All Forum Posts by: Christopher Covell

I've seen the trend of more newcomers to the site and think it is a reflection of the phenomenal impact BP has been on providing learning resources and bringing new investors up to speed. I have encountered many active investors whose path began here at BP. For the relatively short history of the site I feel the evidence of its impact is amazing.

The experienced folks are still around, but maybe are less noticeable due to the shifting ratio of newcomers:veterans as well as the fact that many of the "real" investors are spending more time on the deals than on the forums.

@Aaron Brown I've found my deals primarily right from the MLS, though one was from a wholesaler. I agree it's all overpriced. I'm not paying near asking price, but instead show the sellers my numbers and analysis of what a fair price is. If they're willing to meet me most of the way then we might be able to come to an agreement. I recommend reaching out to sellers--even if it's overpriced--and put in offers (and justify your own valuation). I should do far more of that myself, but more often than not I don't set aside the time to do so!

I like the Independence area and have had success with small multi's around there. It's maybe not Lee's Summit or Grandview in neighborhood quality, but I think it's a decent area (average schools, low crime) offering good CAP rates while staying out of "the hood".

@Christopher Suh What criteria are you looking for (as far as areas go)?

@Phat Vi Are you able to get 4.3% on a non-owner occupied 4-plex? Is that with 0 points? I'm just curious as I'm seeing rates closer to 4.75% on out-of-state 4-plexes.

I also second the warnings about home warranties as those service fees can really eat into any potential value of the warranty. From my experience I don't trust warranty companies to actually back their warranty!

Good luck with the property. A lot will ride on the neighborhood, quality of tenants, and maintenance. Hopefully you get some nice appreciation during your holding period as that can make all the difference between a good and bad investment in CA. Keep us updated here on the results (or let us know if you blog on it).

Definitely shop around to find the best fit as the pay down rate and assumptions will greatly affect your calculated DTI. I found credit unions to be a good source with a variety of options. Most will lend up to 80% LTV, but I've seen options vary from 70% up to 95%.

As far as the pay down goes, as @Justin R.noted some banks might charge 1% of your remaining balance each month. This means you have a fairly high loan constant (with the amortization rate a little under 10-Yrs based on the initial payment). Granted you're paying it down quickly initially so your payment each month goes down. If you're trying to keep your payments low this probably isn't the way to go, especially if you're near the line for DTI.

Others might offer interest-only (with a balloon payment) -- offered at a higher interest rate, of course.

What I settled on is amortized over 20-yr at the PRIME rate with 80% LTV.

Good luck with your search! If you think of it after, reply back with what you settle on -- it's always good to see what other investors are finding (and learn how the story ends!).

Count me in!  Looking at your profile it sounds like we have a similar background and goals so I'm sure we would have plenty to talk about. Weekday nights can be hit and miss but I'll try to make it. 

What is the price?

I like the idea of multifamily investments -- especially fourplexes to start out with. I find in San Diego the fourplex pickings are pretty slim (not a lot of fourplexes built for the size & population of the area) along with cap rates so low you'd be hard pressed to cashflow on them.

That said, I'd be curious what places your agent has in mind and would definitely give an ear to his opinion.

I’m surprised no one has chimed in yet. I’m curious to see other responses, analysis & opinions.

I’ll qualify all of this by saying I’m new and just applying what I do know (so feel free to correct me where I’m wrong – I’ll learn something new!).

On a first glance I thought "no", but giving it a closer look and for having no skin in the game I don't think the numbers are too terrible to consider. One thing I didn't see you mention is it looks like the primary loan is amortized over 20 years. This immediately reduces your cashflow by $439.59/mo and makes the numbers look worse than they really are since more of that mortgage is paying down equity than it initially appears.

I wonder if the below-market rent assumption is too conservative? If you’re renting a 1950’s 3/1 that’s 900 SqFt for $825/mo and the market rate for a 2003 3/2 that’s 1200 SqFt is around $850 - $900/mo is $875 a fair number to use?

It does not break even with the 50% rule until rents are right at $875 / mo. Taking the expenses approach at $875 provides an NOI closer to $39k with a DSCR of 1.24. With the same assumptions ($875/mo) and primary amortized over 30 years the DSCR is 1.5 with a cashflow of ~$1077/mo.

Bottom line (which you hinted at): This looks significantly better once you get into a 30-year fixed.

Just a thought; if you own a house free and clear could you do a cash-out refi or a HELOC at a lower rate to get down-payment funds that would also help you get a 30-year fixed up front to reduce your total debt-service?

Interest rates are generally higher over longer amortization periods and especially for interest-only. As a result the loan constant may be lower for interest-only but may still produce a lower yield when compared to an amortizing loan.

Suppose we modify the example with options for a 3% rate over 10yrs vs. a 4% over 20yrs or a 6% IO (maybe a bit harsh on the IO rate increase vs. 20 yr rate, but for the sake of this example bear with me). The loan constant still looks best for IO, however the 20-year loan would provide a 10% higher annual rate of return. Of course you still have to consider do you want more money today or tomorrow?

As Ben brought up, the flexibility of interest only with option to paydown is a huge bonus factor to consider (and an ideal financing situation in my mind so long as the interest isn’t too much higher).

Notes & Assumptions: 

Assumes no appreciation over the 5 years & CAP rate stays constant throughout.

† Final value defined as = [Down Payment] + [total cashflow] + [principal paydown]

*The ROR formula breaks down when you have negative cashflow since you can't pay the negative delta along the way with the equity you only realize after selling (or refinancing). In this case you’re essentially adding another $5k to your initial investment thus reducing the 5YROR to 37%.