All Forum Posts by: Kevin Siedlecki

@Jose Corbera - As others have mentioned, your mortgage is actually on the low side. But no one has mentioned the viability of this as an investment. If you truly plan to rent out your first home, and are "about to buy" but have still have outs in the contract, you need to find a better deal!

If your best case scenario for gross rent is $2000, you are almost definitely going to lose money in the long term. All it's going to take is a one extra expense per year, or slight increase in HOA, taxes, or insurance to eat up that $105/mo in cashflow. While the HOA will take care of all exterior things, you will also have to make minor repairs as necessary, and maybe pay water/sewer or trash collection, too, depending on what's including in the HOA. This might be a great place to live, but is probably not a good long-term rental investment.

Just wanted to get that perspective out there for you. Good luck!

@Wayland Willingham

If your goal is to grow, and this is the only way to qualify for that next loan, then you definitely should refi. My only question is what you mean by "my available cash per paycheck increasing by 450." Why is your paycheck relevant here?

That said, as long as you are still cash-flowing with the new loan, then refinancing is a great idea.

@Theresa Nelutescu - Your question was if the property cash flows. That depends on if and how you finance it, and it is a very different question than if it is a good investment. When you ran analysis without financing, it did cash flow, but, as you suspect, it is not a great investment. When you run it financed, it does not cash flow, which makes it not a good investment. However, there might be some middle ground where it does cash flow and the COC ROI makes it a good cash-flowing investment.

@Danielle Scott - Whoops, I misunderstood in my first post - I thought you were living there.

If you're not living there, then you only pay taxes on your net income, not the gross rent. Every dime you put into upkeep, insurance, taxes, and mortgage interest is tax-deductible, and you also get a depreciation deduction. Speak with a tax professional to make sure you get it right.

@Theresa Nelutescu - The document shows a small (relative to investment) positive cash flow in both current and projected columns. Why/where are you seeing negative? 

@Larry Bly - The bottom line is that I agree this is just an ok deal- maybe not even that. 

I am a little confused by your statement about debt service and COC. You have to include your debt service in your COC calculation, otherwise you are adding non-existent cash to the calculation, making the deal look a lot better than it is. My guess is that you are just confusing Cap Rate with COC. You do not include debt service in Cap Rate, because it used as a way to compare commercial properties, just so everyone is speaking the same language when listing them. The 12% number you're getting for COC before the debt service is meaningless - what you are actually calculating there is the Cap Rate if the price were only $200,000, and you paid cash. That doesn't make any sense, and doesn't give you any information about whether it's a good investment, because that's not the price, and you're not paying cash. COC means annual profit as a percentage of the cash put in. Your COC ROI, as you point out, is really only 4%. As you also point out, that's not very good. So you have a few options:

1) Use more leverage. A risk threshold of 50% LTV is not going to get you far in real estate.

2) Negotiate a better price. Again, though, if you insist on 50% LTV, you'll have to bring that price way down to bring your ROI up to a reasonable level.

3) Find something better. The great thing about investing is that you never have to buy anything. Move on to the next deal.

@Geoffrey Schnake - Whatever calculation you use for analysis, CapEx is always a guess. It's highly unlikely you are actually going to need $100k in a CapEx account. I'd be curious to hear what others say, but I don't see a need to keep more than $10,000 per property on hand when you're getting started, with a max of $25,000-30,000 no matter how many properties you have. As your portfolio gets larger, the cash flow from rent can also serve as a cushion for expenses you might categorize as CapEx, too.

You should have an idea of the life expectancy of the items that money is reserved for. With the amount of money you've got in that account, you are prepared to replace a furnace, roof, driveway, and water heater on 5 or 6 houses, all at once. If you can look at your portfolio and say you have 3 years left on a furnace, 10 on a roof, etc... then keep that money plus a little cushion on hand. The rest of that money is bonus profit because you used good conservative estimates when you did your initial analysis. Good for you! Enjoy the rewards! Go buy another house, or make value-add improvements to the units you already own. 

@Will Schryver - I do look for 10-12% COC. I never walk away - I'll just make an offer that makes the numbers work. If the seller isn't interested, oh well. I find once you get people going with negotiating, they want to make the sale happen more than I want to buy that particular property.

@Austin Sanne - I don't understand how they can say you can't write the interest off on your taxes. Once you turn the house into an investment, the interest becomes deductible as an investment expense. If it were a second home or vacation home, then I could not being able to take the interest deduction. Refinancing is definitely an easy option, either way, though. You've been there long enough to have a little equity, and rates are still low. Good time to do because you will either be able to take some cash out or lower your payments in addition to getting out of the terms of your first loan,

@Adam Garcia - This is a huge debate here, and the right answer depends on your goals. If you have the goal to expand your portfolio, take the extra cash flow. Don't think of it as maintenance and capex money, but money you are saving for your next downpayment. If you are putting that money into the loan, then you have to pay to get it out in a refinance. If you have it in cash, you can make it work for you in other ways, either by buying another house, or putting it in the stock market.

If you have no desire to grow your portfolio further, then paying off the loan earlier can makes sense. It can be like buying time. If the cash flow from a free and clear portfolio will be enough for you to live on, and that's your goal, then that moment of financial freedom is as far away as your amortization lasts, so going with the 20 year makes sense.

On the other end of the spectrum, taking the long amortization and doing a cash-out refi every 7-10 years, depending on appreciation, is another strategy way to go. That would be a way to take out a nice chunk of cash to either buy more or just have that money, while continuing to have cash flow.

Hope that helps!