Advice Requested: Multifamily Investment
Appreciate any advice you might have.
I am about to close on my first multifamily property that does not break-even / cash flow, but will, over time, hopefully appreciate in value and break-even on a monthly basis. I am putting 10% down, with 5% in capital up front for renovations. The monthly carrying cost is ~ $2,900 on a fixed 30 year note and I’m expecting approx. $2,500 -> $2,700 per month in gross rents right now. My partner’s agreed to invest 50% since we both believe the real opportunity is in appreciation / future rents in this Central Austin property.
Thanks,
Ritesh
ANSWER
Ritesh,
I’m not sure exactly what your question is, but here are a few comments:
Make sure you accurately estimate your rents. I often see people OVERESTIMATING rents dramatically. Right now it’s generally very hard to rent stuff. My Austin properties usually rent fairly quickly, but Round Rock and Leander take forever to get rent. Competition is stiff and rents are low.
Regarding negative cash flow – everyone has different philosophies here depending on their financial plans. Some people will not do negative cash flow either because they don’t have the resources to sustain it (especially during long periods of vacancy), or because they don’t believe in negative cash flow under any circumstance.
I personally will do negative cash flow if I get a lot of equity up front or if I get high appreciation. For example, I bought a property in central that cost me $150K, after repairs, that I’m now renting for $1200/mo. With a PITI of just under $1400, I’m losing $200/mo in cash, but the property is easily worth $205K, and probably appreciating $10K+/yr. With this amount of equity and appreciation, and the corresponding tax breaks this property generates, it’s a great deal for me, and in 8 years, I’ll probably be able to sell it for $300K. So, my $2400/yr investment (taken as deductible losses) should yield me $150K+ (taken as long-term capital gains) in 8 years. If you can find a better investment with that return, let me know.
If your strategy is to buy at full retail price and take negative cash flow. Well, I pass of those deals, unless it’s in a high apprecaiton neighborhood. Hey, it’s still mostly a buyers market – take advantage of it.
Phill
Subject-to Question
Question to the “Subject to” guro…
My problem:
When you buy a property “Subject to”, hold the property for a few
months or several years, and then resell with the new buyer taking
out a new loan, any money held by the original finance company for
taxes &/or insurance in escrow is refunded to the original sellers,
(i.e. the persons you bought the property from), via a check from the
title company or closing company. This check is made out to the
original owners. The ones who originally took out the loan on the
property you bought “subject to”
In past years one could have stamped “For Deposit Only” on the check
along with the account number and deposited the check in any account.
No problems.
With new banking laws, both Bank of America, and Wells Fargo, have
told me that the check must be endorsed by the Payee.
I have a power of attorney, and a letter of instruction from the
original sellers, stating I have authority to handle all matters
concerning the property. The banks are telling me that they won’t
accept the power of attorney because, they don’t know that a
subsequent Power of attorney may be in effect that cancels the first
one.
Any suggestions on how you “subject to” gurus handle this problem
with the original purchase, to prevent this problem on resale?
Thank You
Philip
ANSWER
Philip,
Excellent question! This is one of those advanced sub-to topic that always seems to get glossed over in the how-to books.
There are a few ways to handle this.
1) Just deposit it into your account as though it were made out to you. Do it from an ATM. The odds are that no human will ever even look at the check and it will go though. After all, it is your $$ and you do have a POA.
2) Call the lender and ask them if you can apply some or of the escrow towards the principal. If necessary, tell them you are about the sell the home and ask if you can miss the last few payments and have the escrow cover those payments (make sure that the missed payments will not be charged the to borrowers credit).
3) Before you sell, tell the lender that you wish to close the escrow accounts (and pay the taxes and insurance yourself). If there is equity in the property, they will sometimes allow this. They will then almost always give you the option of getting a check (made to the original borrower) or applying the funds to the principal.
4) Ask the lender if you can use escrow funds as part of the loan payoff at closing. In other words, ask for a payoff that includes the escrow refund.
5) I suppose you could offer the original homeowner some of the proceeds to cash it for you…
6) You can refi or payoff the loan or time the close to just after when the taxes are paid and the escrow is near zero.
Phill
