Financing Considerations in Deal Analysis

[Nick Gray]

When analyzing a deal and valuing a property, what financing terms do you include? As many of you already know, a deal can look very good to very bad to anywhere in between based on the down payment, interest rate, and loan term that is used. Is there a standard set of financing terms that should be assumed in deal analysis regardless of the actual mortgage terms that will be used...say a 30-year fixed rate mortgage at the prevailing non-owner-occupied interest rate and 20% down?

Let me explain why I am asking this. I am currently assessing house hacking opportunities that I would finance under an FHA loan with its associated interest rate and minimum down payment. Simple math dictates that such a low down payment will result in an acceptable cash-on-cash return for even the most razor-thin positive cash flows. However, the same deal might be undesirable once I have 20% equity. If I intend to re-finance into a non-owner-occupied traditional mortgage after some time, should I then analyze the deal with the aforementioned standard financing terms?

As a side question, what return criteria do you look for in a deal (cash-on-cash return, return-on-equity, etc.)?

[Jeshua Patrick]

Personally, I would look at credit unions for conventional financing if big banks won't touch you. You can keep the house hack approach and it will cost you 5% down instead of 3.5% down but it will be much cheaper for two reasons.

1) FHA costs you 5% total at closing although 1.5% is a fee paid to FHA and only 3.5% goes toward your down payment. Conventional applies your full down payment to your principal.

2) FHA's PMI rate is higher and for the life of the loan. The only way to terminate the PMI is a refinance which costs you more in fees. Conventional offers you options to remove PMI voluntarily, sometimes even before reaching 78% LTV.

Hope this helps.