There are a number of assumptions here and if these are verified, would this be a good investment?
Here are the details:
Appraised value: $400,000 - $420,000 (I'd guess $410,000)
Actual value: $400,000 (based on firsthand recent experience representing buyers and sellers in this building)
Purchase price: $370,000 with 10% down payment (would require only $4,000 to $21,000 cash to close depending on appraisal).
*I don't have enough liquid cash on hand to buy with 20%.
Initial Payment (PITI + PMI + HOA): $2,750/month
Rent price: $3,000/month
The plan here would be to refinance the unit in <4 years to drop the PMI which would lower the recurring monthly payment to about $2,300/month. I'd then continue to rent the unit but be ready to sell the unit for a profit if the market conditions were right.
The major risks, of course, are if the real estate market tanks or interest rates greatly increase which would eliminate the ability to refinance in 4 years to drop the payment. A secondary risk would be if the rental market slacked and I couldn't get the expected $3,000 monthly rent for the unit. Other risks are unknown maintenance costs. Some will say this is the biggest risk as I don't even have enough liquid cash to cover the 20% downpayment. True enough, although this is a newer high end unit, I'm very familiar with the building and its management, and I am confident that there will be no major issues in the near future. If there was a major expense tomorrow, I'd have to draw funds from retirement accounts, which while not idea, would not bankrupt me.
I do believe rents will continue to hold or rise for the foreseeable future regardless of another market dip. This particular unit and its surrounding neighborhood have been steadily appreciating over the last few years. I expect this trend to continue unless there is some type of overall market disruption.
The benefits to this deal as I see them are:
1) Instant equity buying a $400k unit for $370
2) Monthly equity gains of ~$550/month paid by the rent + cash flow of $250-$700/month minus maintenance expenses.
3) Possible continued appreciation of unit which would be captured upon resale.
Any thoughts or feedback would be greatly appreciated. Thanks!
