Do these loan costs look high?

Question

This is for an investment property and the interest rate will be 4.125%.  I can pay a couple points less and get a 4.5% rate.  Does it generally pay off from a cash flow perspective to pay down the rate?

Chris Mason · Answer

At 4.5%, P&I is $605.

At 4.125%, P&I is $579.

Paying $4,183 to save $25/month.

Break even is 13.4 years.

Can you put that $4k to work in a way that's going to get you $25 or $50 more per month?

Chris V. · Answer

Glad I could help! You'll find that that moment when they start to consider your rents (at least in part) as income and projected income all of a sudden it is all about the down payment money, which runs out fast if you don't sell other properties. Cash flow is nice but waiting for it to pile up to the point where you can pay a deposit takes too long IMO. If you have a loans person willing to work with you a bit they can start to take at least your existing rentals into account pretty quickly.

One more quicktip:): You know how lenders want you to show that you to have X months of operating expenses in the bank etc? What I found out is that you can actually show them your 401K  to bypass this requirement. You don't take it out, just show you have it. Because you could theoretically take it out having it satisfies their requirement of having that money actually sitting in an account settling dust, which is pretty handy if you are strapped in the first place:).

As far as the frugality I think it is crucial to any type of investing that you are able to control your discretionary spending. There is a lot of talk here on BP about mind-set and I think this one is extremely important to achieving any success. While I agree with the argument that frugality by itself will never get you anywhere really, I do think that you need a frugal mind set to be able to invest. I get really annoyed when I hear people ask: "should I invest or pay off my consumptive spending card debt first"...:/

I really strongly believe in there is something like Parkinson's Law for spending vs. income. Basically, if you are that person that makes $100,000 and you manage to spend it all and you get a $50,000 raise will do NOTHING for you because you will from there on just spend $150,000...:))).

However, if you make $25,000 and you make that work and manage to save $200 every month on top of that, you will be able to save money once you make $200,000 as well. It all comes down to mind-set and its best to develop that mindset early and cheap.

Hmmmm thats a lot of words to say 'you're welcome'. Is this a rant? I think it might be....:)))

Chris Mason · Answer

If you take that $4k and freshen up the place with paint, deep cleaning carpets, whatever other little things could use some work, I'm guessing your increased rent will be more than the increased P&I payment at 4.5%.

3.5 discount points rarely makes sense.

Jorge Magana · Answer

Michael R. this is just my opinion but I don't think it pays off. For example, (I'm assuming the loan amount is about 120k) it will take you 160 some odd months to get back your $4200. I would ask yourself if that is worth it.

Chris V. · Answer

Yeah, use it as part of a down-payment on more property to get even more leverage:)!!!

From you profile it looks like you are starting while working a job, which is what I am doing. My experience was that in the beginning I was held back by PITI vs. Income but after a few years, lenders will consider you an "experienced investor" and they will start counting not only the rent income you realized last year, but also the rent income of the property you are actually buying when calculating your PITI. Once you reach this point your expansion bottleneck shifts from PITI  vs. Income to the down payment amount you can come up with.

That is when having cash becomes really important. The funny thing is that the lenders will allow you to raise cash by leveraging your portfolio as long as you count these loans on the PITI side of the PITI vs. income equation. And as long as you can raise the down payment you can buy up to 10 properties under the fannie/freddie umbrella (last 4 require a 30% down).

And that's why you want to keep that 4K in your pocket! :)))

Jorge Magana · Answer

I would agree with Chris Mason put the $4k to work in a different way.

Michael R. · Answer

@Chris V.  It's funny because I watch the webinars and most people want to invest in RE in order to quit their jobs.  I'm of the few, it seems, who will probably continue working once I've reached "critical mass" since I love what I do so much.

Your input here is golden and in all of the posts I've read I never heard that they would consider the income of the property you're buying after a certain point.  That's a game-changer and was the gap in my explanation to my girlfriend, friends, and family when I explain how you can continue to acquire loans, going forward.  It's also more justification for the frugality I keep preaching.  Thank you so much for your input, I'll keep the 4K and deploy it on the next one. :)

Michael R. · Answer

The property is a duplex with tenants in each so this is really just a matter of "will these savings make a difference over the long haul?"  I think hanging onto the extra cash makes the most sense.  Thanks for your input, guys!  I'll pass on the discount points.

Michael R. · Answer

@Jorge Magana I found this pretty awesome calculator on mtgprofessor that spit out the return for the low points/high interest and high points/low interest options I received from the lender.  Pretty awesome resource.  It looks like the break even point is just shy of 4 years out.  Are there any other considerations that this isn't taking into account?

Do these loan costs look high?

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