Am I Crazy Or What? Rental Props Strategy

[unloopme]

This is something I've been seriously thinking about. I think I used pretty conservative numbers, and I like what they're telling me. I know I didn't include insurance on the rental props, but I also used a pretty low rental income from each...so I think it balances out. I know this may seem very simplistic in nature to some of you, but that's why I'm here...for knowledge! From what I've been reading this seems like a VERY knowledgeable crowd, so I look forward to any comments, ideas, advice, or questions. Thanks in advance!

TARGET CAPITAL
$530,000 TOTAL ($250,000/BULK LOAN + $150,000/HOUSE MORTGAGE, OR LINE OF CREDIT + $100,000 SAVINGS/FAMILY) + $30,000 ($15,000 ON BULK LOAN POINTS & $15,000 APPROX. FOR CLOSING COSTS ON ALL PROPERTIES PURCHASED SIMULTANEOUSLY) THIS SHOULD BE CONSIDERED A ONE TIME INITIAL INVESTMENT AND WILL NOT BE CALCULATED IN THE OVERALL FINANCIAL NUMBERS. HOWEVER, THIS CAN BE RECOVERED BY SIMPLY PAYING LESS THAN ESTIMATED FOR PROPERTIES.

BULK LOAN
$250,000 AT 12% FOR 5 YEARS EQUALS MONTHLY PAYMENT OF $5,561.11 ($66,733/YEAR) (60 TOTAL PAYMENTS = $333,666)

MORTGAGE / LINE OF CREDIT (LOC)
$150,000 AT 7% FOR 10 YEARS EQUALS A MONTHLY PAYMENT OF $1,741.63 ($20,899/YEAR) (120 PAYMENTS = $208,996) HOUSE IS RENTED AT $1,700 MONTHLY ($20,400/YEAR INCOME)

PROPERTY INCOME
8 PROPERTIES (APT/CONDO) BOUGHT AT $62,500 EACH, AT AN AVERAGE OF $800 RENT/MONTHLY = $6,400 MONTHLY INCOME ($76,800/YEAR) – MINUS $9,600 FOR YEARLY TAXES

IN JUST 5 YEARS AFTER BULK LOAN IS PAYED OFF, $6,400 MONTHLY FROM PROPERTIES EQUALS $76,800 YEARLY INCOME. BALANCE OF MORTGAGE/LOC AFTER 5 YEARS = $104,498

*** IF/WHEN THE BULK LOAN CAN BE REFINANCED AFTER 1-3 YEARS OF ON TIME PAYMENTS, AT 6-7% WITH ANOTHER LENDER, THEN THE GAINS & TIMELINE SHIFT SIGNIFICANTLY IN OUR FAVOR. ***

TOTALS ON YEARLY BASIS


$76,800 - PROP’S INCOME
$20,400 - HOUSE RENT INCOME
$97,200 - MONEY IN


$66,733 - BULK LOAN PAYMENT
$20,899 – MORTGAGE/LOC PAYMENT
$9,600 - YEARLY TAXES
$97,234 - MONEY OUT

[Petunia 100]

Are you making any allowance for repairs, maintenance, or lost rent due to vacancy or non-paying tenants? I don't see any.

Will you be managing the properties yourself?

[unloopme]

Thanks for pointing those out!
Repairs, maintenance fees, and property management would be covered by myself. I'm pretty handy, when it comes to repairs and such. I don't plan on getting into anything that requires too much work. I'll be able to cover the maintenance/hoa fees from my current salary, and my hours are relatively flexible so that I am available most of the time to handle any "surprises."

Vacancies or non-paying renters are definitely a concern, but I plan to stay right on top of everything to minimize those losses. Borrowing a bit here and there to cover shouldn't be a big issue either...unless all 8 units or so go wrong somehow.

Again, thanks for pointing these out and giving me more food for thought.

[unloopme]

Double post.

[Slug]

There are also costs for incorporation. Ideally, you want none of these properties in your name. Some go as far as putting every property as its own LLC. This greatly limits liability. But, you typically need an attorney to do this set up (depending on the state you live in).

Thinking that you alone will be able to handle all repairs is really not a fair consideration of that risk. You need to allocate a % of the effective gross income that would go to repairs. 10% is common.

Additionally, vacancy is going to happen. Assume 5% vacancy.

Overall your assumptions feel far too rosy.

There are good spreadsheets on the web for this type of calculation by the way.

[jteezie]

What's your opportunity cost of time and money? What income would you make doing some other job than landlord. What return could you get in the market or other lower labor investments?

