All Forum Posts by: Timothy Gerdes

I just bought an investment property with cash and planned on refinancing right away to pull money out to buy another place. The lender just told me that I have to wait 6 months. He implied it was a Fannie/Freddie thing. Is there any way around it? What other financing options do I have?

Also, I was quoted at over 5%. That seems really high considering I'm able to get below 3% on my primary home.  Are investment rates really 2%+ more than primary property loans?

I've owned an investment property in Michigan for 6 years. Now that rates are low I'm considering refinancing. The title is in a business name. The lenders are saying the the title would have to go into my name, after which I could deed it back to the business. Would that name transfer cause my property taxes to be unlocked?

I bought my brother out of half of one of his investment properties a few years ago, at which time the deed was transferred into a different business name.  At that point the taxes on the house went up 50%. We don't want to repeat that mistake. Was the issue there that the title stayed in a different name as opposed to my current case where the title would come full circle back to the current title's name?

A few months ago I purchased a building with 4 townhouses in it in Texas. I created an LLC. I asked to use the LLC name for the title, but they told me to do it after closing. The loan was sold to another company. I contacted them, and they told me explicitly that they would enforce the "due on sale" clause if I did a deed to put the title in the company's name.

What are my options for protecting myself?

@Richard Ball my point was that the actual metric to look at (cap rate) is the same across all markets, although the value for that metric to be considered 'good' is different from market to market.

@Christian Brodinthank you, your responses have been very helpful. I plan on calculating CAP rate for my properties, as well as updating my CoC calculation to factor in as income instead of expense. I'll wait until the end of the year to do that. I think I'll also categorize some of my expenses (utilities vs repairs vs other) so I can better project what expenses to expect on properties in the future.

I'll also look into IRR/XIRR. Quick question: do any of those work on a month to month basis? Or are they all per-year? If I buy a property in November and use the last 2 months as one "year" of flow in the formula, it seems like it would significantly skew the numbers.

As for capex, are you referring to things like water heater, major repairs (redoing some electrical work), roof, etc?  Yes we do have some properties that have had some extra investment from our side.  I do understand that you can generally write those things off over time, and the person that does our taxes deals with the all of that on the tax side.  As for my own accounting, I currently treat those as expenses in my cash-on-cash. As a result it looks like one of our houses is cash flow negative, although in reality I know that we have raised the value of the house.  How do I factor that into our calculations? 

@Tim VandenToornone of the things we underestimated was expenses.  You say you assume 10% for remodeled, and more for ones that are already occupied? How much more? 15%? 20%? (And to be clear, the % is a % of rent, right?)

@Michael Lerchwhen you say 12% is good in GR, that is cap rate, right?  Thanks. Good info when I go to compare how the properties are actually performing.

@Christian Brodinthanks for your response, it was very helpful. Can you explain more when you said that investors are seeking 7-8% Cash on Cash returns, and a minimum of 15% IRR? How/why is IRR so much higher than CoC?

To be clear, we are buying and holding these properties, and aren't using the income for anything other than to eventually buy more places. We have no plans on selling them any time soon. I feel like many of these metrics can only be calculated after you have sold the property. Is that correct? Can I calculate ROI without ever having sold the property? Otherwise it would end up being negative. My other issue with ROI is that it seems to be unrelated to the period of the investment.

For example, if I were to invest $100, made $1 every year, and then after 5 years sold to get my $100 back, my ROI is (105-100)/100 = 5%

If instead I were to invest $100 and made $5 in one year, and then sold to get my $100 back, my ROI is still (105-100)/100 = 5% even though this is clearly a better investment.

I've been calculating some sort of metric (yearly Cash-on-cash?) like this:

((Total_Gain - Total_Cost_to_us) / Total_Cost_to_us)  *  (12/Number_of_Months_Owned)

That roughly gives me a yearly return rate on our investment.  The total cost is our downpayment + closing costs.  Our total gain does factor in all expenses including P&I.

My questions are:

Does my calculation above make sense?

Should I be using something like IRR? Even if I haven't sold the property? I think this is more what I was looking for -- return rates that understand that time is money... although I was thinking about doing it monthly instead of yearly. Should I only be looking at things and calculating metrics once a year?

For one of our properties we recently paid off our mortgage, which is why I was asking for more complicated metrics.  It completely changes things when there was an up-front cost and then another large cost in the middle.  

Is there any reason to differentiate between cost types (Mortgage, Insurance, Utilities, Property Manager)?

It seems like some calculations ignore the fact that we are using a loan. Why would I use ROI instead of leveraged ROI? Just so that it is easier to compare properties apples to apples?

Cap rate has been mentioned but not defined. Am I correct in saying that it is 1 year NOI (income ignoring mortgage) divided by purchase price? That way loans are ignored and properties can be compared apples to apples?

@Cory Mccarthy thanks for the advice. I looked at the form. It seems great for evaluating a property ahead of time and estimating values, but doesn't calculate actual realized rates for me. Then again you basically answered my question anyways -- I should be looking at ROI. I do calculate that roughly once a year... but it doesn't really factor in time. I generally take the total gain and divide by the number of years we've had it to try to get a per-year %, but I'm sure there are better ways to do it.

@Richard Ball the properties are in Grand Rapids.  I understand that location will change what is considered good or bad values for a metric, but overall it shouldn't change what metrics I should be looking at, right?

My brother and I own 4 different multi-unit (2, 3, or 4-unit) homes in Michigan.  We have purchased them over the last 4 years or so.  We kind of jumped into the whole thing without doing a ton of research.  I feel like the first two purchases were amazing deals (super cheap houses), while the last two are probably below average purchases.  

I'd like to get some statistics on how good these investments actually were so I can determine if we should continue buying more houses (or even sell and get out).  What metrics should I be tracking/calculating on these houses?