All Forum Posts by: Erik Kubec

Hey folks,

Under contract on what will be our 4th property since 12/11--can't believe how busy we have been. We are 'buy and hold' investors, and our general rule of thumb has been to purchase properties (and choose financing options) that enable us to double PITI on a gross basis (if PITI = $650, then it needs to rent for $1300).

Obviously, one of the best ways to effect this ratio is to move from 20% down to 25% down. However, with this property, we are electing to go with 20% and have been quoted a rate of 4.5% (Property is under contract for $115,000).

So I am looking for some feedback, advice, and 'check my math' input on the following. Below is a table. The first three columns my lender provided me.
The next 5 are mine. The 'mo delta yr' refers to those two columns directly below and indicates the difference in monthly and yearly payments.

So I am missing something / doing something wrong?

It seems that the ROI on buying down the rate with points is really high--stupid high at the .125 and .25 rates.

I think I am leaning towards the 4% / 1 point $920 option as this would theoretically have me 'hit' the 'double PITI' goal since our property manager thinks the property can rent for $1200 / month.

Thanks for taking a look

Rate points cost PITI mo delta yr ROI ? Pay back (yrs)
4.500% 0.000% 0 624 0 0 N/A
4.375% 0.125% 115 618 6 72 62.61% 1.60
4.250% 0.250% $230 611 13 156 67.83% 1.47
4.125% 0.500% $460 604 20 240 52.17% 1.92
4.000% 1.000% $920 598 26 312 33.91% 2.95
3.875% 1.500% $1,380 591 33 396 28.70% 3.48
3.750% 1.875% $1,725 584 40 480 27.83% 3.59

For me, my wife and I have two little kids and both have day jobs. Buying and selling real estate seems seems pretty intense and not so passive. So we are currently buying and renting out. I suppose a couple of bad tenants / major fixes could quickly change my view of just how 'passive' being a landlord is. For now, our strategy is to buy, rehab, and then rent. So if we do a decent job of rehabbing, this should limit--at least in the short term--typical landlord 'fix-it' issues.

@Brian Hoyt that is what I had thought. The purchase price was $130k with 25% down. I put about $8k into it and did a chunk of the work myself.

When I look at the 2% rule--or even using Nathan Emmert's 1.5% rule, it does not look so hot: it's 1%. Actually, less if you add in the rehab cost.

Thanks everyone--I think I get it:

My rental agreement states that the tenant will pay $1300 / month + utilities.

My Principal and Interest payment = $486.80.

So $650- $486.80 = $163.20.

I guess the $163.20 is my predicted cash flow based on the rule of thumb that %50 of my total rents will go to expenses.

So the %50 rule is completely independent of the cost of debt since interest isn't included.

This seems odd that such a rule of thumb wouldn't include one of the most important cost factors--the cost of money--in determining the viability of an investment.

So let's say I am looking at a house at a price of $130k and 25% down.

The difference between a loan at 4.125 and 5.125% = $82 / month

Nathan Emmert, so if you bought a property for $100,000, you would want to rent it for $1500 / month?

Really thought I would have an easier time finding a consistent definition of this by googling.

Can someone lay out for me what of the following goes into the expense part of the 50% ratio?:

[/u]Hard, real costs (eg $$$ being paid out)[u]
Principal Payment
Interest Payment
Property Insurance Payment
Property taxes
Mortgage Insurance
Management fees
Marketing fees
Remodeling expenses
Repair expenses

[u]soft costs: real but not $$$ paid out):
Vacancy adjustment

Additionally, should I be pretty happy if my rental property rents at twice PITI?

Example: (Principal, interest, insurance + taxes) X 2 = Rental price that tenant has signed up to pay ?

I may have exaggerated a bit on the '7 winners and 3 losers' bit: His general point was that with his capital and volume, he didn't need to win moderately on every deal. A few of the winners would win big, and the losers may only lose a bit. (this is the same concept though not as extreme as venture capitalist work). So say, lose $5k on 3 deals each and make $50k on 7 each. And do 30 deals a year.

To the point of taking advice from my real estate agent, I don't look to him to choose my properties. In fact, for my first deal, he advised against it based on what he thought about the market economics of the neighborhood. I only use my own research (which of course includes others research) to determine where and when I buy. I look to my agent to give me round numbers of potential costs of things that need fixing, what is the worst case scenario he has seen as a landlord himself. And then I verify.

I joke with him that he really should love it when one of his clients doesn't listen to him. Either I don't take his advice and I end up making money so I am happy, or I don't take his advice and I lose money and he can say "I told you so."

Again, I know infinitely more than I knew a year ago at this time and it is still relatively very little compared to some of the folks here. So with that in mind, I smile a little smile when he says 'E, you are doing better than my investor clients.'

A few months doesn't make an expert.

Back on topic though, as a recent novice who was like the OP Manuel 9 months ago, I would likely walk from this property unless someone can make a bullet proof case that it will be a good investment.

Any other bids on it?

I have rehabbed two properties combined didn't amount to $20k, so I am pretty novice.

It looks like a gang hang out with all the vandalism and tagging.

This one is beat down hard. Like another poster said above, as a first project, this could hurt you. If you have done 15 properties, you would be in a lot better position to make money.

My realtor who is a fix and flip investor says that in a good year, he makes money on 7 properties and loses money on 3.

I'd walk

Solid math above.

I would offer that leverage is directly related to risk-affinity.

Putting more $$ down and getting a higher cash flow rate per property limits your possible highs and lows.

If you maximize leverage and minimize cash flow for each property, your margins are tighter. If property prices move up and rents move up, you win. If rents drop and vacancies go up, you could be sitting on vacant properties. Combine this with a job loss and things could be tight.

I don't know and would venture to guess that a lot of folks here are fairly novice like myself and have day jobs, families, etc. and can't afford to make six figure mistakes.

My last property that I used leverage for I put 25% down (getting a better interest rate) and it cash flows almost the same as my carrying cost: (before escrow readjustment, my cost to carry was $650 and I am getting $1300 for rent, now it is $700 cost to carry, so I am still getting $600 gross cash flow after principal, interest, taxes, and insurance).

My next property I hope to do the same.

I feel these investments are pretty 'bullet proof': if rents drop an unheard of 20%, I still cash flow.

Of course, if I were to utilize more leverage, I could perhaps accelerate my goal of acquiring enough properties to retire. However, given that I am a novice investor, this tactic puts too much emphasis on my limited experience and related skill in property investing.