New to Real Estate Investing - Might have found my first property. Need a few opinions

[Michael Silverberg]

First off I would like to say thanks in advance for any responses to this post.

I am a 25 year old consultant living in NY. 

Jumping right in...

Property cost = 550,000

SQ ft = 10,000

10 minute walk from train station, 5 minute walk to public schools. Household income over past 5 years increased over 10k.

7 units - 9800$/ month in rent (~85k /yr net )

expenses = ~30% of revenue

Building is a 40 year old brick 4 story, and current owner has been very informative and helpful with all my questions:

-Tenant payment history/current leases

-Known building issues

-Reason for selling etc.

I have a good enough job where I can pocket about 2k in saving a month just as a cash buffer in case of any issues, and I plan on keeping all extra income from the property untouched until the mortgage is paid off (about 3k a month in savings from job+net inc)

So, I am in the process of applying for a loan now, I have excellent credit and no debt. I am considering putting 40-50k down, at 4% fixed, and FIRST QUESTION: Is a 10 year mortgage to risky? even though the rental revenue will cover expenses and monthly mortgage payments? I know I will get a cushion with a longer mortgage(incase of a bad month or damage), but I am also ok with not seeing any return/income until the money I owe is paid off.

I am not going to lie, the whole idea of owing that much money is really scary, but I dont want to wake up when im 40 and regret not being more advantageous. 

I need some advice and second opinions. Please dont hold back 

[Mike Williams]

These are only my opinions, you'll probably get 10 different answers from 10 different people, and my answer is heavily based on Northwest GA information. A local Realtor that actually understands cash flow and investment property could help you decide if it's the right price to pay:

1) Your question - "10 yr mortgage too risky?" If you get the same rate for a 15 or 20 yr mortgage (or even slightly higher rate), go that route and set up an auto-draft on the 10 yr schedule. Best case scenario and this goes exactly like you plan, you'll have less trouble with DTI (debt-to-income) ratio if you decide to buy another one. Worst case scenario - you'll have more margin when things get sideways (they ALWAYS get sideways).

1a) How the heck are you getting 4% fixed on a 7-unit building?? That's fantastic. I wish I had that on my deals.

2) What is in the 30% for expenses category? 

3) I don't know specifics for your area, but I'll mention how things work here: I usually take the annual rent as my Gross Revenue, then deduct 10% vacancy, 10% repairs, 15% for insurance/taxes, 5% capital expenditures (if it's in great shape to begin with), and 10% property management. That gives you essentially half the gross revenue to use for debt service (a lot of folks call this Net Operating Income, or NOI). I take that number and divide it by 1.20 because I'd like to have positive cash flow in a deal for those other unexpected expenses. One thing I didn't include here that you may have in this deal is other expenses like water, utilities, garbage, pest, and a host of over expenses that some landlords pay. I typically don't pay those but check to be sure those aren't in the deal and if they are, factor it in...

Based on my numbers above - at that point it looks like you have roughly $49,000 in annual revenue.  If I do the math correctly based on what you told us above, I'm looking at $45,268 in mortgage payments if you're paying 4% interest over 15 yrs. That's $3,731 in profit annually with opportunity for more if you control vacancy well, manage it yourself without a property manager, or get lucky and don't have surprise expenses. If I were you, count on the $3,700 number. That's only $528 of profit/yr per unit, not enough for me to do the deal. I'd really get excited about the deal at $490,000 if it were in my area and probably wouldn't go above $500,000.

Remember though, there are all kinds of other factors involved - are the rents at market, above, or below market? Has the current owner been diligent about keeping the property up to date? Does he have proof of capital expenditures over the last 2 or 3 years? Does he have up to date leases that are clearly explaining what he covers and what the tenant covers? Are the vacancies over the last couple of years documented clearly? Have you checked with local magistrate court to see how many evictions have been filed at this property over the last few years? Is the school system that it's 5 minutes from desirable or no? 

Good luck my man, whatever you decide, wishing you the most success possible!