Are we in danger of over leveraging?

[Paul Evans Jr]

My fiancé and I are currently in negotiations on a triplex and the inspection revealed some unexpected repairs. With the cost of repairs and the down payment, I’m wondering if we are in danger of over leveraging ourselves. Hopefully the kind people on this forum can lend us some advice. We have $50,000 in cash to spend on this property up front. The down payment plus estimated repairs is about $48,000. That would leave us with $2,000 of savings if anything comes up within the first month. One unit is currently rented, leaving $200 for P&I costs each month. I also work full time and we’ve been able to save $1000/month. The property is a good deal. Our numbers show $400/month cash flow. So should we go for it or is it too risky? Thanks!

[Paul C.]

Congratulations to you and your fiancé on taking the initiative to invest in real estate!

Your reserves do seem a little light and may cause undue stress. What will you do if a tenant vacates right away? A turnover could easily cost a couple of thousand dollars, plus you won’t be collecting rent for a month or so. Other unexpected repairs could add to that.

On the other hand, everything may be smooth sailing and you’ll have 17k of reserves in a year and growing.

I would suggest you do some contingency planning. Suppose the worst case scenario transpires, can you borrow from a 401k or credit card at a reasonable interest rate, sell some stock, etc.? As long as you have options and are prepared to use them, you’re probably okay.

Also, this wasn’t part of your question, but how do current rents compare to market rates? If below market, that’s some extra tailwind that can help you as tenants either vacate or leases renew. If it’s at market, just be cautious as any dip in the market could prolong vacancies or require you to reduce rents and 400/month of free cash flow could quickly become less.

The fact that you’re asking about being over leveraged is great. You’re on the right path!