flow in my pocket in my 2nd year).
I’m just very nervous now, since this is my first real deal and I want to do it, but I’m nervous.
On paper, all looks good: condition of property, cash flow and so forth.
Any advice is highly appreciated. Again, thank you.