All Forum Posts by: Derek Kirkwood

I used $710 for ARV. The 70% rule is Max Offer = 70% of ARV - Rehab costs. I think you forgot the $120k he estimated for rehab. So max offer would be $377k.

A. For the 1% rule, I would think you base that on ARV because you are going to take loans out based on that number, but you have to cover that new larger mortgage payment with the same rent. For example on the SFH if you pull 75% LTV out in a HELOC at 4.5% amortized over 30 years the payment would be $1,330 per month which is more than his current cash flow $1,250. Same thing with the multifamily, since rents are only 0.7% of ARV you know from that information alone that you likely will not be able to cover a huge mortgage payment

B. I'm not sure why you are comparing the 1,700 SFH rent to the purchase price 450k of the multifamily? I might have missed something there.

@Mar Now

If you apply the 70% rule to the multifamily, the max you would offer would be $377k.  So buying it for $450 is pretty far above that.  

The other problem I see is neither of these properties reach the 1% rule of monthly rent to purchase price: 5,200/710,000 = 0.73%, 1,700/350,000 = 0.49%. Refinancing either of these will kill the cash flow. You can only do about 65% LTV on the house before you hit negative cash flow, and about 60% LTV on the multifamily.

Pulling 75% LTV out of the house with the HELOC will lead to negative cash flow, which is why @John Leavelle suggested this as only a temporary situation that you pay off as quick as possible with the refi of the multifamily.  

Maybe a better way to look at this decision is this:  You have 1,250 monthly cash flow coming in right now.  If you sell the house and walk away with $325k after costs of sale, can you then invest that money in other deals to generate 1,250 OR MORE per month cash flow?

@Jim Goebel  I'm surprised to see granite on your list.  Are you saying granite has added enough value to your rentals that its worth doing?  Does this make it more likely to be rented or you are able to charge higher rents or both?  I had assumed granite would not be worth the investment for rental properties.   

Thats only about 2% cash-on-cash return (assuming you are putting 20% down).  You can beat that fairly easy in the stock market.  Unless there is going to be great appreciation then it doesn't seem like a great deal to me.  If you rent both sides for 1150 and self-manage it would be more like 10-11% cash-on-cash return, maybe that fits your criteria better?

Are there any utilities that you have to pay?

As a general rule of thumb you can assume 50% of rent will go to expenses.  Thats NOT including the mortgage.  Its not a hard and fast rule, I hear a lot of talk of multi-families and apartments being more like 60%+.  Thats why I think you could justify the 40% you have (without mortgage) with it being a new house. 

I don't see anything missing, and I agree with the math.  Overall I like it.  If 9% and $440 is good enough for the $56k that will be tied up then do it.

The only two risky things I see is 5% vacancy realistic with college students?  What about during the summer?  The other one is expenses are at 40%, which seems justifiable with new construction, but maybe run your numbers with 50% expenses and higher vacancy to see if you could weather that storm.  

Good luck!

Holding costs in addition to the mortgages would be property tax, insurance, Utilities. Then, may not apply to this place but HOA fees and any yard maintenance. Insurance is more expensive than a homeowners policy because its for a vacant property under construction.

@Account Closed Thats a great recommendation, thanks!

@Isaac Braun If I work backwards from your 27% CoC return: Annual cash flow 3,108 which is 259 x 12 months.

Total cash invested = 3108/0.27 = 11,511  which as far as I can tell is just your mortgage down payment (assuming 20% down)

Your total cash invested is actually down pmt + closing costs + any improvements to get it rent ready.  You might have a 5000 tax assessment if seller doesnt pay that, and you are also talking about new carpet/flooring/paint which could be thousands.  I think you need to include more in your total cash invested, so somewhere around $18,000 to account for those things which would result in around 12% cash-on-cash.  Hope that helps.

The calculator link doesn't work for me either