Over leveraged?

Question

I have an opportunity to purchase an 8-unit in a solid area of buffalo NY. I currently own 3 duplexes and want to make the jump to multi. Long story short, the bank loves this apartment, giving me a 10 year loan, 20 year am with 5 year reset @ 80% LTV and 4.5%. However I don't have the funds for 20% down, so I'm planning to use a 0% credit card offer for $60K to cover it - the repayment terms for the $60k will make payments $900/month for my down payment; and after my note payment ($1744) and then 50% expenses, I'm left with only $100/mo cash flow - a combination of borrowing almost the entire purchase as well as a 20 year note. I can increase rents a total of about $250 fairly quickly - the cap rate is 9.6%; ROI if you count the down payment as my money is about 17.7%. Looking for feedback as the first 5 years or so I'd really only be gaining principal pay down of both my down payment and the bank loan.

Luc Boiron · Answer

To me, it depends on any reserves you may have and your income. Is your income high enough to cover the expenses from this property for a while if something goes wrong? Or would you go bankrupt? If you have the ability to cover anything that comes up, and the property is a deal, I would go for it. Otherwise, no.

Mike Moran · Answer

the  biggest issue with this one, is the 20 year loan term from the bank, and the 1.5% payment structure from the 0% offer every month. The property is in good condition and would only need approximately $1000 per unit, and only when a tenant moved out, to bring it up nicely and most certainly increase the rents.  The issue is, I am not getting a lot of cash flow upfront, but instead I'm getting principal paydown because the long term is so short. I am essentially buying my equity stake with a 0% offer instead of saving $60,000 over 18 months, I am using that $60,000 now and paying it back over the same 18 months. I don't foresee any large expenses, and I can use the rental profits of my other properties to offset the lack  of cash flow on this one. The $100-$150 per month cash flow is based on current rents and not taking an increase in rent into account. The expenses at 50% take into account maintenance, reserves, and vacancy.

Imran Patel · Answer

Hi Mike,

Below are the questions that came to mind as I read your post.  I understand you already have a few properties under your belt, so please pardon me if I’m stating the obvious:

How long is your 0% interest rate offer valid for? What would your interest rate/payment be when the 0% offer expires?  Is there a plan to payoff the credit card with some form of refinancing within the 0% interest rate period?

Is the 100/mo cash flow with or without the rent increase?

Allocating 50% for expenses looks to be the general rule of thumb on BP, however what kind of condition is this property in? If the property is due for renovations or major repairs soon, then you may need to budget higher expenses, which will likely eat up your profits.  Do you have a large cash reserve in place already for your other properties which may help out with unexpected expenses at this property?  If your other properties are cash flowing nicely, they may provide some buffer, but it’s also possible that this property eats up your existing profits.

Keeping in mind my limited experience, this deal seems risky to me unless you can lower your monthly payment obligations somehow.  Would refinancing another property for the downpayment on this deal be an option? i.e. would the increase in the mortgage payment for an existing property be lower than the monthly payments on your credit card? This approach could provide a higher monthly cash flow.

Full disclosure, I’m new to the real estate game.  I own a 2 bdrm condo in Chicago, which I had to buy with my own cash because I’m from Canada and US banks won’t finance me yet (and I wanted to avoid commercial lenders for now).  I’m working on building my credit history in the US so I can refinance my property with a US bank for down payments on duplexes and triplexes….what I’m trying to say is that I’m still figuring out the financing end of things.

FYI I live in Toronto and work in Buffalo at M&T Bank. It would be great to meet up sometime to discuss deals & strategies in the Buffalo area, I’m looking to start buying in the Buffalo area later this year once my US credit history is established.

Mike Moran · Answer

on Kenmore Ave - near st joes. Lake shore savings. They don't always do 80% - but consider it.

Chris D. · Answer

Also, for future knowledge, what bank are you working with that will let 20% down?

Chris D. · Answer

Mike, may i ask what street this is on?