Financing Strategy Ideas for 2 Condo units within short timeframe

General Real Estate Investing
14yFollow

Financing Strategy Ideas for 2 Condo units within short timeframe

Jeff Bridges
Investor · Hyattsville, MD · Member since 2012 · 822 posts · 441 votes

I have decided to dive head first into a rental property with a strategy to landlord for long term.

My strategy was to start with a condo apartment, gain experience and proceed in buying more units later on, however 2 good opportunities landed on my plate and I want to see if I could close on both properties in a short timeframe.

I have a bank accepted short sale unit in contract for 40k and a 54k short sale unit also in contract but pending bank approval (had prior pre-approval at the price). Each unit has potential to generate 5-7k annual after-tax net cash flow, which seems worth my while.

I'm trying to figure out the best way to finance both of these projects especially given the short timeframe that they might close within one another. I have mortgage approval, but its only realistic to close on one unit at a time and given the short timeframe between both closings, my lender (or any other) wont support both projects simultaneously.

I was considering paying cash for the 40k unit (from savings), either a month after (or 6 months seasoning), getting a penfed HELOC with no closing costs for 4.75% and getting back all if not an additional 10k out for future potential purchases (assuming this meets 80% of the appraisal value)
This would allow me to use my conventional 5% 30yr non-owner financing for the more expensive 54k property with 20% down (from cash savings), and leaving the financing at that... (conventional on one/ HELOC on the other)
Don't have enough cash to buy both outright and then obtain HELOCs for each, which appears better since the HELOC has no closing costs while traditional mortgage does.

Does this seem like the best strategy for leveraging and not keeping too much money tied into both units? Is there a way to have even less equity tied into the 54k property for future potential purchases such as also getting HELOC? I understand that one should ideally have 5-10k equity left in each property after financing. any other possible suggestions on making the financing work for both units and keeping original cash investment low?

0Reply
21 views

4 Replies

Jump to latestLatest
  • Jeff Thompson
    San Diego, CA · Member since 2011 · 86 posts · 9 votes
    14y

    You didn't state the FMV of the places or if they're needing repairs. HOA's can kill cashflow and can change, so be aware of that as well. If the investor to OO ratio gets out of whack financing can become difficult (if not affecting your financing, it will affect the values).

    If you haven't already, I'd recommend reading this article on deal analysis:http://www.biggerpockets.com/renewsblog/2010/06/30/introduction-to-real-estate-analysis-investing/ Be sure to do your calculations and ensure they are good rentals.

    Here's a thread I started looking at a condo as rental deal: http://www.biggerpockets.com/forums/88/topics/72615

    0Reply
  • Jeff Bridges
    OP
    Investor · Hyattsville, MD · Member since 2012 · 822 posts · 441 votes
    14y

    Jeff: Thanks for the links. They were both relevant helped bring my NOI back to reality and give me a better way to do deal analysis. Further, I have a little more confidence in using condos for rental property even if the condo fee costs more than the mortgage itself (in my case $325 and 285 respectively!). Completely eats my potential return.

    Unit 1
    Price: $40,400
    FMV: $41k-$61k
    NOI: $541
    Cash flow: $273
    COC: $273*12/ $10000 (10k estimated repairs)= 33% cash on cash return
    (assuming 40k HELOC after repairs)

    Unit 2
    Price: $52,500
    FMV: $60-80k
    NOI:$910
    Cash flow: 677
    COC:$677*12/ 16,000 (10,500 down+$3500 condo lien payoff+ $2000 repair costs)= 50% cash on cash return

    Unit 2 is a clear choice for a promising income unit and meets most people’s criteria such as 50% rule. Unit 1 is unusual since, depending on the financing direction, I hope to have less than or equal to 10k capital invested.

    0Reply
  • Jeff Thompson
    San Diego, CA · Member since 2011 · 86 posts · 9 votes
    14y

    Those NOI's sound too good, are you sure you're not being overly optimistic on your rents and/or under estimating expenses?

    As for financing you need to start talking to banks and line up financing now. It might be difficult to get a HELOC on your investment properties and may have to go with cash out refinancing (or move in for OO). It's best to have each step of financing lined up before you even make your offer.

    0Reply
  • Jeff Bridges
    OP
    Investor · Hyattsville, MD · Member since 2012 · 822 posts · 441 votes
    14y

    [b]Jeff: I believe I'm being fairly conservative with my expected expenses for unit 1, but you are right, the rent could be optimistic but not overly so. The last tenants were paying $1000, but were living in sub-standard/ pre rehab conditions (the place is a dump). The area rent comps generally command $1100-1300 depending on the level of amenities. This is right on the border of DC in MD, where home prices are not super high, but they still command a high rent with proximity to DC area. I've reworked my numbers and found out the HOA is lower than originally advertised.
    Option#1 -NOI: $1300 * .88(12% vacancy) - $197(taxes) - $42 (insurance) - $250(HOA)- $42 ( $500 annually repairs)- rental license ($9)= [/b]$604
    Option #2 (less optimistic) NOI: $1200 * .88(12% vacancy) - $197(taxes) - $42 (insurance) - $250(HOA)- $42 ( $500 annually repairs)- rental license ($9)= [b]$516

    $40k HELOC @ 15yr payments will cost $311/ Month.
    Cashflow will either be [b]$293 or $205 a month depending on monthly rent price above.
    Conservative rent price COC=$205*12/$9000 (more accurate repair estimate from contractor)=[/b]27%
    Alternatively with $1300/ month more optimistic rent:
    COC=$293*12/$9000= [b]39%

    While ultimately the COC seems to be worthwhile, I ultimately was trying to figure out financing recommendations. Its hard to get preapproved for a HELOC if I don't yet own the property no so that will be hard to do (that will be a dice roll, but I've spoken to my credit union and vetted all of the requirements). I already have mortgage preapproval with my broker, so that is ready to roll for the other property.

    I'm limiting discussion to unit 1 since I found out last night that on unit 2, the HOA will not accept our settlement offer of $6k on a $16k outstanding balance (seller hasn't paid dues in 2 years) to make the deal happen. Not only that, but they are demanding the full outstanding balance and don't seem to be open to a settlement offer of any kind. Their listing agent seems to have given up and asked me to sign a contract release but I pushed back and asked her to escalate the case, upload new docs to equator showing hardship on paying the HOA dues and unwillingness of HOA to settle for outstanding balance at all, and see if they make an exception. I realize that BOA doesn't pay for HOA dues, but they have made exceptions before and it's worth asking and being persistent especially given that no other buyer would pitch in that much for dues in addition to the asking price.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free