Hello, I am about to close on my first rental property, and BAM Covid-19 comes blasting in from left field, turning everything uncertain.... I'm just looking for some advice on how some of the more experienced investors would handle my situation.
Here are the facts:
1) I am under contract to close on a single family for $75k in the Kensington Section of Philadelphia (the rough side. C-D class). The home is worth about $100k (my own unprofessional comp. review). Before the market drop, the area had a lot of promise to appreciate (may still?)
2) The closing is on Friday, 3/27
3) I have $6,000 earnest money invested, paid for using my HELOC (non-refundable)
4) the property needs at most $5,000 worth of work. (cut that in half if I do it myself). So all in, including closing I'm looking at +/-$85k.
5) comparable properties in the immediate area are renting for $900-1,100 per month.
6) I am purchasing the property using my current HELOC, which has a variable rate (4.5% last I checked, probably lower now since the Fed rate dropped again since I last checked). The rate won't increase more than 2% per year, with a max. 7% increase over the life. I also have the option to lock in a fixed rate, but that is currently at 6% over 20 years (last I checked, could be lower).
7) I will have $0 of my own money invested into the property (at least that's how it's planned thus far)
8) The original plan was to purchase with my HELOC, then after closing, cash-out refinance my personal home to pay off the HELOC, and essentially have two homes on one mortgage. My lender was on board, and saw no problems with this. If all went well, my monthly mortgage payment would remain the same (+ taxes & Insurance). As we all know things have turned upside down in the last two weeks. The lender still thinks it will work out, and assures me not to worry, but everything I read worries me.
9) If I make the minimum payment on the HELOC while the house is empty, it will only cost me around $350/month to carry. (not including taxes & Insurance, which I included for the first year in the $85k figure above. So for the immediate future, I am only responsible for $350/month. (I'm not using these numbers to calculate my ROI or Cap Rate, just to get me through a possible long temporary vacancy if people decide not to move due to this whole virus thing) The true holding cost would be around $660/month (including principle, interest, taxes, insurance & maintenance).
My current financial situation:
- a) I have $16k in accessible savings that was meant to be my cushion for this property in the event that I had to hold it for a while vacant, (still is).
- b) I work in the architecture field, which is dependent on a decent economy to get new work. I think my position is safe, but that could change.
- c) My significant other is in the service industry, so she is temporarily out of work, unpaid. ( I can't imagine that it will last forever.) She has about $10k saved for this type of situation, which should cover her expenses for at least 5 months of no work.
My Question:
1) It seams like it will be increasingly difficult to get a mortgage in the near future. I have excellent credit, and a good amount of equity in my home. Where do you see the mortgage climate going in the next couple of months.
2) Would you back out of this deal, and forfeit $6,000? I'm not experienced enough to know when I'm chasing an investment down a hill.
3) I've read that in a down economy, lower class properties tend to fare better than their counterparts because renters begin to downsize their lives. Have you found this to be true?
I'm sure I'll think of more question, but those are the main ones on my mind. I'd I think of more, I'll post in the comments.
Thanks in advance,
Rob
