Folks,
I'm looking for some feedback. My situation may be a bit unique and while not new to real estate, I'm new to traditional financing. I appreciate your patience, humor and input.
Background
I'm a US expat and have been abroad for the last 40+ months and will likely maintain this for the foreseeable future. I work in industrial construction, my living expenses are paid. My home base is Washington State (no state income tax) although I've yet to purchase a primary residence yet. I have good income, excellent credit & no debt.
Thinking Aloud
I've been playing with the idea of buying up a few fourplexes (over the next few years, making each one my primary residence for the minimum time period of 12mo) in Spokane, WA, using an FHA loan (primary residence, 3.5% down) to achieve the following:
- Take advantage of historically low interest rates
- Take advantage of my income, credit & debt situation to control a good bit of cash flowing RE with very little down.
- Lock-in long term cash flow once properties are paid-off (by tenants) in 15-30yrs (reinvest cashflow for early payoff) or provide solid profits with shorter-term hold and then end-sale (after 10yrs - appreciation, mortgage paydown & rent cash flow).
Numbers
- Fourplex purchase at $180,000
- $10,000 down
- Mortgage amount of $170,000
- Gross Rents of $29,000 annual
- Net Cash Flow (50% Rule less Mortgage Payment) $4,000 annual
Game Plans
Plan A: Hold forever, let the tenants pay-off the mortgage, contribute cash flow to mortgage paydown to expedite pay-off, never sell. In 15-30 years, I have a great cash-flowing property that's paid off.
Plan B: Hold for ~10yrs (pending market cycles) and then sell retail (or provide seller-fi, lease option or something else creative) and realize the following potential:
- Net cash flow from rents ($4k annually *10yrs) = $40,000
- Mortgage paydown (thanks tenants!) *10yrs = $34,000
- Appreciation (if I'm so lucky!) @ 3% annual vs $180,000 purchase price = $62,000
Assuming I have to put $10,000 down, I'm seeing a potential return of $136,000 after the sale in 10yrs or an annual cash on cash ROI of 136%.
As I'm not a fan of anticipating any appreciation, looking at the hard numbers (cash flow and mortgage paydown) still leaves me with $74,000 return after 10yrs or an annual cash on cash ROI of 74%.
**These numbers exclude very obvious mortgage fees, selling costs, etc for simplicity sake.
***Actual forecasted (speculated) appreciation is 3.5% annually
****These numbers exclude any possible tax benefits, something that's a large benefit to me as single w/no dependents and good income.
Question
What am I missing here? It's hard for me to find true, convincing downsides.
The only thing I don't appreciate is taking on debt...but this is smart, income producing debt. My existing single family properties (7) are owned outright...so taking on mortgages and committing myself to years of debt, albeit cash flowing, feels...weird, constricting and dangerous.
This was long winded but I really would appreciate any feedback. Thanks!