Is this a good plan?

Question

Hello all,

Let me start by giving some background on myself.  I am originally from NJ, and I serve in the Navy and I am currently stationed in MD.  I bought my first home here last summer.  I will be leaving the Navy in about 8 months, and I do not plan to live in MD for too long after that.  So at that point the house I bought here will become a rental property.

I eventually plan to move back to NJ so that has been where I am looking to purchase my next house.  I regularly check the Fannie Mae site for the foreclosures they are selling.  I recently found a 2 unit multifamily for sale at a pretty good price for the area.  The house needs a little cosmetic work, but it does not appear to be anything major.

Here is my plan for coming up with the finances for the house, and the area I would like some feedback on.  I currently have about 50k of equity in my current house, and the new house is listed at 131k.  I do have some savings, but I would like to do this next deal without tapping into that if I can.  So my plan is to get an equity loan for the 50k if possible, then use about 30k of that for the down payment on the new place.  Then around another 5-10k for any cleaning, or repairs that may be needed.  The remaining 10-15k can be kept as reserves to make the monthly payments on both the mortgage and equity loan until the house gets filled with renters.  I calculate that the 10k should last for around 7 months which would be more than enough time to make any repairs and find renters.

What do you guys think of this?  In my head it seems like a good way to make the deal without much, if any, money out of my own pocket, besides maybe closing costs which I would be ok with.

Thanks for any advice you guys can provide!

Account Closed · Answer

I understand the amount of the equity loan will be based on how high the appraisal will be.  I have looked at a few different options and there are a few that are offering a 90% LTV.  I am figuring I can get about 40-50k in an equity loan.  If it comes out to be a little less I can make up the difference with savings.

Account Closed · Answer

I put together some numbers for this deal.  Can you guys please review these numbers and let me know what you think?

Thank you very much.

Account Closed · Answer

I agree with multi-units being a good place to start.  It just makes way more sense to me to have more than one source of income per property.  Even at 50% the profit still doesnt seem to bad to me.  What do you guys think about how I plan to come up with the finances?  Do you see any holes in my plan?

Account Closed · Answer

I apologize for leaving some info out.  My current PITI is 735 a month.  The second home PITI will be around 1150 a month, and the equity loan should be around another 300 a month.  So the added monthly debt will be about 1450 a month.  The new home should bring in at least 1300 a month per unit.  So it should leave 1150 a month in profit.

So to me this all sounds like a good plan, but I am just wondering if there is anything you guys see that I might be missing.

Steve Babiak · Answer

The amount of a HELOC you get will be based on the lender's CLTV - combined loan to value - for the property.  And the value then becomes a factor.  I posted some sample calculations for somebody else in this next link:

http://www.biggerpockets.com/forums/49/topics/80090-business-loc---does-a-newbie-have-a-chance?page=1#p478554

William Bannister · Answer

Duplexes, tripexes and 4 units are a great way to start in this business That is how i cut my teeth when I began investing for income property

William Bannister · Answer

Oops sorry its 1300 per unit not entire property this looks pretty good now with these number

William Bannister · Answer

Correct me if I am wrong here 1450 a month in debt service and 1350 in rents is not profit but a negative cash flow of 100 per month?
   How many deals like this would it take to sink your ship?
When your starting out in real estate make sure your deals are positive cashflow not negative cashflow.

Will Browm · Answer

Search on the forum on the 50% rule. Your profit will be considerably less than you are projecting.   You can be profitable but this is not a home run.

Will Browm · Answer

I think in order for anyone to help you, they will need more info about cost associated including current PITI , expected costs of the second loan, rental income expected, etc.