All Forum Posts by: Derek Kirkwood

That does seem weird that its been on the market that long.  Compared to the 1% rule its at 2.5%.  You're sure your lender will lend on that small of a purchase price?  Are there any landlord paid utilities?  or maybe you included utilities in your 4,200 misc.  How much for closing costs?  When you included the 6k taxes in the purchase price... are you sure the bank will let you roll that into the loan?  If not I would treat it like a closing cost which would knock your cash on cash down to 25%.  Still seems great though, we must be missing something.

@Josh Thompson

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@Julius F. Merry Christmas to you sir!

If you end up paying the agent fee yourself I would include that as closing costs, which will raise your total cash invested, lowering your Cash on Cash return.  For the $310k sale price the fee would be $9,300 which will lower your cash on cash from 12% to 8%.

Still seems like a good house hack. After living in it for a while you will have a much better idea of how much to budget for repairs. You could use any cash flow to pay down the balance faster to get rid of the PMI as soon as possible.

Does this area support renting out to 3 individual roommates (i.e. college town)?  My concern is what if you are not able to find 3 tenants, and only a family would rent it, would a family pay $2,600 for a 3/2 in this area?

@David K.

Normally you would use closing costs + down payment + rehab costs to calculate your total cash invested in order to calculate your cash on cash return. But CoC is only relevant for the first year or two then you need to use something like Internal Rate of Return or Return on Equity to look at the overall picture long term.

How long did you own it before you rehabbed the lower unit?  If it was less than a year I would think just include it in the total cash invested as though you did it right away.  If its been a few years then maybe look at just that $8k investment:  it increased your rents by $300 per month, or $3600 annually.  Thats 3600/8000 = 45% return!  And that would pay for itself in a little over 2 years.  Seems like a great value add.

You might take a second look at refi.  You said you won't refi because you didn't add any value.  If your lender's appraiser uses the income approach then you absolutely added value, and you could refi to pull money out.  I don't know how often duplexes are appraised based on income approach, maybe others could speak up about that, but it seems to me that most duplex buyers would be investors rather than home owners so they are going to buy based on income and cap rates.  

@Julius F.

How much for utilities?  Does it need any work to get it rent ready?  You listed the 3% agent fee separate, does that mean you have to pay 3% for your agent in addition to the purchase price?

Correct, debt service is not included in operating expenses. Debt service is just the principal and interest mortgage payment (or payments if there is more than one mortgage). Its common to have insurance and taxes paid from an escrow account, as the lender has a vested interest in the taxes being paid and the house staying insured. Because of this you pay Principal, Interest, Taxes and Insurance (PITI) as one lump payment for convenience, but its important to note that taxes and insurance are operating expenses, but the principal and interest are not. From your gross operating income (rents minus vacancy allowance) then subtract all the operating expenses to find Net Operating Income or NOI. You then use the NOI to pay the debt service then keep whats left over as cash flow.

At the end of the day you are paying the same amount regardless of what we call it, so why does it matter? It matters because NOI is the income a property produces regardless of the owner's financing or personal income tax situation. This is the number another investor you try to sell it to will care about. For example, an all-cash buyer doesn't care what your loan payment is. NOI is also the number you begin with to calculate your taxable income. Taxable income is generally = NOI - deductible mortgage interest - depreciation.

I would be concerned if a property's expenses were at 50-55% of rents not including taxes and interest, as you are doing.  The "big four" things that make up the bulk of your operating expenses are: Taxes, Insurance, Maintenance, and Management.  Those plus any other operating expenses is what is referred to with the 50% rule.

Hope that helps!

@Donald S.

The math is correct if these numbers are accurate, I used the 2600 rent and got the same 11-12% CoC. Seems like conservative estimates, and nothing I can see thats missing. This is one of the better deals I've seen posted on here in a while, awesome!

@Dan Shelhamer

The image didn't come through, maybe try posting another format

@Mar Now  I agree.  It seems very difficult to find properties in good condition that meet the 1% rule.  I sometimes see talk of 2% or 2.5% properties and I have know idea where people are finding these.

I have a similar decision to make, where or not to sell a house or turn it into a rental.  Similar to yours it has appreciated a lot since I have owned it so the price I bought it for many years ago seems irrelevant.  After spending a lot of time thinking about how to view the value of keeping it I finally decided I should treat it as the opportunity cost of selling and doing other deals with that money right now.  

So in your case if you walk away with ~300k cash, use that for downpayment on deals with 80% LTV which is commonly advocated on this site, you could get into ~1.5 million worth of properties. That is the opportunity cost of keeping that house. The HELOC is kind of a meet in the middle approach where you pull out a lot of the value but not all of it.

In my case the opportunity of having that much cash on hand far outweighs the mediocre rental income I would get from keeping it.  Another way of stating this is if you owned no houses but you had $300k cash on hand, would you buy this exact house today?  Or would you do something else with that money?  If the answer is no then sell.

Same explanation as above.  On the multifamily if you are going to keep it forever and not refinance then you don't really care what the ARV is. I'm assuming you will sell this at some point down the road and before that refi based on the ARV to pull money out. If so then you need to know what you can cash flow with that 5,200 rent.

Totally agree with you on the house, you have 1,250 cash flow free and clear so the 1% rule doesn't mean anything, unless you do a HELOC then it matters.

The 1% and 70% are just general guidelines. In the case of the SFH you have owned it long enough that you know exactly what it costs to operate so you can calculate exactly how much of a HELOC you could take with the cash flow you have, no rules of thumb needed.