Originally posted by Jon Holdman:
Lets be generous and assume you can buy such a building for $800,000, and that you can get a 30 year 7% loan. I know rates are 5.5% but that's for the best borrowers with conforming loans and 20% down. Lets also assume 40% for expenses rather than 50% because you're going to be right there to work on anything, show a vacancy, etc. Further, you'll have one tenant who will never be a bit of trouble although they will never pay a dime in rent -- you!
Scheduled rent: $7200/month
Expenses: $2880/month
Lost rent: $1800/month (your unit)
NOI: $2520/month
Payment: $5322 assuming 100% financing
Cash flow: -$2800/month
So, you're going be forking out $2800 a month in "rent" while you hope for the place to appreciate. You're paying an extra $1000/month over what it would cost you to just rent a place.
Now, lets put 10% down, plus closing costs (about 2%) and loan origination fee (1% typically, though could be more for a loan like this.)
Total cash invested: $103,200
Cash flow: -$2270/month
Cash flow: -$27,200/year
So, you're investing $103,200 and losing $27,200 a year. Yes, there will be some tax benefits. But if you can cover that $2800/month loss, I'd guess your income is pretty good, and you may not be able to take those benefits. The rent income would be tax free, but you don't pay taxes on actual losses in any case. So, the passive loss would only be able to be used to offset other income if your AGI, not including this loss, is under $150K. If your income is under $150K, you're not getting this loan.
Keep in mind, too, that when you sell real estate, the costs each up at least 8% of the sales price. So, if you put 10% down, plus those other costs, and end up selling in three years for the same price, you'll pay $64,000 in closing costs. That will net you $736K. You'll have to pay off a $720K loan, leaving you $16K.
If the property depreciates more than 2%, you'll have to bring more money to the table to sell. If the property depreciates 20%, which is entirely possible in my mind, it will be worth $640K. It will cost you $51K to sell, netting you $589K. But you still owe $720K. So, you have to bring $131K to the closing table.
Thats a grand total of $213K in total losses.
Jon, thank you for taking the time to run through these numbers with me. I would have never known how to break down the expeses of owning a building like this.
I'm Assuming that the expenses category is including things like property taxes, insurance, maintenance, pest control....am I missing anything important here?
Once the numbers are broken down it seems that to make this pllan of mine work, I will need to find a 4 unit at a price around $400-500K (assuming the same rents) to make this work.
Also, regarding max conforming loan,(let me see if I have this right) for 2009, the max amount I would hypothetically be able to borrow is $720K, assuming that i have great credit (which i do, btw) and a large downpayment. Just exactly how substantial of a downpayment is needed for a loan of this size? You mentioned in the neighborhood of 20%. It is completely irrational to hope for a loan of that size for a borrower with pristine credit, good job, and say, 10% or less?
Again, thank you for all of your time and responses.
/Mike