Questions About Crunching The Rental Numbers (newbie)
I'm really looking to get involved in purchasing multi-family (2-3 fam) properties and renting them out for both the build-up in equity and the positive cash flow, but I'm new to REI and have been doing a lot of reading. But I just really need someone to help push me in the right direction.
Here in the Boston suburbs, an average 2-family house will go for easily in the $500k-$550k range.
I don't have much cash available for a down payment or closing costs, but my credit score average is 693 (between the 3 CRA's) and I also dont pay any rent or other housing costs. (just a couple cards and my car payment)
I've been looking at some listings in my area, but I don't know how to take that FMV (which is negotiable), the prop taxes, and average area rents and work out the expected cash flows assuming full tenancy (this is also a college town w/ 2 schools nearby).
Second question is after looking at all the different kinds of financing avail I'm still not sure what would be best to try and qualify for. My income is derived from self-employment (which is always a bear to provide a fair picture of it) and I'd like to be able to find 100% financing or some way that allows me to minimize how much it will require me to put down up front... Worst case I could potentially get some cash on note from a family member but I'd prefer to avoid that if possible.
I really want to be able to get involved and close my first REI rental deal in the next few months, but I want to make sure I completely understand the whole process before so I don't go for a bad ride.
Thanks!
Let's start with your financing. Can you afford it? A $500K loan at a generous 6% interest rate will cost you $3000 per month in debt service. Taxes and Insurance are dependent upon the property.
Just to cover your monthly loan payment, each half of a two-family will need to bring in $1500. Now add in the cost of property taxes, hazard insurance, an occasional vacancy, utilities, advertising, legal fees, management fees, repairs and preventive maintenance and your minimum monthly rental income requirement is probably in the $2000 range per unit.
Are market rents $2000 per month for the property you are considering?
If you have a vacancy, and your monthly mortgage payment is $3500 to $3900 per month (PITI} do you have the cash reserves to tide you over? How about a major system replacement (roof, or furnace are good examples) -- do you have the cash on hand to cover this?
These are just some things to think about before you jump in head first.
There is an article titled "Number Crunching For Newbies! - Investing Terms and Calculations," written by Hibby76 on December 17, 2003.
Look for this in the article archive. It is an excellent article with much useful information on a mathematical analysis of investment properties.
Good luck!