I just wanted to do a quick post to update readers on the status of Rental Property #5. At this moment in time, I am under contract for a fifth rental property which is listed at $180,000. The property is located in Chicago and is another 2-flat, similar to Rental Property #3. Each unit has 4 bedrooms and 1 bathroom.
The property is currently under construction and the seller would like to start closing in December. However, because I just closed Rental Property #4 this month, realistically, I don’t think this will be possible. I need some time to build up some cash reserves, and I am very doubtful my loan file will pass through underwriting. I’m currently negotiating with the seller, and asking for an extension until January. If closing starts in January, then I most likely won’t need to come up with the 25% downpayment + closing costs (seller paid for, but lender needs me to show enough funds to also cover this) until sometime in mid-February.
Mid-February works much better for me. If we run into another glitch (like last time), I should be able file my 2013 taxes to overcome any debt-to-income problems. Rental Property #1 will be on 2 years of tax returns (2012, 2013), so I’ll be able to offset that $230,000 loan.
I really like this property, and even stopped by to take photos of it when I was in Chicago earlier this month. It should rent out for $1200/month for each unit, bringing in gross rents of $2400/month. The cash-on-cash returns will be around 19% or so.
When running numbers, my returns are always calculated with maintenance and vacancy reserves in place. I used 5%, which I think is reasonable. Property management is 8%, also included.
Also, even though the property will return a portion of the principal with each mortgage payment, and depreciation come tax season, these gains are not included in my spreadsheet calculations. Principal paydown and depreciation are awesome, but I’m still looking for deals that return 15% cash-on-cash without factoring these benefits in.
Lastly, closing costs are not included because I’ve worked out a deal with the seller to cover all closing expenses. I will also be getting 1 year rent guarantee and a 5 year warranty on the roof.
Here are the numbers:
All About the Timing
If the timing doesn’t work out, I may have to let this one go and wait for another property that’s further out from being fully completed. This property is under construction and should be fully completed (ready to rent) in another two weeks. Finding a property to close in March or April would probably be the best move (financially), otherwise I will have to stretch myself a bit to close this one. So, for now I’m under contract and the numbers are shown above. I will of course update as more details emerge. Don’t be surprised if this one falls through and I have to readjust my gameplan. This stuff is always changing and dynamic in nature.
But, you know me, I like to take risks… Good thing I have some ESPP coming down the pipeline in January. 🙂