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How much leverage is too much?

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  • pit.alumni
    replied
    You ask is this a bad idea?
    Really hard to analyze a real estate investment like this from the numbers in your post. I think investment real estate can be a great addition to a portfolio providing both income if cash flow positive, inflation protection, and capital appreciation from mortgage paydown and appreciation. However, to invest in direct ownership you need to understand the numbers involved which is really just simple math.
    Is $3800 your total mortgage and $4300 your total rents? This leaves a $500 delta, but there are other expenses such as utilities paid by owner, maintenance and repairs, vacancies etc...Are taxes and insurance covered in the $3800? If you are getting a commercial mortgage generally the terms are shorter, 7-10 years with a need to refinance at the end of the term. Right now if you can get a conforming residential mortgage, which can be up to four units, you can lock in thirty year financing at very favorable rates. I agree with WBD that with commercial you have to be prepared for prolonged vacancies. I own exclusively residential and in the right locations my vacancies range from a few days to a few weeks as long as they are priced right.
    Two questions to consider. How long will you be happy living in one of the apartments? How likely are you to covert the commercial space to a dental office, cost of conversion, etc......
    What is the cap rate for the property vs the interest rate of the loan. Generally, if your cap rate is greater then the interest rate you have a good shot at earning a decent cash on cash return for the down payment. When looking at cap rate do not trust the numbers provided by the broker selling the property. They may underestimate things like repairs, vacancies, leave out property management etc...I'm not saying they always sandbag them, but you should do your own do diligence.
    If you do not understand cap rate, and cash on cash return, you don't have the basic knowledge required for successful RE investing. This is not meant to dissuade you. You were smart enough to go to dental school and can learn the basics pretty quick. But you need to know the basics. Bottom line, not enough information in your post to say one way or another.

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  • Hoopoe
    replied
    This seems higher risk but some very good upside long term. Worth consideration. And it sounds like you would have a perfect commute on some days.

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  • MidSouthWest2thDoc
    replied
    Originally posted by White.Beard.Doc View Post
    With commercial property, one of the risks is a prolonged vacancy leading to negative cash flow. How much demand is there in your area? Would you be able to carry the mortgage if you were to face a prolonged vacancy?
    I would be able to easily carry the mortgage for 6-8 months probably.

    Leave a comment:


  • MidSouthWest2thDoc
    replied
    Originally posted by Molar Mechanic View Post
    You need to dig into the numbers a little bit more, but you've got $2400 for the two rentals (in theory $3700 since you are now living free?) and another $4300 split between 3 tenants, one of which is unstable. P&I are $3800 and I'm assuming that is a very short term loan. How much is taxes, landscaping, etc. If the chiro does leave, how long would it sit vacant and how much of the renovation would you be asked to fund to the new tenant. How much is that tenant paying?

    Thats best case $4200 in free cash flow for taxes and maintenance, and profit. Don't overlook the maintenance, both routine and capital expenditures.

    Short answer is that this seems solid.

    I'd advise buying into an existing practice over starting fresh. Cash flow on day one is a big deal.
    The nice part is this is outside any non-competes so if I was starting up, I'd continue to work at my current place and open for a couple days a week. I was looking at a long term loan with very little down.

    Leave a comment:


  • Molar Mechanic
    replied
    You need to dig into the numbers a little bit more, but you've got $2400 for the two rentals (in theory $3700 since you are now living free?) and another $4300 split between 3 tenants, one of which is unstable. P&I are $3800 and I'm assuming that is a very short term loan. How much is taxes, landscaping, etc. If the chiro does leave, how long would it sit vacant and how much of the renovation would you be asked to fund to the new tenant. How much is that tenant paying?

    Thats best case $4200 in free cash flow for taxes and maintenance, and profit. Don't overlook the maintenance, both routine and capital expenditures.

    Short answer is that this seems solid.

    I'd advise buying into an existing practice over starting fresh. Cash flow on day one is a big deal.

    Leave a comment:


  • White.Beard.Doc
    replied
    With commercial property, one of the risks is a prolonged vacancy leading to negative cash flow. How much demand is there in your area? Would you be able to carry the mortgage if you were to face a prolonged vacancy?

    Leave a comment:


  • Brains428
    replied
    It seems like a decent idea. Commercial is a different animal than residential, but you have the benefit of triple net leases and longer term contracts. I'm not sure how the mixed use works out. In order for you to know if it's a good idea, you probably need to see if both the residential and commercial sides of the property are cash flow positive, and if they're not, why not. I only have experience with SFH rentals, so multifamily and commercial are only known to me via books. Hopefully someone else can weigh in

    Leave a comment:


  • MidSouthWest2thDoc
    started a topic How much leverage is too much?

    How much leverage is too much?


    I'm a 2018 dental graduate, and I make 225k a year from working 3 days a week at one job, another 3 days a month at another job that I recently started at 1000 a day (so another 36k). Student loans are at 71k. And by April 1 they will be at 55k because the state is paying me through a program. All of this is at W2 income in a high income tax state (not California). I currently rent for 1300+utilities per month. I'm considering buying a mixed use commercial/residential place for 750k. For the amount I am willing to put down, the commercial mortgage would be about 3800ish. It currently houses a chiropractic practice that I think has the intention to leave and 2 tenants. I was going to move into one set of apartments with my wife (wife doesn't care as this place is bigger than our current place). This place is in a high income area (lots of retirees and I think the median income is around 75k , with a college 2 miles away, and right next to a high school. They are currently collecting 4300k in rent. With major renovation, I could convert it to a startup dental practice if that was my goal. The office and residence is two separate buildings with no real landscaping. There is a strong housing shortage (west coast) so 2 other rentals would go for 1200 easy. So office+3 rentals, live in one, two separate buildings. According to the zoning, if the chiropractic practice leaves, I can leave it commercial or convert it back to housing units. Is this a bad idea?
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