Background
My wife and I have lived in our principal residence for 8 years and accumulated enough equity to take out a HELOC (currently at 4% interest) to use for a down payment on our first rental property. Being in a market as expensive as northern NJ is, we knew that this wasn't going to be easy. In addition, we wanted to find a property which would not take any major renovations. We both work full time, and we wanted to learn the investment & rental ropes first. Perhaps, in the future, we may look at more of a BRRRR type deal. This made our process even more selective.
Our Team
A friend of mine is a real estate agent and also has a background in finance. I called him up when we began our process. I knew nothing of the off-market deals, wholesaling, auctions, etc. at the time, but I knew that my friend would certainly be able to help us work off of the MLS while also understanding the financial/investment side of things.
We've been working with our mortgage broker since we purchased our primary residence, and he has proven immeasurably helpful with refinances throughout the time we've known him. He also was happy to work with us on our new investment.
We got introduced to our attorney through our real estate agent, and, so far, we've been very happy with her. Specifically she has been helpful guiding us through the process.
Requirements
down payment: $50,000 (25% down)
max sale price: $200,000
Our max down payment available (through the HELOC) was $50,000, with closing costs on top of that. We wanted to make sure that whatever we use of the HELOC, it is not exhausted. We want to have a cushion for other expenses/repairs that pop up early on. Putting 25% down plus points would leave our 30-year fixed mortgage rate at 2.75%. We could obviously either put less down or buy a more expensive property, but we wouldn't be able to find that interest rate.
type of property: SFH or condo
Most of the multi-family homes in northern NJ that were on the market either needed significant renovations or were priced out of our range. This left us with the option of a single family standalone home or a condo. If we went with a house, we'd end up paying a manager. If we found a condo in good shape, we'd plan on managing it ourselves.
The Offer
purchase price: $205,000
mortgage APR: 2.5% with points
down payment: $51,250
closing costs incl. points: $9,000
rental income: $1,800/month
After looking for a few months and crunching numbers on over a hundred properties, we saw a condo in a decent area (with great accessibility) come on the market. We called our agent and saw it that day. The numbers seemed to work out, the condo was in very good condition, and the HOA is well managed, so we made an offer. We ended up coming in only slightly above asking price, and our flexibility was one of our assets. The current owner still needed time to find a new place.
We ended up negotiating a Use and Occupancy agreement to allow the seller to stay in the apartment while he looks for his next home. He'll be paying carrying costs (interest, taxes, insurance, HOA fee, utilities) for the first 45 days and full rental price ($1,800/month) after that. He must give us 45 days notice of his intent to leave. We close soon.
Once we get the condo rented, the numbers end up looking like this:
The numbers assume a yearly 3% increase on all expenses, 2% increase in rent, and 1% increase in value (condos are whack). We will be managing the property ourselves.
Given that the interest on our HELOC will start out at $200/month, the cash flow more than covers the HELOC payment.
The Plan & The Future
We plan to aggressively pay down the $60,000 HELOC balance using all net income from the condo plus what we can put in from our regular W2 income. In a couple of years, we should be at a point where we can repeat the process, or maybe even look at a BRRRR property. The more properties we own, the faster that that HELOC will be paid down each time, hopefully allowing us to create a nice portfolio within 10 years.
What Do You Think?
How does this look to you? Did we miss anything? Do you have any advice for things to watch for as we move forward?
Thanks so much for taking the time to read!
