My First Deal, Any Input Would Be Appreciated
I set a goal to purchase 30 rental units with a net positive cash flow of $300 per month each and i am about to make an offer on my first property.
Here are the numbers tell me what you think would be a good first offer
Rent 3 units @ 750/m each or
$27,000 year
Taxes, ins,water,sewer,garbage electricity,maintenance ($2500??),lawn care,snow removal,oil
$14,000 (rounded up)
net operating income $13,000
asking price $145,000
I will be taking a home equity loan on my presant home for the down payment of 10 or 20% (have not decided)
and financing the balance.
I would love to hear the thoughts of those of you who have done this before,
what would be your first offer?
how do i verify these numbers?
will my tax go up ?
I dont like putting my residence at risk but even with great credit bank wants 20% down, can i take a home equiaty loan on the income property after i purchase it and pay myself back the down payment?
any other comments warnings or suggestions would be welcome
thanks in advance for your help
Al
What will be your cash flow? Tell me how much of your net operating income you have left over after you make your monthly loan payment.
Let's assume that you will have just one month of vacancy in each unit each time a tenant moves. Let's assume that you will have some advertising costs, leasing costs, and legal fees. Let's assume for now that your monthly net operating income is closer to $900 per month (perhaps still a little optimistic at $10800 per year).
If your cash flow goal is $300 per month per unit, then you must pay all cash because you have nothing left over for debt service. If a 7% return on your money is good enough, then go for it.
If you decide to forego any cash flow on this property and purchase it with 90% financing (at 7% fixed), then you will be very close to a break even property, using the numbers you have provided.
Just using the numbers you have provided, this property does not make good business sense for me at these prices.
Using an annual NOI of $10800 and if you are willing to accept just $100 per month cash flow per unit, then the maximum mortgage loan (30 year, 7% fixed) you can afford to place on this property is $90000. With 90% financing, this means that your maximum purchase price is $100K.
Dave T , thanks for taking the time to go over this with me.
The all three of the units are already rented So i only deducted 2 months rent from the gross rent roll. Do you think 3 vacancies in a 3 family house all in the same year is likely?,
I also increased the property tax by 5% in case i get re-assesed. other then that these are the numbers the realtor supplied me with. I am not sure what the $2500 maintenance and 790 other is for.
1827 school and property tax
460 insurance
2750 water and sewer
852 trash removal
1978 electricity
2500 maintenance (???)
500 snow removal
1554 heat
790 other
Total EXpense 13,211
Total income 25,500 (27,000 less 2 month vacancy)
net operating income 12.289
Debt service
I am prequalified for 6% with 10 % down
At asking price of 144,900 less 10% my payments on $130,410 30 year fixed would be 681/month or $8170 per year
At this point my cash flow is $4119 per year. Now i have to figure the cost of the 10 % i borowed to put down $14,490 add in another 4500 for transfer tax and closing fees (3%). thats $8600 (rounded)
I can get this from my home equity line of credit of 5.5 percent but am not sure how to figure out what the payments will be???
I will call my bank on Monday to figure that out. But even with out that my cash flow is only 343/per month - less then $125/unit.
Asyou said these numbers dont work but what would you consider a safe cash flow?
Is $300 per month per unit realistic?
I am in NW PA
What would you offer for this property if your goal was to buy and hold for cash flow?
My income is $75,000 per year so how do tax benifits fit into the picture or should i just consider that icing on the cake and not figure it in.
Thanks to all who take the time to look at this and post a reply
Sincerely,
Al
I can get this from my home equity line of credit of 5.5 percent but am not sure how to figure out what the payments will be???
To get your payment, you could technically only figure it out for a single month. The reason for this is that it is a variable rate most probably tied to the Prime rate. As you know, Prime went down a few days ago to 4%. Some banks allow you to fix in a portion of the line, so that you can amortize your payment.
To answer your question, IF your line is interest only payments, you would take the 10% (let's say $14,000) and multiply it by the annual rate (say 5.5%) and get your annual interrest payment of $770.00. Divide $770.00 by 12 months and you would get $64.17. Some lines have a payment factor of 1%. You would then add your monthly interest payment to the principal owing ($14,000 + 64.17 = $14,064.17.) You then would multiply that number by your payment factor (1 or 2%.)
I understand the tax benefits that one can get. They are nice, though I NEVER count them towards my cash flow. Also, my purchase price is reduced accordingly until I have a positive cash flow of 200-300 per month (after ALL expenses.) I plan this much, because things always come up, that you don't think of, so it is good to be prepared...
Hope this helps
Derek
Thanks for your input.
when you say 2 - 300 per month. is that per unit or per dwelling,
the house is a 3 family
thanks again
Quote: all three of the units are already rented So i only deducted 2 months rent from the gross rent roll. Do you think 3 vacancies in a 3 family house all in the same year is likely?When do the leases expire. If they all expire in the same year, then a more prudent course of action might be to assume the worst -- all three tenants move somewhere else.
Quote:I also increased the property tax by 5% in case i get re-assesed. other then that these are the numbers the realtor supplied me with. I am not sure what the $2500 maintenance and 790 other is for.Things will always crop up during the tenant's occupancy -- plumbing problems, a garbage disposal needs to be replaced, or the HVAC system needs repair. Every now and then, you will need to paint a unit, too. These maintenance and repair items will eat up that $2500 allowance.
Have no clue on the $790 "Other" expense. Maybe this is for extraordinary expenses such as termite/pest treatment, advertising, leasing fees, legal fees, court costs, service process, or perhaps a group of miscellaneous non-recurring, unplanned, charges that always seem to hit landlords.
I do not see a replacement reserve expense item. You need to set aside money for planned major systems replacements. For example, you may expect carpet to last seven years, so contribute something monthly to a replacement reserve account so you do not have a cash flow crunch when you have a large bill. HVAC replacement, and roof replacement are other major systems that should also be considered in your replacement reserve contribution.
Quote:At this point my cash flow is $4119 per year. Now i have to figure the cost of the 10 % i borowed to put down $14,490. I can get this from my home equity line of credit of 5.5 percent but am not sure how to figure out what the payments will be???Let's assume for now that your payments on your equity line will average $140 per month, or $1680 per year. When subtracted from your prelinimary cash flow of $4119, you will have just $2439 annual cash flow (or $67.75 per unit, per month). Is this good enough for you?
Quote:My income is $75,000 per year so how do tax benifits fit into the picture or should i just consider that icing on the cake and not figure it in.Yes, tax benefits are just icing on the cake, do not make a real estate investment decision solely on potential tax benefits. For investment rental property, current cash flow should be your decision criteria.
Thanks again for your post,
bottom line - How much cash flow per unit would you consider a good investment,
I can work the numbers backfrom their to find an offering price.
Quote:How much cash flow per unit would you consider a good investment?dna816,
This is a discussion you should have with your CPA and/or financial planner. Because you appear to have a job with ample discretionary income, breakeven cash flow might be good enough for your life circumstances.
Your current age, time horizon until retirement, investment goals, current and future income needs, career prospects, risk tolerance, and total return on investment should all be taken into consideration.
Develop an investment plan, then annually review your progress. You and your advisors may decide to modify the plan to fit changing life circumstances.
Thanks again Dave,
My cpa was the one who suggested i look into this venue. My backround is in elecrical, and hvac presently i am a maintenance supervisor for several buildings in NYC. I would not do anything without running the numbers past him and a few others but was just curious as to the minimum amount you would accept per unit above the break even point.
Thanks again for your advice.
Al