Rental Property Investor · Albuquerque, NM · Member since 2018 · 21 posts · 9 votes
My fiancé and I are currently in negotiations on a triplex and the inspection revealed some unexpected repairs. With the cost of repairs and the down payment, I’m wondering if we are in danger of over leveraging ourselves. Hopefully the kind people on this forum can lend us some advice.
We have $50,000 in cash to spend on this property up front. The down payment plus estimated repairs is about $48,000. That would leave us with $2,000 of savings if anything comes up within the first month. One unit is currently rented, leaving $200 for P&I costs each month. I also work full time and we’ve been able to save $1000/month. The property is a good deal. Our numbers show $400/month cash flow. So should we go for it or is it too risky?
Thanks!
Rental Property Investor · Henderson, NV · Member since 2013 · 96 posts · 33 votes
8y
Congratulations to you and your fiancé on taking the initiative to invest in real estate!
Your reserves do seem a little light and may cause undue stress. What will you do if a tenant vacates right away? A turnover could easily cost a couple of thousand dollars, plus you won’t be collecting rent for a month or so. Other unexpected repairs could add to that.
On the other hand, everything may be smooth sailing and you’ll have 17k of reserves in a year and growing.
I would suggest you do some contingency planning. Suppose the worst case scenario transpires, can you borrow from a 401k or credit card at a reasonable interest rate, sell some stock, etc.? As long as you have options and are prepared to use them, you’re probably okay.
Also, this wasn’t part of your question, but how do current rents compare to market rates? If below market, that’s some extra tailwind that can help you as tenants either vacate or leases renew. If it’s at market, just be cautious as any dip in the market could prolong vacancies or require you to reduce rents and 400/month of free cash flow could quickly become less.
The fact that you’re asking about being over leveraged is great. You’re on the right path!
Canton, OH · Member since 2018 · 118 posts · 63 votes
8y
@Paul Evans Jr What kind of repairs? I think it depends on what kind of repairs you are talking about. Some repairs can open the door to others such as wiring, plumbing, foundation. Some are open and shut, no further issues such as replacing furnace, etc. What came up on inspection?
Rental Property Investor · Albuquerque, NM · Member since 2018 · 21 posts · 9 votes
8y
Most of the repairs are open and shut like fixing holes in the wall, replacing doors, etc. However, the roof does leak in one spot so we’ve budgeted $1000 for that repair. The furnaces and swamp coolers are old, too, and would likely need to be replaced within 5 years. Instead of replacing those, it was suggested to us by a contractor that we just install central air. The electrical needs to be updated so this type of work would cost around $18,000.
Rental Property Investor · Campbell, CA · Member since 2017 · 419 posts · 499 votes
8y
@Paul Evans Jr, if a few thousand dollar surprise is all that it would take to cause you to start missing payments I say pass. In my experience there are always surprises, some big and others small, but they are additional expenses.
You need some reserve capital to take these surprises into account. If it’s a great deal, maybe you can try to get a personal loan or ask family for a little help as a stately net, but without a safety net it would be irresponsible to proceed. Do you want to roll the dice with your savings and risk losong it all?
Rental Property Investor · Henderson, NV · Member since 2013 · 96 posts · 33 votes
8y
Congratulations to you and your fiancé on taking the initiative to invest in real estate!
Your reserves do seem a little light and may cause undue stress. What will you do if a tenant vacates right away? A turnover could easily cost a couple of thousand dollars, plus you won’t be collecting rent for a month or so. Other unexpected repairs could add to that.
On the other hand, everything may be smooth sailing and you’ll have 17k of reserves in a year and growing.
I would suggest you do some contingency planning. Suppose the worst case scenario transpires, can you borrow from a 401k or credit card at a reasonable interest rate, sell some stock, etc.? As long as you have options and are prepared to use them, you’re probably okay.
Also, this wasn’t part of your question, but how do current rents compare to market rates? If below market, that’s some extra tailwind that can help you as tenants either vacate or leases renew. If it’s at market, just be cautious as any dip in the market could prolong vacancies or require you to reduce rents and 400/month of free cash flow could quickly become less.
The fact that you’re asking about being over leveraged is great. You’re on the right path!
Rental Property Investor · Albuquerque, NM · Member since 2018 · 21 posts · 9 votes
8y
@Mike V. thanks for the input! We could get a personal loan from family if it really came down to it. Since we are able to save $1000/month and the P&I is only $700/month we could cover that if the currently rented unit becomes vacant. I think that puts us in a good spot.
@Paul C. you make some good points as well. We will look into our options for contingency plans. We have a credit card we could use and our families would give us a personal loan. Also, the market rents are below average for a renovated version of this triplex. The exact same building next door rents for a lot more. If we increased rents to match those (after renovation, of course) the cash flow would be $750/month. Also, how did you calculate that we’d have 17k in reserves after one year? Thanks!