[unloopme]

Originally Posted by Slug

There are also costs for incorporation. Ideally, you want none of these properties in your name. Some go as far as putting every property as its own LLC. This greatly limits liability. But, you typically need an attorney to do this set up (depending on the state you live in).

Thinking that you alone will be able to handle all repairs is really not a fair consideration of that risk. You need to allocate a % of the effective gross income that would go to repairs. 10% is common.

Additionally, vacancy is going to happen. Assume 5% vacancy.

Overall your assumptions feel far too rosy.

There are good spreadsheets on the web for this type of calculation by the way.

Thanks for the reply. Your right about my being overly optimistic. I do feel that I have good support via family & friends(financially and otherwise,) that I can make this work. Could you please provide a link to a spreadsheet that can help me gain a better understanding?

Originally Posted by jteezie

What's your opportunity cost of time and money? What income would you make doing some other job than landlord. What return could you get in the market or other lower labor investments?

Thanks for the reply. Pardon my ignorance, but could you please "dumb down" your questions for me? I believe you asked what other salary I would have other than landlord. I plan to keep working, I have a pretty flexible schedule, so I honestly believe that I can both manage the properties and continue working.

[Fizgig]

Paraphrasing your plan, as I understand it.

You're going to borrow over $500,000 from banks and some more from family, to buy 8 condos that are unlikely to break even. Also, you're managing them yourself while working full time.

I don't like it very much. Slow down. Buy one with your savings and give it a shot, before you leverage your whole life and your family's money. Markets aren't coming up any time soon, so there's no hurry.

[snafu]

Before making your final decision on condos purchase, I suggest you review the rights of tenants. Evicting a tenant requires specific protocols so there is significant opportunity to loose rental income.

As landlord will you reside in the complex? Be prepared for the most astonishing requests and unreasonable, middle of the night requests.

[disneysteve]

Originally Posted by unloopme

TOTALS ON YEARLY BASIS

$97,200 - MONEY IN

$97,234 - MONEY OUT

Originally Posted by unloopme

Repairs, maintenance fees, and property management would be covered by myself. I'm pretty handy, when it comes to repairs and such. I don't plan on getting into anything that requires too much work.

Vacancies or non-paying renters are definitely a concern, but I plan to stay right on top of everything to minimize those losses. Borrowing a bit here and there to cover shouldn't be a big issue either...unless all 8 units or so go wrong somehow.

Well since you asked, yes, I do think this plan is crazy. You are looking to borrow hundreds of thousands of dollars to get into a money-losing situation. Note that I didn't use the word investment because an investment is something that you get into expecting to make money. By your own calculations, you will lose money on this deal. How? Your money in and money out estimate breaks even but doesn't include all expenses associated with the deal. Even if you do all repairs and maintenance yourself, which I doubt you can actually do on 8 properties, there is still a cost involved. You have to buy supplies, HVAC filters, cleaning products, replace damaged items, fix or replace broken appliances and leaky faucets, paint, carpet, etc. You also are basing your numbers on 100% occupancy which is not going to happen. If even one unit is vacant for a month, that pushes your losses even higher.

If you really want to get into real estate, buy one property and get your feet wet. See how hard it really is and how much of your time it consumes. And only do that if you are otherwise debt-free and can get into this deal without borrowing from family. That's a recipe for disaster by itself.

[unloopme]

Thank you all for the great advice...really, this is what I was hoping for when I posted.

I would actually be borrowing more like 300K from a bank, I have about 200K to invest on my own(mortgage/loc on the house I own(paid) and will rent, was from an earlier version of this idea.)

Also, yes. This would be a break even(best case) or most likely lose investment for the 5 years I outlined(less if I can refinance the high % loan after a 1-3 years.) But after those 5 tough years, the payoff would be substantial IMO.

I'm taking everyone's advice very seriously, and am starting to realize that perhaps I'm being overly ambitious. I just feel like this is the perfect time with the how the real estate market is to take a big swing for the fences. I'd hate to look back with regret that I didn't take full advantage of a big opportunity.

[bjl584]

I would not pursue this plan. I've read quite a bit on real estate investing, as it was something that I have always had an interest in. A lot of money can be made in multiunit properties and in buying multiple units at once, but that is an advanced stage of real estate investing, and certainly not a good strategy for a beginner. Start buy looking at either single unit properties or duplexes or triplexes. Start by adding to your real estate portfolio one property as a time. There is a learning curve and buying into 8 properties with a half a million in debt will send you screaming. Plan for taxes, vacancy, deadbeat tenants, and repairs. Also, plan on finding a good property management company. With you working full time, the last thing that you want to do is be fixing a furnace at 2am. I would start by looking into bank owned properties. Something that you can get into with a managable mortgage, so that you can generate positive cash flow right out of the gate. Start there, and see how it goes. If all is well after a year or so, then start to think about adding to your portfolio.

