All Forum Posts by: Michael Hyun

If mid term rental is the only option, I'd be very careful with this deal. Run a report for what you could get if it wasn't a mid term rental.

You assume you'd get 6.50 interest in two months from now. I think that's also a bold assumption. I'd assume 7.5, and I'm not even sure if thats conservative or not. Just look at the difference between rates two months ago and what it is today. 

Each home making 4k a month is pretty insane. I hope that rental number is accurate.

If you're willing to manage 2 SFHs, leasing the rooms out individually, I'd urge you to take a look at STRs. Look up the STR Loophole. The tax benefits could be a game changer for you.

if you're from san jose, like I am,  then there is almost no cashflow homes within at least an hour and a half from you unless you want to be creative.

Perhaps creative financing, or creative real estate deals, like Airbnb, mid term rentals, househacking, or something else. If you're not willing to do that and you jsut want to buy something easy to start off with that is relatively low effort and simple, then I wouldn't even bother looking in the Bay Area. 

I also play the appreciation game in Livermore, CA. I have two SFH there, but I'd do things differently now that I look back on my investments. In total, these two properties will negatively cashflow 2k a month. Pretty terrible investment, right?

These homes allow me to not pay any federal income tax this year (thats another 2 hour discussion right there), but the tenants are A+ tenants. No headaches, they auto pay on time, they are very communicative, etc. 

I got a 3.25 and 4.25 interest on these homes, and I'm negative about 2k a month. I just found out, however, that there are much better loan options out there for this style of investing (appreciation play investing). 

THIS IS MY FIRST TIME RUNNING THESE NUMBERS. PLEASE CHECK MY ASSUMPTIONS AND MATH AND LET ME KNOW IF EVERYTHING CHECKS OUT.

Let's use the numbers from my actual purchase but with different loan options:

Assuming:
1. 900k purchase price
2. Interest only rate is slightly lower than a conventional since its interest only

3. The rent I can collect is $3400 (currently the actual rent I am charging)

1. The conventional loan(I went with this because I didn't know about option 2). Amortized Interest and Principal payments for 30 years.
- 4.25 interest
- 2500 interest per month
- 1000 principal per month

- 1000 for insurance and Tax

- TOTAL PITI: $4500

pros:
- principal pay-down (but is this a pro? - i'll explain below)

- 30 year fixed - no balloons, fixed rate. Unless you get an 7/1 or 10/1 ARM.

cons:

- principal paydown (1.2k more per month compared to option 2)

- higher monthly payment

With this option, I'd be cashflow negative about $1100 a month. Not including any other expenses, like maintenance, vacancies, etc.

2. 40 year interest only loan

- 3.75% interest

- 40 year term
- ~$2300 per month

- $1000 for insurance and taxes

- TOTAL PITI (in this case, "ITI"?): $3300

pros:
- no principal pay-down

- cashflow breakeven (much easier to hold the property when cashflow is tight)

cons:

- no principal pay-down

- 10 year balloon

With this option, I'd be cashflow POSITIVE about $100 a month. Not including any other expenses, like maintenance, vacancies, etc.

You can see from this calculation that even a 900k SFH in the bay area can ALMOST be cashflow BREAK-EVEN with the right financing.
BUT I don't get principal pay-down. After revisiting the concept of principal pay-down, can someone help me understand why principal pay-down is a good thing?

I would much rather have an interest only loan and KEEP the extra $1000 in my pocket every month, rather than being forced to pay it to my equity each month. The problem is that every month I put in $1000 into my equity, but my monthly payment doesn't change.

Sure, you'll pay less interest over time, but having and extra $1000 in my pocket each month allows me to actually re-invest it rather than putting it into my equity, where it doesn't even reduce my monthly payment. What's the ROI on the $1000 that I put into the equity each month? Plus, the interest only loan has a better interest rate anyways, so I don't think you'll actually save much more in interest over 10 years.

Compare that to how I could invest that extra $1000 per month into buying more real estate. Why is principal pay-down a good thing?

