All Forum Posts by: Jacob Sampson

LOL.  I wonder if there is just something wrong with my browser.  I will try a different one.

Thanks.

it must be more than just @personsname.  How do I do it?

If I buy a property outright for $100,000 cash and after expenses I have $10,000 a year left in NOI then that is a cap rate 10%. If through my intelligence are ingenuity, or whatever (assuming all else stays the same) I can spend $1,000 a year less in expenses then I get $11,000 in NOI and that is a cap rate of 11%.

Cap rate is not dictated by anything but the buyers and sellers. Cap rate is only a function of NOI/purchase price. I think Ethan has it right. The article stating that an area has lower cap rates, isn't saying that some entity is dictating what the cap rates have to be, it is just saying that in that area, a majority of investors, are willing to pay more for a given NOI, thus driving down the average cap rate for that area.

And how do I do the @persons name properly?

@Ethan Bruland

I'm thinking through the numbers as I type this, so bare with me. So P&I = $1,362/month + $250/month for taxes and insurance = PITI of $1612.

Ok here is what I think.  I think long term you aren't allotting enough for vacancy and maintenance.  Even if you use 20% for v&m your margins are pretty slim.  You will care that it isn't generating much cash when you get late night calls or have to come up with cash to replace the roof, windows, etc.  There verywell may not need to be maintenance now but this is a long term play for you so you should use long term numbers.

My fear is that you have been looking for a while and are super anxious to finally pull the trigger, this is the best option you have seen and so you are trying to make the numbers work no matter what.  I get it, I've been there, in fact, I've made that purchase. 

The numbers are close, they just aren't quite there for me personally. This wouldn't be the worst deal I have seen or done, though.

On a side note, with 0 cash down, obviously the CoC return isn't that useful anymore. A 1000% return on $1 doesn't really matter.

Here are my fast and dirty numbers.  Keep in mind I am in Topeka, KS.  Not sure how my market compares to yours.

I max out at 60Xmonthly rent (including rehab costs) for a purchase price.

I use 30% as my vacancy and maintenance cost as a long term average. With that taken into account, I want at least 12% CoC ROI on a 15 year loan. So for your deal, this is how I would look at it. Assuming there isn't any rebab needed immediately. Keep in mind, there is likely to be more deferred maintenance than you expect.

At $2235 in gross monthly income I would pay up to $134,000 for that property.  Without knowing taxes, insurance, and interest rate it is tough to get too specific but that's what I would be looking for in my market.

You'll put $27,000 down and say $4,000 in closing costs. Your 15 year note at 4.25 would be for $107,000, which will give you a P&I of roughly $805/month add in some taxes and insurance, which I am totally guessing at, of $250/month gets you to a total PITI payment of just shy of $1200/month.

Your rent of $2235 - 30% = $1564 - PITI = about $400/month in cash flow, or $4800/year return on the original $31,000 invested. Which would be a 15.5% CoC ROI. I would be excited about the deal, if my numbers are anywhere close you what you are thinking.

I'm going to buy an asset (multi-family) before I buy a liability (your personal residence).  With further details about both options my opinion could change but in general, I don't care one wit about my personal residence.  It is a means to and end, it keeps my family safe, dry, and warm.  Other than in unique temporary market situations, you are going to lose money on your personal residence.  Which is OK, personal residence, in general, is serving a different purpose.

@Brianna H. 

I think the fact that you just woke up is less the issue than the fact that I feel the need to use 100 words where 5 will suffice.  My main point was just that the principle portion of your mortgage payment is no different than the money you used to purchase the property so each month the amount you have invested increases by a bit.  That should be taken into account in your calculations.

Also, As you have found, monthly calculations of either ROI or ROE are nearly useless as decision making tools. Those are better used when you have a year or more of data, where you can figure out what a long term average ROI/ROE is.

You've been given good advice regarding your question. I would just add a tweak to the way in which you calculate the performance of your buy and hold real estate. Here is an example of why you need to calculate it slightly different. If you purchase a $100k home with 20% down and 5k is other costs then you have $25,000 invested. If after all expenses you clear $2500 cash flow in a year then you have a 10% ROI. If everything stays exactly the same then 15-30 years later you owe nothing on the house and are still clearing the same $2500 a year in cash flow. You are not still getting a 10% ROI because your principle payment is your cash that you have chosen to invest in that property (forced by bank or not) you could refi that cash out to invest elsewhere are you could sell and invest the cash in something else.

For buy and hold RE you should use return on equity (ROE), that is value of the property minus the amount owed.  If there is significant cash invested in closing costs and fees you will want to add that in.  Generally, unless I am absolutely certain that my property has appreciated, I don't bother including appreciation in the calculation.  I use my purchase price as the actual value.

In the example above where the property is paid off you would only be getting a 2.5% return on equity.  Assuming rents increase as fast as you buy principle down then you continue to do well.  In my case I only do 10-15 years loans so i usually pay principle down faster than rents increase.  Thus, my ROE slowly gets worse and worse and once I drop below 10% ROE that is my signal to re leverage my equity, to keep it working hard for me.

This feels long winded and possibly not all that intelligable. if so, I apologize and just ignore it. Long story short, add principle payment into the amount you have invested when calculating ROI, because that is your money.