Good Investment?

[77jaym]

My friend and I have decided to partner up and invest in a $360,000 triplex.  The terms are seller will carry 30%, at 3% interest.  My credit is 550, my partners is 630.  The loan we were able to get for the remaiming 70% is at 10% interest.  The rents generate $1800 a mth, the total amount that we would out of pocket would be $700 a mth. due to our credit.  We will get $25,000 back at closing.  After one year we plan to sell.

Should we use the $25,000 cash at closing to cover the $700 monthly out of pocket?  

We are new to investing, and we did expect higher interest rates due to our credit scores, but is this a good deal to get us started?
   

[WilsonTaylor]

77jaym.

I see no advantage to you for buying this property.  Residential properties will typically rent for 1 percent of their value per month unless you are in an over inflated market such as California.  This property should generate $3600 in rent or should only cost $180,000 (max).  Plex's will typically generate more than 1 percent of their value in rents.  Also, you said that you would have a $700 out of pocket each month.  If you borrow $360.000 to purchase the property, your principal and interest (P&I only) will be over $3100 per month, leaving you with a $1300 shortfall before you pay for taxes, insurance and maintenance.  This is a big aligator to bite you in the back pocket.  If you are planning on appreciation to bail you out of the situation, I would warn you that you may not get what you expect from the property.  As my mother used to say, "Don't count your chickens before they are hatched".  Appreciation is one of those things that are nice to have but if the deal cannot stand on its own without it, then find another deal.

Wilson

[Roger J]

No it's NOT a good deal.  It's a VERY BAD deal.

You don't buy anything that doesn't have a positive cashflow.

This thing is either grossly overpriced or has grossly undervalued rents, neither of which you want to deal with being a new investor.

Roger

[77jaym]

After 6 mth-1yr we can re finance for a low  % which would bring our payments down to around 1700$, after raising rents our cach flow would be around 200$-300$. We would use a portion of the cash at closing to cover the out of pocket expences untill then. Still not a good idea?

[Roger J]

No, it isn't

Raj

[77jaym]

So if we somehow got an intrest rate for the 70% at 5.5 or 6 % we would generate a cash flow of about 25-100$ a mth. Now a good idea?

[Roger J]

jaym,

If you want to buy the property, then buy it.  That's about all I can say.  it's NOT a good deal, period, and the financing is the least of the problems.

As stated, from the info provided this sounds like a severely OVERPRICED property.   Trying to get more favorable financing in order to make the deal look better is only avoiding the real problem, which is the price.

If you're interested in buying multi's, I'd suggest that you read up on the subject so that you can better understand the variables that make a multi a good deal or not.

Put in layman's terms, and only using the cashflow as a guide, this deal doesn't work because there is not enough cashflow to cover ALL the debt.  Keeping it simple, you need to generate 25% more money than your payment just to break even.  WHY?  because lenders will only count 75% of rents received as income, allowing the other 25% as "emergency funds."  That means that if this property generates $2100/month (which you said you could get it up to), your payment shouldn't be over $1575/month.

I'll add one more point.  Again assuming a $2100/month gross rent, each unit is renting for $700/month.  Personally, I would want at least a $700/month positive so if you get one vacancy, you won't be going in the hole every month until you get it filled.


Roger

[aak5454]

just to echo others; this puppy looks way over priced unless it was under-rented and this place was in top, A-1 condition in a strong market.

[tone]

Hey Jaym,

This deal is a vampire ready to suck the dreams right out of your life.  One, you will be out of pocket on a monthly basis!  Two,  you are not figuring possible vacances!  Three,  what about possible repairs and stuff?  Four,  what about taxes?  On top of that if your out $700 a month and you figure upon selling later for appreciation, you would be out $8400 a year and if appreciation slows down or slumps in the area you are stuck holding on to a property that is way over-valued and way under rented.  

Just an Opinion,

Thxkbye
Tone  8)

[niravmd]

sounds like you're "dying" to become a real estate investor.
this deal will kill you.

a good investment is any deal that makes you money. if it doesn't
make you money, its a bad deal.

i'm buying brand new properties from builders at a 10% discount, with
builder paying closing costs and am getting 100% financing. after that
i break even or even make $50/mo. and i'm putting in lease-option
tenants who put down $3k-$5k. now thats a good deal!  even if
it is 12 hrs drive from where i live.