Partially owner occupied MF analysis to start investing in RE

Partially owner occupied MF analysis to start investing in RE

Tuckahoe, NY · Member since 2013 · 28 posts · 6 votes

I'd like to bounce this question off the forum. I'm thinking about leaving my $1,700 per month studio in Manhattan to live almost rent free in the immediate suburbs. The house in question is on for $435,000, 1,750 sq ft, 2 units (one 2 br & one 1br), $12,400 taxes, $2,500 insurance, no immediate work needed (house is completely updated) but estimating annual maintenance at .75 - 1% of sales price. The house will be mortgaged 50% and I will live in the smaller unit and rent the other out for atleast 2,200 per month (area is very desirable and units are rented within 3 weeks). That is approx $2,700 in monthly mortgage, insurance, property tax, and estimated maintenance cost, meaning I will only need to pay $500 per month. If I were to move out in 5 yrs and rent both units(smaller unit will rent for $1,400), the return on the down payment is a little over 5% and the cash on cash return is 3.9% with the mortgage and 10% after the mortgage is paid off with a post mortgage net cash flow of 23,000 annually (assumes 5% vacancy). From a pure investment standpoint this is a mediocre return with the mortgage, however the upsides are:

- I can save money as I will have an extra $1200 per month ($1,700 current rent - $500)

- I will avoid the current NYC income tax of 4% on my salary

-Benefits of mortgage tax deduction

-I can take a loan on the property to put 50% down on a $200k multi unit home in a college area nearby (pure investment property)

QUESTION; is this a good starter property given the low cash flow and mediocre return? Do the benefits outweigh the lower return or should I look for a 3 unit house ? Advice? Thanks all!

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Commercial Real Estate Agent · Rossville, GA · Member since 2013 · 37 posts · 12 votes
13y

I agree with @Jeff Arndt , why are you putting so much cash in? That's why your returns are so low. With interest rates being as low as they are, you're much better off financing as much as you can from a pure numbers standpoint. The flip side is the security of a smaller payment and less risk, but you should be able to find a happy medium. Run your numbers at 20, 25 and 30% down and see what that does for your return. Also factor in what you can do with the additional cash, perhaps buy another investment property somewhere else and REALLY increase your profit.

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  • Investor · Pittsburgh, PA · Member since 2011 · 117 posts · 78 votes
    13y

    Sorry I don't have a lot of time to thoroughly answer you question but I will say this. If its true that you're going to save 1200 per month plus the savings from not paying 4% to NYC. The additional savings should really help you get the next property. The fact that you can live in near NYC for that little is an impressive feat IMO.

    Another thing to consider is your transportation costs. How much more a month with it cost you to commute to work now that you don't live in the city? The 1200 a month may become considerably less.

    Why are you putting 50% down? Have you calculated your potential return with 25% down?

  • Darren SagerPro Member
    Investor · Tampa, FL · Member since 2013 · 2k+ posts · 1k+ votes
    13y

    @Michael R. I believe that if you're going to live in the premises you still need to run the numbers and see if it works for you if you're not living in the unit because at some point there's a good chance you'll move out.

    You brought up an interesting point that I touched on when we had a group meeting in NYC last week which was location and vacancy rates. Location to me is everything. I would be more willing to take a lower return on my money to have a much lower vacancy rate. I'd pay more for the units but that's me. I know there's people on this forum that would cringe at only getting the returns your talking about. However you need to know that they're still decent returns. And although you can do better rate wise can you find a better location?

  • Commercial Real Estate Agent · Rossville, GA · Member since 2013 · 37 posts · 12 votes
    13y

    I agree with @Jeff Arndt , why are you putting so much cash in? That's why your returns are so low. With interest rates being as low as they are, you're much better off financing as much as you can from a pure numbers standpoint. The flip side is the security of a smaller payment and less risk, but you should be able to find a happy medium. Run your numbers at 20, 25 and 30% down and see what that does for your return. Also factor in what you can do with the additional cash, perhaps buy another investment property somewhere else and REALLY increase your profit.

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