Should I become a "slum lord"?
I live in Austin and am considering a property that is most definitely in a bad part of town. The street is littered with lots of un-picked up garbage and several cars on blocks. But the financing looks great.
4-plex listed for $190,000
4 occupied units renting for $650 each, so $2600/month net income
using the FHA 3.5% down and assuming the current FHA rate of $3.75%:
the mortgage would be $845
taxes would be ~$286/month
estimate $67/month for homeowner's insurance
estimate $149/month for mortgage insurance
total payment each month, therefore, would be ~$1347/month
I will keep 6 months PITI ($8084) on hand for any vacancies/maintenance.
I will have to be an owner/occupier, but will pay myself the $650/month in rent.
Cash flow each month, therefore is $2600-1347 = $1253/month and $15,036/year*
*assumes best case scenario of no vacancies and no maintenance
My goal would be to get up to owning 80% of the value of the property as fast as possible so I can refinance the property as an investment property and move out of the slums.
Assuming 0% appreciation (just to be conservative), 80% of $190,000 is $152,000.
I'll start with a 3.5% down payment ($6650), so will begin by owing $183,350.
At the end of year 1, the balance of the mortgage will be $179,031.
If I put the $15,036 cash flow into the property at this point, I would have a remaining mortgage balance of $163995 or 86% equity.
At the end of month 20, I'd have a mortgage balance of $177,659 and a total cash sum of $25,060 and be able to put that cash into a refinance with 20% equity.
At that point, I refinance the remaining $152,000 and now pay a monthly note of ~$1037 and have a cash flow of $1563/month and $18,756/year and can move out.
I know these numbers are optimistic as they include neither vacancies or maintenance, so the real date of refinancing would likely not be after month 20, but could be later, like month 24 or even 30. But even if it did take 30 months for this place to have bought me itself as an $18,000/year (best case) passive money maker, isn't that still a good deal?
I already know that the units have working appliances, 5 year old roof, no foundation issues and all 4 are inhabited by long term tenants (I would have to move into the apartment that became available the soonest). I'm also aware that using the $8000 I am keeping in reserve in the refinancing allows me to do it at 15 months, though I'd be wise to keep that around regardless.
Experienced investors and landlords, what am I leaving out of the calculus? Why do I not want to do this?