So with that in mind, I'm leaning towards doing a 40 year interest only loan for my next deal, or maybe my own primary home. Maybe for places like the mid-west where homes barely appreciate over 10 years, I wouldn't do this. But in the Bay Area, I'd be willing to bet that my home appreciates at least a small amount to where I would probably sell the home or 1031 MUCH before the 10 year balloon of the interest only loan. I'd probably have less equity than the conventional financing route, but I'm willing to bet that there will be enough equity for me even without the principal pay-down, where I could 1031 exchange into some nice cash-flowing properties later.

These are just some thoughts that I had, please feel free to poke holes in my assumptions and opinions!

I'd ask around for private money - perhaps some friends or family might be interested in making some returns on their cash right now.

Investment Info:

Single-family residence buy & hold investment.

Purchase price: $900,000
Cash invested: $180,000

Bought a negative cash flow property - about $1500 a month negative. I'll long-term rent it out and eat the negative cash flow, and do cost segregation and bonus depreciation. My fiance/soon-to-be wife holds REP status, which will allow us to take close to a 250k write-off in year one, which we'll use to buy cash-flowing properties.

What made you interested in investing in this type of deal?

It's purely a bonus depreciation play - although home prices may fall, I'm planning on holding this for the next 10 years or longer. I plan to use the huge tax savings from this property to buy cash-flowing properties.

How did you finance this deal?

20% down, 4.375% 7/6 ARM loan.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

Eileen Kim - my fiance.

So I'll throw this out there as a free little golden nugget. A market that I considered heavily is Zion National Park. The main town that surrounds Zion National Park completely banned STRs in all residential zoning. 

The competition there is almost none because of this. The only people doing STRs are either commercially zoned properties, or conditional use permitted spots. Look at the tiny homes of Zion national park and behold the crazy demand that they receive because they have almost no competition from residential Airbnbs. Their success is long-term. Sure it's more work, but in just one year, Joshua Tree became saturated in my opinion. Can you still make money there? Yes. Is it harder than last year? Yes. 

Their calendars are completely booked 3-5 months out. That's the type of occupancy I want. 

Beware though - the people of Utah in that city know that Zion national park has a bunch of investors trying to get in that market. In order to get a conditional use permit, you need to go before the city council and show why you should get that permit. Some locals might object and prevent you from getting that permit. But if you get it - your future looks bright. 

Heres the zion tiny homes: https://www.zionstinyoasis.com...

My personal stance on this is that money is always made in places where other investors are scared to go. This is just my take, but you can't hold STR to the same standard as LTR - just because a STR does well its first year, doesn't mean it will do well the second year. Joshua Tree increased in STR unit count by 50% in one year. Demand didn't grow by 50%. This is because its a STR friendly area and investors flocked to it like crazy.

But in markets like Henderson, NV - Airbnb is strictly regulated (but still legal). Each airbnb needs to be 1000 ft from the next Airbnb. This severely limits the number of Airbnbs in the city and caps your competition. This ensures long term success, not just a few years.

Currently, I'm asking questions like "how can I get into this market" rather than "which markets allow me to do this".

@Andrew Freed so the only caveat is the 40% seller financing part - that is not a 30 year loan, is it? I heard its a 10 year balloon - what does that mean exactly? 

Does that mean that 40% is amortized over ten years? If it is, then even at 1%, isnt the monthly payment for that 40% still realtively high?

Is it a 90% LTV if the seller carries 40%? I think he mentioned its a 10 year balloon on the seller financing at 1%. And yes, this is if the seller is more desperate.

Here is the video I watched.  50/40/10 loan video.

So I just heard that there is this financing option where I can combine Non-QM loan for 50% of the purchase price, and then seller finance the 40%, and then down payment for 10%.

If I can get the 40% of seller financing at 1-2% interest, that would make a good deal a great deal. 

Pros:
- only 10% compared to 25/30% down payment. I'm looking to buy as much real estate as possible in the next 5 years so this is big.

- Much lower monthly payments

Cons:

- harder to find a seller willing to finance

- Having to deal with the seller? I'm not too familiar with seller financing. What if they want out?

Any thoughts on this?