buy a 340K fourplex or pay off 130K of student loans @ 7%?

[tkwit]

I've been racking my brain on this on what is the right thing to do. I have about $92,000 in savings; 50K in securities about 42K in cash.

I am debating whether to use 50K of my savings to purchase a Fourplex with a friend who has experience in managing property. It'll generate after expenses & mortgages about net $1,700 US a month in cash. My share would be half so $850 in cash flow.

I also have 130K in student loan obligations that I need to pay off. If I don't buy the four plex. I'm thinking I'll plow my savings and income into paying this off monstrosity.

My income is about 100K a year.

Your thoughts on the right course of action, and advice would be appreciated.

Thank you!

[marty998]

I keep getting my fingers burned advising people to buy property on this forum. Some people here seem to believe you shouldn't buy anything unless it is priced for armageddon and prints money like the US Treasury.

Down here in the land of Oz properties are not purchased for yield, they are purchased for cap gains.

Buy the fourplex and and use the net cash to pay off the student loans. Then keep buying fourplexes every couple of years.

Over where I am $340k gets you 1 little 2 bed flat 30-50kms from the city CBD. You guys have it sweet.

[tkwit]

Thanks for your reply. Prices are a bit outrageous in Sydney.
Its really a bit 50/50 from the few I've talk too.
Some say plow away at the loans first because its a guarantee return and real estate does have its risk.
I'm sitting on the fence at the moment as the seller has yet to accept my offer.

[Another Reader]

What exactly are you buying?  Are you buying a half interest in a 4-plex for $340,000?  Or does the 4-plex cost $340,000 and you are buying half?  Without knowing anything about the property and the income and expense, no evaluation can be made of the investment.  You also don't state the rates and terms of the student loans.

The fact you have not posted any of the property details indicates to me you do not know much about the property or about real estate investing and you are relying on your friend.  In your shoes, I would want to know a lot more about the specific property and about real estate investing before I wrote any checks.

You have a large student loan balance.  Even with the good income, it may make more sense to get rid of those and study real estate investing in the meantime.

[Another Reader]

Ooops, missed the 7 percent on the student loans.  That guaranteed return is tough to beat.

I'm skeptical of the net income on the 4-plex.  I'd have to see the seller's I&E statement and the pro forma your friend is using.  Most of these statements are, ummm, overoptimistic.  How are the operating reserves going to be handled?  Is the place fully leased?  Are there rehab/lease-up costs to be incurred after purchase?  Lots of questions....

[tkwit]

The seller's I&E is actually less than my calculations.
Rehab is mostly cosmetic work. New roof was installed 2 years ago.

My calculations are:
If a 20% vacancy rate - nets me 42K annual. Section 8 is at 1,100 for 2 bedroom which I consider my floor for the market.
Expenses including property management fees are 1,000 a month. Mortgage is at 1,300/month.

[Another Reader]

Are you saying that your anticipated gross income is $4400 - all two bedroom units?  Are they currently rented or are you taking over a vacant property with lease-up costs?  Looks like the PGIM is 6.4 and the EGIM is 8.1.  It also looks like you are allowing 28 percent operating expenses ($12,000) from effective gross.  Where are taxes/insurance?  Are they included in expenses or in the mortgage? 

This property might have some potential, depending on the location and what the comps and the rental market look like.  I'd be concerned about your pro-forma if it's in the 'hood and I would expect a higher rate of return.

In your shoes, I would have a hard look at the student loans and have a bullet-proof plan to pay them off before I bought a rental property.

[TheNessaEmpire]

Am I doing your estimates right? bc they come out different.
1100 *4 = 4400 as Gross Monthly Income at 20% annual vacancy means you will gross about 42k a year or 3500/mo

That's before you pay out all fixed monthly expenses like...
1000 property management fees
1300 mortgage (assuming PITI)

Those expenses mean you're  left with 1180 a month to split. Plus...
Cost of rehabbing for that cosmetic work?
Cost of lease-up?
Pest Control/landscaping/Maintenance?
How much for operating Reserves? Are you/he cashing out every month and expect to fill in reserves from another account when needed? Is anyone putting in sweat equity for these costs?

When you add those up its a far cry from your expected 850 as half net monthly cash flow

With math like that you're saying you'd be willing to pay 28% of your gross in management fees to your friend? Is this because you're itching to invest 50k on a rental property and agree to only 50% of the net cash flow? That sounds very risky on the partnership front bc he'd be getting paid that management fee every month and you'd get only whats left over.  That fee is crazy high. What is he bringing to the table with that fee exactly?  Property management rates in my area are around 10%. so your buddy gets 1k + 50% of net cash flow every month. The deal seems tilted in his favor. Plus, how do you know he's invested in keeping costs low if he gets a cut before you do. I know property managers who I would never invest with because they don't value keeping costs low like I do as an owner since they are only incentivized by their set fee and little else.

I'm not saying the deal shouldn't be a go but I'm seeing flags with your property management friend. I would love to tell you to jump into real estate but there's plenty of time for learning. Maybe I'm missing some details but I would think the student loan payoff would be a more solid return since you have enough income to save heavily to invest in a similar real estate within a year or two while you learn a bit more about rental properties and your local area trends. There are plenty of deals to be had and no need to rush for any particular one that you aren't fully aware of. 

just my .02 cents

[Joel]

I would very likely pay the student loans for a guaranteed 7% return.

Partnerships with friends are DANGEROUS. Do you do more work? Does he do more work? Should you be paid equally? What about when spouses get involved? What happens if the great opportunity is not so great. You could lose your ass. Regardless of how great a deal it may be, I would not do it unless I had no other debt. Especially debt at 7% interest of which, I could get an instant guaranteed return.

[Done by Forty]

Hi tkwit,

I'll echo those who have said the 7% guaranteed return on your debt is hard to pass up.  It's a high-yield, lay up of a return on your money.  I personally also don't like the idea of a partnership but it'll be hard for anyone on the internet to advise on your particular situation.

Good luck with the decision. 

[plantingourpennies]

I'd take the 7% all day long.

Maybe ARS will jump in here soon...