How Much Reserve $$ Do I Need Before Owning First Rental Multi?
I am about to go through the processes necessary to purchase a two family property in a stable low income area (area on the rise). Any suggestions on funds necessary as reserve to tide over until the positive cash flow begins coming in??
I do know that I will need 30% of gross put aside monthly for maintenance..
Thank you![ Edited by sellisny on Date 03/08/2004 ]
You should always have 3 months Principle,Interest and taxes and insurace socked away so that in case of vacancy you can carry mortgage. The property itself should make your payments and as long as it's rented you will have positive cash flow[ Edited by maw on Date 03/08/2004 ]
I agree with the post above....however, I wouldn't pass up a great deal because you're stocking your bank account. You can get those funds through concessions at close as well. You can also do the same through lines of credits and a sound business plan.
Thank you for your insight..I think its pretty much that I am VERY nervous..its my first deal..and I worry..what if and what if and what if some more..
Quote:Any suggestions on funds necessary as reserve to tide over until the positive cash flow begins coming in??If the property will not produce a positive cash flow immediately, I suggest you pass. No amount of cash reserve will be sufficient if the property will never generate a positive cash flow.
As Dave mentioned, positive cashflow is essential, especially if you are concerned with getting a good night's rest! You don't mention any numbers, but in a low income area you need a higher cashflow than what you find in lower middle and middle class neighborhoods. My simple rule that I use in lower income areas is 4x gross annual rent =max purchase price after all repairs. If you stick to that you will have no problem getting a positive cashflow. That's not difficult to do in much of the country, but I don't know about NY.
davmille,
Am I missing something here?
If I have a house renting at $850.00 a month, x12, x4, I get a total of $40,800.00. I don't know anywhere in the free world where I can get the equivalent of $850.00/month gross on a $40,800.00 house.
$48,000.00 for $1000.00/ month gross? I'm there!
Just kidding I must be missing something. I am a little slow sometimes. Please elaborate.
JohnCl
Well, the property is out of state, not in NY..mtg(piti) is approx $1700/mnth, 2 family with total rent of $2500/mnth, purchase price is $169k.
I am thinking of doing tentants with 100% Section 8. I do not want to be a "slumlord", but I will have a property management company handle things for about $100-$150/mnth. Again, this is my first "deal", so pardon me if I seem somewhat ignorant here.
The property is only a few hours drive, and was wondering if in addition to property management, if I should be physically checking the exterior/yard 1x a wk myself?
Actually, to JohnCI, that is something else that I am curious about. I've seen a similar calc but x5, and that is significantly below what's available for sale.....
So, is it that figure (total rents ann x5 +est. expenses) equal total "ideal" purchase price?
If it is a good deal, go for it now. If I waited till I had enough money to do things, I would still be sitting on the sidelines.[ Edited by bbnx on Date 03/09/2004 ]
Thank you!!
Hi JohnCI,
Those numbers are actual numbers for low income, although as I mentioned, they are not possible everywhere. I don't think that 4xGAR is actually an outstanding deal really. I purchased a nice low income home which I only have $10k invested in and it rents for $300/month. That works out to less than 3xGAR. I regularly see 4xGAR in several different states/cities some of which I invest in. Again, this is low income(not slumlord stuff, well maintained) you are not going to find these kind of numbers in an area of town that you would walk around in at night although I and my tenants feel perfectly safe in these neighborhoods during the day. I've never even had a break in occur with an occupied unit.
Analyzing GRM of 3x or 4x works for areas where you are satisfied with cash flow only...if you also desire appreciation, paying 6x, 7x and 8x GR works in surrounding areas of metro DFW...I don't purchase propt. that I or my family wouldn't live in...and no investment is worth the other crime risks to me.
Hi Ram,
Low income is certainly not for everyone.
I think everyone has to decide on the style of investing that not only works for them but also that they feel most comfortable with. Strangely enough, I am very uncomfortable investing very much hoping for appreciation rather than having a pretty much guaranteed cash flow. I look at the statistics of available rental housing vs. demand, and the farther you go down the economic scale the greater the demand, but the less the supply. There is far more to these numbers than I mention here, but basically, it is almost impossible to not have a tenant for a low income property no matter what the economy does if managed properly. I have friends that have done well with all different types of real estate including commercial and I'm happy for them. To me the most fun and oddly enough, profitable niche of real estate has been low income although I've tried , and try, a lot of things.
Just a sugestion to keep your operating expenses down. I have a buyers agent that manages any property that I buy thru her for free. This cuts my expense by 10%, ask around with all the buyers agents and be honest say I would like to buy several homes in this area if you would be willing to manage the properties I would make you my sole agent. Who knows you might save 10%.