Getting Ready To Purchase My First Rental -Critique Please

Hi all,
The wash DC real estate market is crazy.
I want a thumbs up or down from experienced folks
on my potential first deal. Will need to submit a
contract tomorrow.

The property is a townhome for $350K.
Rental potential is a max of $1550/month.

350000/(1550 * 12 ) = 18.81( pretty high)

This does not include the Operating Expenses like
assoc fees and taxes.

The plan is as follows.
Willing to invest $30K cash.
Have a HELOC for say $42K @ 6%
That covers around 20%
Will be doing a COFI for $288K and am told that the
interest alone will be around $1200/month for the COFI.
The $42K heloc will amount to $300/month.

So cost per month
1200 + 300 + assoc fees say 75 + taxes say 300.

Total payment = 1875.
Rental potential = 1550

I will be out $325 negative cash flow per month.

The speculation is property appreciation.
The exit strategy is to sell if
a) The market tanks pretty bad.( Say over $30K may be).
b) If the property does not get rented say for over
4-5 months.
c) Hold the property for 2 years and then may be do a
1031 to a different investment property in a different
geography.

Should i go ahead with submitting a contract or there
are red flags in this plan.

I need to get over the barrier on this first deal.

Please critique.
Thanks a lot.

Comments(11)

  • karensilver10th April, 2005

    Thumbs down! $350,000 is alot of money and for the property not to cash flow. What is the property worth?

  • Palmguy3010th April, 2005

    agree with karen
    buy somthing with a positive cash flow!

  • commercialking10th April, 2005

    Quote:350000/(1550 * 12 ) = 18.81( pretty high)

    No, its not. If you are attempting to calculate a cap rate the correct method is NOI/PRICE or, in this case 5.3%. If you are trying to do a net rent mulitplier then you have the right formula but a NRM of 19 is not a good deal.

    I have no idea what the association dues or the taxes are but both numbers strike me as light. My guess is that your negative cash flow is more like $500 per month. If we also assume 60 days to lease in the first year it looks like your first year negative cash flow is about $9,000.

    That amounts to about 2.5% of your $350,000 purchase price so you would have to see that much appreciation just to break even. The DC market has been doing much better than that so if you can afford the $9,000 in negative you might still be ok.

    Since the COFI loan has a lower rate the the HELOC you might want to consider borrowing more money there assuming the lender will let you. BTW $350K minus $30K minus $42K is $278k not $288k.

    Selling if the market tanks is probably a bad idea. Better in that situation is to sit and wait it out, pump your $6,000 a year into the deal and lick your wounds.

  • krish10th April, 2005

    Here is the 2005 assessment per the county website

    Land: $50,000
    Improvements: $193,300
    Fair Market Total: $243,300

  • krish10th April, 2005

    Thanks for all the replies.
    I have the HELOC open for a max of 100K.
    Already have a COFI approved for $380K loan amount.

    Btw, it appears that there is a speculative projection
    from CNN i guess that the DC area on the average
    will appreciate between a low of 9% to a max of 16%.

    This might be even higher in some areas of the metro.

  • karensilver10th April, 2005

    I would look for something you can buy below market that way you are not hoping for it to appreciate. Instead you will have equity going into it.

  • commercialking11th April, 2005

    Quote: It appears that there are more second home buyers
    and investors out there than first time home buyers.

    If true this is a very bad sign. About 75% of the buys should be Owner-occupants. If the investor number gets to 50% then you are almost certainly approaching bubble status. Especially if rental vacancies are high and there is downward pressure on rental rates.

  • InActive_Account11th April, 2005

    I grew-up in your neck of the woods (Sterling). I would bet your negative cashflow would be even higher than 500/month. No mention of repairs, upkeep, vacancy etc.

    I know the area is appreciating, but you are setting yourself up for a fall if you are paying 10K out of pocket each year.

  • krish15th April, 2005

    Folks,
    Yep. Passed on this one.
    The townhome went off the market the first day the
    sellers were to review the contracts.

    Sure, the market has to slow down. To the contrary,
    If you check the
    chat for realestate in washington post realestate
    section online, there appears to be high levels
    of optimism for sustained appreciation.

    -Krish

  • lavonc15th April, 2005

    If you want to send me an email via the system, I would be happy to send you a copy of the lease we use for our property management.

    **Please See My Profile**

    LC

  • JohnMichael17th April, 2005

    This should help

    http://www.uslegalforms.com/samples/VA/VA-864LT.pdf
    [addsig]

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