All Forum Posts by: Jason Barnett

You have it exactly... to calculate "net income" you want to include all costs that are NOT part of your debt service. So include things like maintenance, trash, insurance, utilities (if you pay them), etc.

Then to calculate ROI you take your yearly net income and divide by your original purchase price. If you bought 14 years ago then your ROI is probably a good % rate right now since rents go up over time, but the original cost stays the same.

The 15 yr. loan gives you better cash flow because you pay out less money per payment than you would with the 10 yr. loan. In turn I assume that you're going to take this extra cash and re-invest it in something that will earn you market ROI (in my example it was 10%). However, if you don't plan on reinvesting your money then you would be best off just paying off the loan entirely. Does this make more sense now?

Remember, you make money by creating a "Spread".

Spread = ROI - WACC

Spread > 0 is a good thing and is a requirement for success.

Obviously if your deal has negative ROI before you even borrow money then you're throwing your money down the toilet. Not trying to go off on too much of a rant here, but if you can understand this then you can see what deals are actually good deals (instead of asking pinheads like me to figure things out for you...) :lol:

Of course you can keep asking me if "this is a good deal"... just be sure to include things like "street address", "asking price" and "name of owner" if possible. :groovy:

Good catch on the closing costs, I didn't figure them into the original calculations. The breakeven point would be at an average ARM rate of about 7%. So if you are worried that your ARM rate will average more than 7% over the next 16 years then you should lock in the 15 yr. fixed rate now. This is still likely, but I don't know how likely.

Well I can work up the totals... but like most things financial it depends on a few assumptions. The problem lies within the compounding interest i.e. the interest you earn is added to your pile, and then interest is calculated from your savings PLUS your interest.

@ 4% interest in 10 years:

Saving $10 every two weeks you would have $3,193.88 ($593.88)
Saving $25 every two weeks you would have $7984.70 ($1484.70)
Saving $50 every two weeks you would have $15,969.40 ($2,969.40)
Saving $100 every two weeks you would have $31,938.80 ($5,938.80)
Saving $250 every two weeks you would have $79,847.01 ($14,847.01)
Saving $500 every two weeks you would have $159,694.02 ($29,694.02)

Amounts in parenthesis are interest that you earned over 10 years.

There are only two reasons you should even possibly consider this deal.

1. You are not self-employed / you do not currently have a way to spend pre-tax money for business expenses.

You said your niece is already self-employed so this doesn't really apply to you (both of you anyways).

2. You are banking on major appreciation.

I have no idea what appreciation is like in that area, but it would have to be an annual appreciation of 10% or more to even consider this deal.

Here is my reasoning. Even with no vacancies and no maintenace $ your ROI on this property is less than your cost of borrowing. You make money on spread and this deal is worse than leaving your money in a bank account at 2%.

Perhaps you should consider buying out-of-state or trying to rehab in LV instead. You make most of your money on a deal when you buy the property. Or maybe you should partner up with someone in an area that can put your money to better use? For example, here in Ohio you can get a multi-unit with positive cash flow for less than $200K.

I have put a lot of effort into an Excel spreadsheet. If you want I am willing to email the sheet to you to help you out with future decisions. Onward!

Google terms that "are in parentheses" if you don't understand them.

Today's lesson in Finance 333 covers the concept of "Spread".

"Spread" is the concept where you try to earn a Return On Investment (ROI) that is higher than your Weighted Average Cost of Capital (WACC). You take your yearly "net income", divide it by your original purchase price, and you get ROI. This ROI should be higher than your WACC (this would just be your cost of borrowing if you own the property by yourself).

All of my comments below assume you earn 10% ROI in your area.

The value of this option depends on two things: the market rate of return in your area and the rate of T-bills. If your ARM stays at 4.875% then obviously it makes sense for you to keep your cash on hand and re-invest that money into a new property.

Also: you only have to pay PMI until your LTV gets below some certain percentage. I think you can quit paying PMI when your LTV hits 80% (check your promissory note).

If this building originally qualified as FHA, then why not consider getting an FHA fixed rate mortgage? I got one for my first building and I didn't have to pay points.

In any case, with the loans that you presented here the 15 year fixed loan is absolutely a better option than the 10 year fixed. The rate of return is higher for the 15 year loan and obviously cash flow will be better since you are taking longer to repay.

It's kind of hard to compare your original ARM with the 15 year fixed, but here's what I came up with. At 10% ROI, in order for the 15 year fixed loan to be a better option your ARM would have to average more than 6.1% over then next 16 years. This is likely, but I'm not sure how likely and I'll leave that decision to you.

The choice to pay off a loan mostly depends on your ROI. At 10% ROI it is bad business to pay off the loan, but if your ROI is low (say, 6% or less) thenpaying off the loan makes sense.

For anyone else reading this message here is something you all can use: when you pay off a loan you are getting a guaranteed return of X% (where X% is the interest rate on your loan). This is why it makes sense to pay off your highest rate loans first because they give you higher returns for paying them off early.

The best way to protect your personal FICO score is to buy homes in the name of a company instead of titled to you personally. Have the mortgages tied to the company as well. Debt to income is a major component of your FICO score and when you buy multiple houses (especially if you're rehabbing the houses instead of renting them out) it is quite possible that you're presenting a larger risk.

National Tenant Network:

www.ntnnet.com

They don't charge any annual fee for membership, although they do ask for a small amount of information (just enough for them to know where to send your bills).

It's a pretty nice service; they have different kinds of screening that you can do (credit check, criminal background checks are usually what I look at) for different prices. Plus they will do searches on the person nationally instead of just checking your state's records.

Last but not least: the customer service is good. In one instance I had a potential renter that was from out-of-country (husband was bringing his new German bride into the country). I called up NTN to find out what they could do for me and I had an answer within an hour. Granted, they couldn't give me a LOT of information, but they were quick to respond to my problem.

Gotta love Google:

http://www.iowalandlord.org/

For anyone else looking for a local group, try googling for "REIA "

In a nut-shell: yes, some will. In fact it's best if you can start things off with a hand-shake agreement (your private lender will "agree" to loan you up to $X for Y% interest at some point in the future). Then when you find the deal you want you have the lender come to a closing with you and you sign an actual contract.

FHA loan with very little money down on a 4-plex (basically closing costs). PMI was in the deal, but the interest rate was 6.25% so I'm not complaining.