All Forum Posts by: Steve Lundy

 Great point, thanks Ted!

Thanks for the reply. My loan would be a 30 year loan. The "15 year mortgage rule" I included in the table above is simply another metric I came across. I don't really give it much value. The premise is to ensure the rent minimally covers a 15 year mortgage payment, taxes, and insurance. 

To clarify, the "primary mortgage" I am referencing is the bank loan I would take out to fund the purchase of this property, not my own house's primary mortgage. Apologies, it was probably worded in a confusing way.

@James C., thanks for your response. I do have an Excel spreadsheet I developed which calculates all this for me fairly easily, including a decreasing sale price (in decrements of $10K). The key question I have is how to analyze the numbers, and is cash flow truly the only metric I should be paying attention to.

When you say "10% on your money", do you mean ROI? (which I define as annual cash / total initial investment; in this case it is a paltry $916/$47,000 = 1.9%)

As I showed in my table above, there are all kinds of metrics for analyzing a property. The issue does come down to financing and how that impacts analysis of a property. If I did have a large wad of cash sitting around, this property would look like a much better investment, even at $150K purchase price - the monthly cash flow would be around $950, ROI around 7.5%. Perhaps not the greatest deal though, since the cap rate would still be less than 8% and the "One percent rule" is at 1.35%.

This is what it boils down to - for someone like me, who is investing with a bank loan for the purchase price and a HELOC to cover the closing costs, I feel I only have 2 options:

1) Find a property that is such a "steal" that the cash flow numbers work. I've been monitoring the market for months and nothing in my entire county seems to come even close. Even if I do end up finding one, I'll definitely wonder "what am I missing?" about the condition of the property, if it truly is this much of a "steal", and likely hesitate to pull the trigger. 

2) Take a risk on a property in the city near me (cheap prices, high turnover, poor schools, low income), which is not a great city for real estate, that I can buy entirely using my HELOC. My realtor (who has a bunch of properties of his own) recommended against buying anything in the city.

Any ideas for other options besides these to get started?

Thanks!

New guy here. Thanks in advance for any help or guidance you can provide. I am looking to purchase a 2-4 unit MFR as my first foray into real estate investing. My goal is to have a property management company manage the property. I have a realtor, I've been pre-approved for a loan, and I've been watching the MLS.

A 3-unit property became available recently, which intrigued me primarily because of its location (highway accessible, proximity to major city, and proximity to new 500-employee office building).

Projected Purchase price:  $150,000 

Initial costs
Down payment: $37,500
Closing costs: $7,500
Initial renovations: $2,000
$47,000 = Total Initial investment

Monthly rent: $2,025 (total from 3 units)

Expenses

Monthly taxes: $186
Monthly insurance: $63
Monthly utilities: $255 (sewer, water trash)
Monthly management: $203 (10%)
Monthly maintenance: $203 (10%)
Monthly vacancy: $169 (1 month of rent)

$1,078 = Total Monthly Operating Expenses

I am planning on using a HELOC entirely to fund the purchase of this property (down payment, closing costs, initial renovations).

Debt service
Monthly P&I - Primary: $586
Monthly P&I - HELOC: $285

$871 = Total debt repayment

$1,949 = Total Monthly Expenses

My thoughts/questions:

• In this scenario, the cash flow is next to nothing ($76/month). Is it absolutely silly to do this deal? Any upsides you can see? 
• If I do the property management myself (increasing cash flow to $279/month), does its outlook improve? I noted in the beginning of the post that the property is in what I perceive to be a great area to keep it rented regularly. 
• To what extent should I be considering or not considering the debt repayment expenses in my analysis of this purchase? 
• If for some reason you think I should proceed, how would you envision paying off / paying down the HELOC so that I can free it up for another property's purchase? How to move forward after a purchase like this seems difficult, since all my cash would be tied up.
• What would need to change for this deal to be worth it (e.g. how much lower would purchase price need to be, or any other ideas)?

As an aside, I have studied various "rules of thumb" and "real estate investment guidelines" calculations, picked some target thresholds, and plugged this deal in. Most thresholds say I'm not meeting the mark, but some do. How to best navigate and prioritize these?

Interested in any feedback or insights you have! Thank you very much.