All Forum Posts by: Michael J Scanlon

I wanted to help out and share a breakdown from a first time investor client of mine to show what can be done. 

3 Unit Purchase Price: $289,000. Seller Credit: $8670. Down payment: 5% or $14,450 (home possible loan.) 

Actual closing costs: $7940. Repair credit used as a price reduction: $2500 (updated 5% down $14,325). Closing date: June 1, 2020. First mortgage payment: August 1, 2020. 

Total rental income: $3500/month. 

$14325 - excess credit = $13595. $3500 rent credit at closing + $3500 deposit credit + 110% tax proration ($3001.90) = 10,001.90

Initial Earnest deposit: $5000. Cash to close: None; buyer credited $1436.90. 

Buyer put $3500 into security deposit account but received $3500 rent for July. 

Total out of pocket investment by time of first mortgage payment: $3563.1 

Monthly payment: $1951. Rental income: $3500. Reserves: 20%. Cash Flow: $849/month. 1 year reserve account: $8400

Total cash flow profit year 1: $10,188. Total investment: $3563.10. Cash on cash return: 286% 

Plus the buyer turned the basement into a legal 4th unit which should receiver $800/month when she moves out and increase cash flow to $1489 a month with monthly reserves of $860. Actual expenses are far less but buyer has been making upgrades. I would expect the property to now appraise at around $330,000 minimum with upside. All for $3563.10 plus some reinvesting into the property from the reserve account. 

Welcome. If you ever need a referral partner in Chicago, don't hesitate to reach out. 

Hi Chris,

I've messaged you. 

There is definitely better numbers though this isn't going to negatively cash flow. I think there are slightly better areas for appreciation (bronzeville, hyde park, humboldt park, hermosa, etc). Even further out are Garfield Park, Austin. You should be able to get 10-22% cash on cash return with 25% down and significantly higher with less than 25% down in the Chicago market. (18-22% seems to be the best deals I see and 10-18% are acceptable). 

You certainly won't lose based on the numbers presented but there may be better. 

If you only owe $350k on a $750k property and can rent it out at rates that make sense for a $750k property, your own cash on cash return is infinite since you aren't investing anything yourself so that metric is great. Depending on the rental rates, you would want to calculate ROE (return on equity) and you could potentially see what rents you are getting and refinance some equity out to use on other deals which would increase your ROE, technically lower your ROI on this property but would raise your overall ROI if used on another cash flowing property.

@Peter Korty

Yeah that is possible. My mind immediately went to thinking you would be buying it as an LLC but if not you'll be able to get the lower interest rate.

I guess though assuming the mindset of rich dad, poor dad. It's not if it makes sense, its how it makes sense. So what price would you need to buy the note to get excited? I already spoke with another investor who regularly buys notes and said she does so at usually $0.65/dollar. So if that works then you're looking at cashing out the current note holder for $22750. 

I think if you have the ability to do that, I would. If you meet the income requirements (below $69k) you could even do a 5% down home possible loan on a multifamily and then in year two still use an FHA for another multi. But if you want to do a regular conventional and then an FHA, and have the ability and DTI, I would.

Get yourself a house hack and buy for cash flow. I wouldn't worry about appreciation. If you have a longer time horizon, you'll be fine even if prices do dip a little over the next year or so. 

Couple things:

1. Is this going to be a house hack? Because if you're buying it as an investor and never living in it, you'll have to adjust your interest rate up to at least probably 4.75%. To get 3.3%, it would have be be owner occupied. 

2. You accounted for no other expenses outside of management and vacancy. What about repairs/maintenance?