Question: I signed up to purchase three investor condominiums two years ago when construction just began. The prices are locked in at $300,000 each and my plan was to put ten percent down on each unit. I was told by my real estate agent that financing wouldn't be a problem and that the value of the condo units would rise.
Well, she was right about the price of the condos. I am about thirty days away from settlement and these units are worth at least $380,000 each. When I spoke with a lender he told me I couldn't qualify for the financing because my salary is only $90,000 and I only have a ten percent down payment. I then went to a mortgage broker who searched around for a "no doc" loan. I was shocked when he came back and said that all he could find was "hard money" -- 12 percent and five points! Any suggestions? I don't want to lose the equity I have made. My plan is to keep the units and rent them out for at least a year. My agent says I should be able to rent them out for $1,800 each.
Answer: Let me get this straight. You make contractual obligations to purchase $900,000 worth of residential real estate and the only discussion about financing was that a ten percent down payment "wouldn't be a problem"? What's that real estate agent smoking?
Let's run some general numbers and see where we are: Three units purchased at $300,000 each with a ten percent down payment makes for three loans at $270,000 each, totaling $810,000.
Assuming you could qualify and receive the best rates available for 90 percent investor financing, you might find a rate at about 7 percent with no points. Principal and interest payments would be $1,796 per month. Let's estimate taxes at $200. Private Mortgage Insurance (PMI), at a minimum might be $120. PMI might be eliminated if a "piggy-back" 80-10-10, but that's a detail we needn't worry about yet.
What's the condo fee? I'll guess $200. Add all this up and you have a total monthly obligation of $2,316. Multiply by three and you have a total monthly nut of $6,948 -- nearly $7,000!
Your annual salary is $90,000, or $7,500 per month. Your take home pay might be only about $5,000. I think you're in over your head.
Renting each unit out for $1,800 means that you will have to feed the units $516 each in order to stay afloat. I don't want to sound like a scolding schoolteacher, but shouldn't these numbers have been crunched two years ago?
That's water under the bridge. I am a mortgage broker by trade and I poked around and could not find a "no doc" investor loan with only a 10 percent down payment. Your broker might be right. "Hard money," as it is called, might be your only alternative.
But let's look at the practicality of this thing. Even if you could secure good financing you have a $1,500 shortfall that would need to be paid. Most folks have mortgage payments, utility bills, a car loan, etc. An additional monthly obligation of $1,500 is probably not affordable on your salary. What would happen, heaven forbid, if the rental market softens and your units became vacant for a few months?
If these properties are indeed worth $80,000 more than your contract price, and they can be quickly sold, it may make sense to take the hard money and flip the properties. Here are some quick numbers:
Twelve percent on $270,000 equals $32,400 per year, or $2,700 per month. If it takes you two months to sell the properties, your accrued interest would total $5,400. Five points on $270,000 equals $13,500. Other costs associated with the purchase and subsequent sale might be an additional $6,000. Let's also assume that you pay a 6 percent sales commission when you sell. $380,000 X 6 percent = $22,800.
Total costs, therefore, might be $47,700.
Sell for $380,000, subtract the principal loan balance of $270,000, subtract $47,700 in transactional costs and you net $62,300. Your down payment was $30,000 so your taxable profit would be $32,300 for each unit.
Besides taking the safe route and walking away from the deals, such a scenario is the only thing that I can come up with. My advice would be to fine tune your knowledge of the marketability of these units. The real estate market can turn on a dime. Your overall financial picture does not suggest that you hold these properties. If you can get out with a profit, do so.
