All Forum Posts by: Lance Smith

@Derick Davis

That upcoming correction does concern me.  I'm in the Denver area and we have had the double digit appreciation in the past few years.  I'm worried the correction will wipe out the gains I've had and I'm constantly thinking about how to prepare for it.

@Derick Davis

That is what I really like about real estate.  We aren't relying on a CEO or hedge fund manager to determine our profits.  We get to take our future into our own hands.  I never like to compare down but investing in anything is better than what most of Americans are doing on a yearly basis.  I think if we all just keep pushing forward and helping each other along the way we will make it in the end. 

@Derick Davis

If those numbers do reach that they may offset the negative cash flow when you go to sale.  I just hate speculating on appreciation. 

@Derick Davis

Another question, when you state you have $50K in equity are taking into consideration the costs of selling the property?  We were recently looking at selling a rental and our $80K in equity turned into $65K pretty quick.  That was with our agent reducing selling fees from 2.8% to 1.7%. Its a whole other topic but this is an example of why it might be beneficial to be licensed. 

@Derick Davis

I completely agree with Jacob.  You don't have any cash flow.  Subtracting 20% of your rent puts you right at your monthly mortgage payment.  Also, like Jacob, I think when you factor in vacancies, repairs, property management, and cap ex 20% is really low.  

@Jacob Sampson

I think the deciding factors would be determining how much of the $995 is going to building equity and what other factors are in place to offset the negative cash flow.  

Basic expenses of 5% for vacancies, 10% for repairs, 10% for property management, and 10% for cap ex means the $1250 in rent only brings in $812.50 in income. Of course these numbers aren't absolute.

Due to the negative cash flow he is having to come up with an estimated $182.50 a month over the long haul.  The major issue, at least as I see it, is he is generating profit but can't access any of it.  If he has other sources of cash flow he could hold onto it for a while but as you said, equity is very market dependent.  Also, I think very few of us would agree that using cash flow from one property to pay for negative cash flow on another is a wise idea. Unless of course he is expecting, with reasonable certainty, huge appreciation.  

If it were me I would determine my ability to raise the rent, determine the cash flow with a 30 year mortgage, and then determine how much of the 50k in equity I would have after paying for real estate fees if I sold.  One thing to consider, there is a high possibility switching to a 30 year mortgage will only reduce costs enough to avoid a negative cash flow.  The switch may only bump him up to $0 in cash flow but he will have to pay closing costs to obtain that.  

I think you need to determine what can be done with the capital before deciding how to access it.  For instance,  $50,000 will not buy you to much in my area short of investing an hour away or in an area you probably don't want to invest in.  

Another aspect to consider is your calculations for the property. I understand you have a 15 year loan which is raising your PITI but a $250 margin every month might be setting you up for failure. You are paying down the mortgage quicker but, as you are currently witnessing, are not able to access any capital for future growth. I don't have a sound answer for you because I don't know the whole picture but I would suggest getting out of the 15 year mortgage at a minimum.

@Ray Arends That is a pretty good idea but I have zero experience with commercial loans. Plus in the Denver area $325K isn't going to get you much.  However, in going to keep this advice in my back pocket in case I need it.

@Upen Patel Thanks for the great advice. I ran it by the lender and it helped me to lower the DTI enough for the loan!

@Brie Schmidt  Thanks for the advice.  My main issue was all of my debt is in the form of mortgages.  I couldn't get rid of any additional debt because there isn't any. However, Upen and your advice put me where I need to be for the loan. It's time to go shopping!

Hello,

I'll try to be brief....

We just bought a new house and have rented out our old one. However, in the process we came up against DTI issues. We had to provide a signed lease and proof that the 1st months rent was deposited in order to qualify for both mortgages. They did count the lease as income for the year. We are, or may be depending on the circumstances, back in the market for another rental. We have enough down payment to cover a $325K purchase and provide us with $25K in cushion on top of a cushion for the other property. With all that, how do I address the DTI issues?

Thanks in advance,

Lance

@James Lamb I do like the thought of having a lump sum of money to seize an opportunity when it comes along.  I just have to make sure it is the right decision and that there is an opportunity to seize.