Question about assuming a loan

[Dalton Willett]

Good Evening everyone! 

I want to bounce an idea off of you all and see if my logic on this makes sense. 

My uncle owns a property in Iowa City, which is a great place to own real estate and a market I want to get into. There is a chance he moves within the next few years and I had talked to him about purchasing the property from him to add to my portfolio as a rental. I was thinking that, since he got his loan through the VA and I believe it is assumable, if this is something that any of you have done, and what goes into assuming a loan, and what are some things to look out for. The reason I want to assume the loan is his interest rate is far lower than I can get today, and at a 6-7.5% percent interest rate the numbers do work, but if I could take over his loan of sub 2%, obviously, it would enhance the investment a great deal on a cash flow basis. I ran the numbers back of the napkin, and here are 2 scenarios given the higher interest rates.

Property Price	$315,000
Loan Amount	$252,000
Down Payment	$63,000
Rent	$2,650
Mortgage	$1,960
Taxes	$350
Insurance	$105
HOA	$100
Total Cost	$2,515
Monthly NOI	$135
Yearly NOI	$1,620
Appreciation 3%	$9,450
Debt Paid Down	$8,400
Total Yearly Earnings	$19,470
Yearly Return	30.90%
Property Price	$315,000
Loan Amount	$252,000
Down Payment	$63,000
Rent	$2,800
Mortgage	$1,960
Taxes	$350
Insurance	$105
HOA	$100
Total Cost	$2,515
Monthly NOI	$285
Yearly NOI	$3,420
Appreciation 3%	$9,450
Debt Paid Down	$8,400
Total Yearly Earnings	$21,270
Yearly Return	33.76%

[Eric Spond]

Quote from @Dalton Willett:

Good Evening everyone! 

I want to bounce an idea off of you all and see if my logic on this makes sense. 

My uncle owns a property in Iowa City, which is a great place to own real estate and a market I want to get into. There is a chance he moves within the next few years and I had talked to him about purchasing the property from him to add to my portfolio as a rental. I was thinking that, since he got his loan through the VA and I believe it is assumable, if this is something that any of you have done, and what goes into assuming a loan, and what are some things to look out for. The reason I want to assume the loan is his interest rate is far lower than I can get today, and at a 6-7.5% percent interest rate the numbers do work, but if I could take over his loan of sub 2%, obviously, it would enhance the investment a great deal on a cash flow basis. I ran the numbers back of the napkin, and here are 2 scenarios given the higher interest rates.

Property Price	$315,000
Loan Amount	$252,000
Down Payment	$63,000
Rent	$2,650
Mortgage	$1,960
Taxes	$350
Insurance	$105
HOA	$100
Total Cost	$2,515
Monthly NOI	$135
Yearly NOI	$1,620
Appreciation 3%	$9,450
Debt Paid Down	$8,400
Total Yearly Earnings	$19,470
Yearly Return	30.90%
Property Price	$315,000
Loan Amount	$252,000
Down Payment	$63,000
Rent	$2,800
Mortgage	$1,960
Taxes	$350
Insurance	$105
HOA	$100
Total Cost	$2,515
Monthly NOI	$285
Yearly NOI	$3,420
Appreciation 3%	$9,450
Debt Paid Down	$8,400
Total Yearly Earnings	$21,270
Yearly Return	33.76%

Yearly return of either 30.90% or 33.76%?????????? Let's talk cash flow. Your yearly return is based on the cash flow, not your equity. Remove both debt pay down and appreciation out of your equation. Those are not earnings. Your equity is a return when you decide to sell. Your earnings are the rent you collect. Some items missing to factor in for your cash flow are vacancies and repairs. Once you factor those items in, you will likely be in negative cash flow. Even if you were at $285 a month cash flow with those factored, that's not much on the bone. Good place to start I suppose, but, that sure won't get me out of bed.