January 20th, 2011
Wanting to gain experience in the real estate field, Edward Alexander is looking to invest into a small income-producing apartment in the Back Bay-Beacon Hill area of Boston. He considers paying rent to someone else a waste of a capital building opportunity, given that he is building someone else’s equity.
Becoming familiar with the area is the first step Alexander did; therefore Edward Alexander checked the demographic data on age breakdowns, education, employment, marital status, income, and ethnic background of present Beacon Hill residents. He was also able to access the ...view middle of the document...
After two months of search, Alexander finally had an opportunity with a four-unit apartment house located on the back slope of the Hill in an improving neighborhood. The property, according to Alexander, was aesthetically desirable and had profit potential; additionally the asking price of $350,000 was within his price range. Some renovation on the property was needed and the cost approximates $165,000 according to a contractor. After preparing an income and expense statement, Alexander projected a cash flow before financing of $61,510, without any allowance for the work he would do himself. He also planned to live in the top floor apartment with his wife “rent free”, while making money by managing and renting. With time of the essence, he had to act fast and take the property off the market before a potential investor got ahead of him.
Geraldine Smith, a mortgage officer at one saving bank, found Alexander’s rental figures $9,600 higher than those originally submitted by the present owner and offered him a $400,000 mortgage for a 20-year period at 8% interest rate with no prepayment penalties.
A second mortgage loan officer, Sarah Harris, agreed to a $450,000 mortgage for a 20-year period at 8% interest rate after appraisal based on an income approach using 10.9% capitalization rate. Although not certain of her judgment, she considered Alexander’s projected figures realistic, but required him to personally sign the note as additional protection to the bank against loss.
The idea that Alexander was going to live “rent free” in his building is somehow not relevant to me because even if that is the case, he still will be consider a consumer and an investor. Alexander’s search for his property was somehow limited. Even though Beacon Hill proved to be an expensive neighborhood that attracted wealthy personalities, I believe that some Boston neighborhoods were also...