[disneysteve]

Originally Posted by unloopme

borrowing more like 300K from a bank

This would be a break even(best case) or most likely lose investment for the 5 years I outlined

There is not way this is even a break even deal so I'd get that thought out of your head. This is GOING to cost you money for AT LEAST 5 years. You are going to be losing money every single month for at least the next 5 years. Does that sound like a good investment to you? You may not make it to the 5-year mark if you can't keep up with the losses before then.

[bjl584]

OP,
Where did you get the idea to pursue this? Have you talked to a bank at all? You may not even qualify for something like this. This looks to me like a deal that would have been written before the mortgage meltdown, but today, this may not get approved. It doesn't look like you have enough capital to make this happen.

[unloopme]

Originally Posted by disneysteve

Does that sound like a good investment to you? You may not make it to the 5-year mark if you can't keep up with the losses before then.

No, that does not sound good. I appreciate your honesty and advice.

Originally Posted by bjl584

OP,
Where did you get the idea to pursue this? Have you talked to a bank at all? You may not even qualify for something like this. This looks to me like a deal that would have been written before the mortgage meltdown, but today, this may not get approved. It doesn't look like you have enough capital to make this happen.

Yes, I spoke to a lender. It's a "bulk loan" program they are offering.
Looks something like this:
·Rate: 12%
·Penalty: 1 year (you can buy down the penalty)
·Points: 6%
·Closing: One closing for 5 or more units
·Time: Generally closing within 30 days
·Down Payment: 40% to 50%
·Title: Corporate Title a must.



What about if I scale back a bit and get in for the 5 prop minimum, to qualify for this bulk loan? I would like to take advantage of this program, and should be able to handle the monetary requirements associated.

[disneysteve]

Originally Posted by unloopme

What about if I scale back a bit and get in for the 5 prop minimum, to qualify for this bulk loan?

I think this is nuts. Why would anyone want to buy anything with a 12% loan?

OP, how many rental properties do you currently own or have you previously owned? What experience do you have being a landlord?

What is your current annual income? Do you have any debt at all including your primary residence. How much do you have in savings, both non-retirement and retirement? How old are you? Are you married? If so, what does your spouse think of this plan?

[disneysteve]

Originally Posted by unloopme

What about if I scale back a bit and get in for the 5 prop minimum, to qualify for this bulk loan?

You're still looking at a deal that is going to COST you money every month for years to come. I wouldn't even do that with one property. If you can't get into a rental property that is cash flow positive, don't do it.

[unloopme]

Originally Posted by disneysteve

I think this is nuts. Why would anyone want to buy anything with a 12% loan?

OP, how many rental properties do you currently own or have you previously owned? What experience do you have being a landlord?

What is your current annual income? Do you have any debt at all including your primary residence. How much do you have in savings, both non-retirement and retirement? How old are you? Are you married? If so, what does your spouse think of this plan?

I personally have no landlord expirience, but 3 sisters and mom are all currently rental prop owners. 1 or 2 each, nothing as ambitious as what I'd like.
I make 40+K, have 29K saved, only debt is my condo which was a short sale for 70K 15 months ago. I'm 38, not married. I also own a paid home valued at about 250K.

Originally Posted by disneysteve

You're still looking at a deal that is going to COST you money every month for years to come. I wouldn't even do that with one property. If you can't get into a rental property that is cash flow positive, don't do it.

I have to say, even though your a complete stranger, your doing a hell of a job of convincing me not to do this. The idea is/was to refi that 12% to something more manageable after 1-2 years of timely payments.

[bjl584]

OP,
Think of a rental property as a stock that pays a monthly dividend(rent.) If you are not in the black after expenses, then you shouldn't pursue the investment.

If you are established and have enough properties in your portfolio, then you can afford to take a loss on a few properties for a short peroid of time. But to be taking a loss on all of them for several years, and to be completely leveraged and not hold much equity in the properties is bad business.

As I said earlier, look for ONE property to buy to get your feet wet. The money is made when you buy. Look for a distressed or bank owned property that you can buy into with a lot of equity and start generating positive cash flow right out of the gate.

[Ima saver]

I think it is a very bad idea. I decided to buy 3 single houses many years ago (when young) and rent them out. My husband is a builder and could do all the repairs.
It was a nightmare and the worst 3 years of my life. Tenants would call at 2 a.m. to say the heat was not working. You would go over just to find out their tank was empty. (no fuel)
They trashed the houses, would not pay rent and I had to evict them. I finally sold all three properties for much less than I paid for them.
I would not become a landlord again even if the houses were given to me for free.