BRRRR: Calculating Mortgage Payment

[Daniel Mendez]

Good afternoon BP,

So i am looking to purchase my first investment property at the end of the year.

I had a question in regards to estimating the mortgage for the investment property.

When calculating on how much cash flow will be do I estimate the mortgage payment to be at what the house is being sold for? Or the ARV of the house?

For example, say I purchase an 80,000 home. The mortgage will be say $800. Rent around the area would run for $1,000 hypothetically speaking. Once I repair the house it is now worth $140,000. I refinance the loan to $140,000. Now my mortgage payment is $1,200. Well now my cash flow will be in the negative. Am I right?

[J Scott]

Originally posted by @Daniel Mendez:

@Adam Gollatz

So just to make sure before purchasing a property I have to make sure that the average rent is high enough that it will fall under what I am estimating to be the new mortgage payment once I have repaired the house right?

No, if you want positive cash flow, you need the mortgage payment to be MUCH less than the rent amount.  Remember, out of the rent, you will lose money to:

- Taxes

- Insurance

- Maintenance

- Property Management

- Turnover

- Utilities

- Capital Expenses

- Etc...

You need your mortgage payment to be less than the rent minus those items.

Good rule of thumb:  Divide the rent in half...the mortgage needs to be less than that amount for you to get cash flow.

Here's a primer on analyzing buy-and-hold deals.  Read it as many times as you need to to understand it:

https://www.biggerpockets.com/renewsblog/2010/06/3...

[Adam Gollatz]

Thats correct. Once you repair it, the rent should go up as well. You either over rehabbed it or overpaid/bought a lot of deferred maintenance in that example.

[Anthony R.]

If I may, a shameless plug 

How-I-Evaluate-Deals | Bigger Pockets Blog Post

[Daniel Mendez]

@Adam Gollatz

So just to make sure before purchasing a property I have to make sure that the average rent is high enough that it will fall under what I am estimating to be the new mortgage payment once I have repaired the house right?

[Daniel Mendez]

@Anthony R.

Thank you very much! This is really helpful.

2 questions:

What is the formula you use to obtain a price per unit?

Also, based on the example, that the mortgage you pay after refinancing the house will not be greater than $1,100 or $1,200 which is the mortgage you said people were paying?

[Adam Gollatz]

The simple answer, Yes. Unless you are looking to leave some of the rehab money in the deal, ie buy for 80k put in 30k, and refinance for 100k. Youre all in for 110k, but got out 100, so you "left" 10k in the deal.

[J Scott]

Originally posted by @Daniel Mendez:

@Adam Gollatz

So just to make sure before purchasing a property I have to make sure that the average rent is high enough that it will fall under what I am estimating to be the new mortgage payment once I have repaired the house right?

No, if you want positive cash flow, you need the mortgage payment to be MUCH less than the rent amount.  Remember, out of the rent, you will lose money to:

- Taxes

- Insurance

- Maintenance

- Property Management

- Turnover

- Utilities

- Capital Expenses

- Etc...

You need your mortgage payment to be less than the rent minus those items.

Good rule of thumb:  Divide the rent in half...the mortgage needs to be less than that amount for you to get cash flow.

Here's a primer on analyzing buy-and-hold deals.  Read it as many times as you need to to understand it:

https://www.biggerpockets.com/renewsblog/2010/06/3...

[Anthony R.]

Your price per unit is going to be highly dependent on the area you're settling in. It also has to do with your risk tolerance, and how you're financing the deal. 

For me, I've been shopping in two cities. One is a A-B class city (30-45k per unit) and the other is a C-D class city (20-35k per unit). 

I realize those numbers seem arbitrary. However, the reason I picked those ranges is because those are my value added ranges. These are the ranges specific to me that I know will be run down cosmetically, that I can fix up, and that will net my target amount per door after I finance it through a bank. 

In the end that's all I really care about, my net per door minimum is met. I don't work for free and you shouldn't either. 

So to answer your question, what is my price per unit? It's the amount that I will be willing to pay, that I know will net me a minimum of at least $200 per door after all the expenses are paid. It's a variable amount. In one city it could be 100k, in another it might be 1k. It all depends on expenses, interest rates, how you finance the deal, how much I have to put in, etc etc etc