Rental Property Investor · Henderson, NV · Member since 2013 · 96 posts · 33 votes
8y
Sarah Albert cool, sounds like you’ve thought things through. The 17k was from 1k/month from personal savings and 4,800 from 400 a month for 12 months. Again, that’s assuming everything went right the first year.
Investor · The Creek, WV · Member since 2014 · 890 posts · 1k+ votes
8y
@Paul Evans Jr Believe it or not, I basically use credit cards for my emergency repairs. Just had a heat pump go out and had to replace it at the tune of $3k. Swiped that Capital One CC and will pay it off over next 2 months of collecting rent.
Also have a Lowe's Card that is 6 months same as cash as long as I spend at least $300 so I always put that sucker to use too. Best of luck.
Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
8y
You might have issues getting a loan with so little liquidity left, so that could be a potential road block. How much equity are you adding with these repairs? If this is a BRRRR type deal where you can recoup that cash through a refinance, I would do the deal. If you've spent that money with no way to get it back, I'd be nervous about having so little reserves
Rental Property Investor · Albuquerque, NM · Member since 2018 · 21 posts · 9 votes
8y
@Jason D. Thanks for the advice. We will be adding equity with these repairs. We'd purchase it for around $165K, then put around $24K into it (if we include updating the heating and cooling system). Triplexes nearby have sold from between 178K and 220K, both of which were in better shape than this one. We weren't really planning on doing a BRRRR deal for this because we are very new to real estate investing (this is our first one) and it has been difficult to find comps. Our realtor isn't sure how much the ARV would be since we only have two comparable properties in the area. We were just planning on having this as a buy-and-hold property. Also, we have already been approved for the loan.
Real Estate Investor · Unionville, CT · Member since 2016 · 260 posts · 167 votes
8y
As a possibility- this is what I do. My HVAC and plumbing company does all my repairs for those areas. They are typically big ticket items like furnace/ water heaters/ ac. They company offers 0% financing for a period of 18 months. So I don’t sweat these repairs anymore.
I also just replaced a boiler and instead of using their financing- I used the energy financing program through my power company- They have a 10 yr O% financing program and it’s even for non owner occupants. They tack it right into you electric bill. It’s maybe $60 more per month. Look deep for these programs ! They are out there.
Investor · Arlington, VA · Member since 2012 · 1k+ posts · 491 votes
8y
If you can rely on the personal loan for unexpected expenses and have credit cards available, I think the extra $1000 / month you have as padding would make me pull the trigger if I were in your situation. The comps concern me as you are probably buying at or a bit above market value, but $400 / mo cashflow for a triplex is nice in this market and is hard to come by. Also, the fact that there are limited comps is a good sign that other investors like what they have in that area and want to hold.
Real Estate Agent · Post Falls, ID · Member since 2016 · 1k+ posts · 1k+ votes
8y
@Paul Evans Jr - If I were in your shoes, I would say you are over leveraged. I don't think I'd be able to sleep at night with just $2,000 of savings and a property on hand.
If you do have a higher risk tolerance then I think you need to ask yourself, what would you do if things go wrong? Could you take a loan against your 401k? Could you use a 0% interest credit card for up front costs and pay it off before interest starts? Do you have friends/family that would be willing to help you out?
The Woodlands, TX · Member since 2017 · 45 posts · 31 votes
8y
@Paul Evans Jr, looks like you have an exciting opportunity, congrats!
Your risk tolerance is different from mine or anyone else on this forum so take advise with your own twist. The key issue is income vs expense and their associated risks. Even your income savings of $1000 may have some risk to it, but it may be tolerable (i.e. low probability you will lose it or it goes lower). If you feel good about the risks and your mitigation strategy , you should have enough confidence in moving forward.
Remember that even after your decision, you should reassess the risks so that you can mitigate them going forward. For example, you may want to have a roofing inspector give you an estimate (if not already) for a more accurate budget or periodically check on the furnaces/coolers to more accurately anticipate that expense. Having a plan to do things like this help optimize your opportunities and give you confidence in your decision.
One thing to consider is your cash-on-cash return. Cash of $4800 for $48,000 investment is 10% which is pretty good, but many like to see this a bit higher due to the unexpected expenses (risks), especially if you will spend $18,000 on a new HVAC system within 5 years. This would nearly wipe out your cash flow, so it's something you may want to get more information/confidence on for a buy/hold position and no plans to sell to cash in on the appreciation value.
I use a LOC as my operating account, draw as I need and deposit all rental income directly into the LOC account. This keeps track of all income and out going expenses. I operate with 100% leverage however I do have other funds available if needed. I have however never needed to dray on any funds other than the LOC.
I have sufficient funds to pay off my properties however that approach does not fit my investment philosophy.
Investor · Dallas, TX · Member since 2015 · 446 posts · 197 votes
8y
You will be fine. This shouldn’t deter you from purchasing this property. You have demonstrable savings ability and discipline. I say do it. If you hit a speed bump I’m confident you can overcome it from your statements.
Good luck!