40 year mortgages good?

Question

Hi BP Carebears!

I'm looking at purchasing my first multi-fam rental property to create cashflow. The area is the Jersey City, which has pretty low prices considering its proximity to NYC and values will be climbing significantly in the next 5-10 years. However, when I put these homes through the handy-dandy BP Cashflow Calculator, the cashflow seems to range from -$100 to +$100, with cap rates very low. Here are the reasons I think this is happening:

- I'm trying to only do 3.5% down (FHA), which elevates my monthly expenses.

- Although prices are low, rents in the Bergen-Lafayette neighborhood are also still low.

- High property taxes in NJ

The first time homebuyers assistance program that I'm considering working with, MAHNY Management, is able to get 40 year loans to help people lower their monthly. When I redo the cashflow calc with a 40 year mortgage, it really helps the numbers.

My question to you guys is, what are your thoughts/experience with 40 year loans? I know you spend allot more in interest, but I'm not planning on keeping this home that long. Maybe selling in 5-10. This seems like a good way to go, but I'm pretty unexperienced and need the input of smarty pants.

Thanks in advance everyone for taking the time.

Best,

Nicholas

Paul C. · Answer

Hi Nicholas -

My suggestion would be to analyze deals and not factor in the financing, at first. That way you can view the merits of each property. Once you find an outlier, then throw your financing package on top of it. OR, as Josh from the podcast as suggested, analyze it with 100% financing.

I'd be curious to get your opinion as to why you think JC Bergen-Lafayette neighborhood is a good investment. I'm familiar with the area and there is still a lot of violent crimes (muggings, shootings, stabbing, etc.).

Ian C. · Answer

Nicholas,

I think it all boils down to cash flow. While I never heard of 40 yr mortgages, I would gather they have the same style/format as other FHA products in the 15-30 yr.  If it assists you in getting in the property, go for it!

Steve S. · Answer

If you can get the 40 year program at a downpayment you can handle then do it. It is just like an interest only loan. If you're buying something for cash flow then as long as you're in a safe, stable loan program a 40 year amortized loan or IO is the best option. keep the money rolling in and the equity building.

Russell Brazil · Answer

Im not sure that you can do a 40 year loan with FHA.  @Upen Patel would know this for sure.

Nicholas Mahon · Answer

Thanks @Paul Cognetti. It's a good question about Bergen Lafayette. I'm drawn to it because of the combination of a decent inventory of nice brick homes for low prices as well as appreciation. Journal Square is a hot area and a good investment, but homes are pricier and there's allot of back architecture, crappy vinyl. I'm aware Berg is rougher, but it's getting better. However I haven't spent a ton of time there so am a self-admitted novice and am curious about your experiences with the area. What area do you live in?

Paul C. · Answer

I live in Hoboken and have driven by the area multiple times to get a sense of it. I was personally kind of shocked by the amount of violent crimes still in the area. I've been told by good friends who are more familiar with the area that it could change in a big way, but until the City gets a hold of the gangs, etc., it may be a while.

Steve Vaughan · Answer

Sounds like a 5-10 year spec play.  Might be possible.  Might leave you in a lurch.  Not exactly buying at the trough anymore today.  Is this otherwise a value-add?  Or a roll of the dice, hoping the 7s keep coming?

If you're paying FMV with no value-add and need to stretch the am to 40 years to pencil, I wouldn't do it.  Mine have to work assuming a 10% DP and standard am of 30 yrs, at most. Pencil for me means beating what I can do in the market.  Not doing tenants and toilets for free. No way.

How quickly some seem to forget 2008. Seems like yesterday to me.  40 years from now is 2055.  Whoa, right?!  These crazy prices may drive you to a different market or different asset class. Glad you you're here and asking the questions @Nicholas Mahon!

Nicholas Mahon · Answer

Thanks for your thoughts everyone! Still not sure if I'll go this route, just trying to find a way to make this work and get creative. I've also read articles that tout the advantage of paying off the principle asap to increase cashflow. But I don't imagine keeping these properties for the full length of the mortgage. And trying to pay off the mortgage sooner with these properties would likely cost me money every month, which is not an option for me.

40 year mortgages good?

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