All Forum Posts by: P M

I have located a duplex in a transitional neighborhood that is presently rented on both sides, with combined rents of $900/month.

Through my credit union, I believe I can get a 2-yr ARM at 3.75% for 30 years. They do not require PMI and have only a 0.75% loan origination fee.

THe owner is asking $70,000. I'm thinking I should aim for between $44k and 56K using my methods separate from 2% and 50% rules.

What do you think?

Does anybody here use ARMs for buy and hold rentals (not flips) that they expect to hold for more than 3-4 years as income properties?

Is this too much tempting fate on the 50% rule?

If you are using ARMs, are you pre-paying your mortgage with some of your cash flow to reduce risk on the ARM reset date?

I'd love to hear any ARM strategies that people believe have neen successful, and how much risk they brought to the table for your deals.

A final note from this thread, mostly for Jon, who may be monitoring it.

In July, we bought the house and moved in with a bridge loan from a family member to help us with the down payment. Yesterday, we sold off the condo at $20,000 over what we paid for it in 2006. When all the transaction cost dust settled, we netted about $12,000 in profit. plus our equity. We will pay the family member back at about 75-80% of their loan, and then complete the payoff over the next several months.

In the meantime, I have begun a personal research project on a promising neighborhood that I have mentioned in another thread. I will start geocoding rents and sales prices of homes where I can find the data, and build a "heat map" of the local market while saving some money to invest.

My target purchase there will be under $70k, and looking for $100 cash flow per door.

Thanks again to those who gave me the straight talk earlier this year.

Good discussion.

Uwe- is the division by 2 included in your cap rate calculation in order to represent the amount of the income stream consumed by maintenance, in this case, 50 percent?

I want to make sure I'm understanding the cap rate calculation correctly.

Also, to both Jon and Uwe- let's say I got the price to either of your preferred levels. You seem to agree that maintenance of the property should cost the same regardless of the purchase price.

If this was your first rental property, how much would you set aside in reserves as a sensible pool of money before making the purchase?

Thanks for your insights.

I drove through an up-and-coming area of a city nearby yesterday, and found a FSBO duplex with the owner asking $70,000.

One side rents for $515 and the other rents for $450. Roof has been redone recently, and new linoleum has been installed in the kitchens.

The wild card is what type of rate I could get if I put 20% down. I am assuming 7% right now, does that seem reasonable as a rate I might get?

I ask because I assume if I want to meet the 50% rule requirements, I need to get the price down or get a rate closer to 5%. Thoughts?

First, thanks for the advice/confirmation of strategy.

I wound up getting $1250 below my asking price with $4000 towards his closing costs. I am also doing a $525 repair/improvement that will lower his condo dues $20/month.

All in all, I successfully bargained up approximately $6750 from their initial offer.

Thanks for the second (and third) opinions!

I'm not sure if this belongs in this forum or another forum. I am selling a condo FSBO, and have an offer on the table.

The offer is $8,000 below our asking price, and also the offer contract requests that we put $4000 towards closing costs. There is also going to be a 2.25% real estate commission which will be a little over $3000.

I am now drafting a counter-offer. To increase my selling profit, I can come back with a higher price, a lower closing cost contribution, or some combination of both.

My question to the group- is there a strategic advantage to flexing on one of these rather than the other? My inclination is to counter-offer with something close to my asking price but leave in the closing costs because it will be easier for the borrower to get another $1000-$7000 from the bank than come up with cash for the transaction costs. But I'm open to alternate strategies.

What would you do?

HA! Touche, Kevin. Your recommendation is appreciated, but I'm doing better with monthly dividends from PGH right now. (Very low P/E ratio) I use that and CDs as comparative investments.

The depreciation recovery was a facet I was not aware of. Indeed, that is an important factor. Thanks for filling me in.

This thread is encouraging me to look at more single family opportunities in the area in lower income neighborhoods with limited amounts of violent crime.

Jon,

I hear your point on potentially underestimating the cost of maintenance. But here's where I wonder about the 50% rule, and I struggle to accept it.

If the 50% rule says expenses are half of rent, then as rents get higher, so do expenses. Or, put another way, wealthier renters cause more damage?

This seems counter-intuitive to me unless you're renting a home to a hard-partying rockstar.

In my mind, most higher income folks who can afford a big rent payment may have owned property before, or are at least familiar with the notion of maintaining an asset.

Of course, maybe the 50% rule's tie to rent is actually the mortgage payment on a place, in which case then the tie to rent value makes sense. (more expensive homes should rent for more money)

I'm presently not a landlord, so I can't speak from experience, but I still find the 50% rule a bit rough for making decisions.

If there's a way to break the 50% rule into a X% debt payment rule and a Y% operations/maintenance rule, I'd have more confidence in it.

Any thoughts?

Also, Jon, do you calculate ROI using Josh's method on your properties? Or another approach?

Thanks!

I'm very familiar with the notion of opportunity cost. In this situation, though, isn't putting down the full purchase price double counting the $34,500?

Here's what I mean. I put down 20k out of my pocket. The $230 a month is my cost to obtain $34,500 that is Other People's Money (OPM). I don't experience a cost of an extra $34,500 when I put down the $20k. I only experience that cost as a $230 expense each month on an ongoing basis.

At the $43k price, I am clearing $102.95 a month in BTCF or $1235 per year. 1235/20,000 = 6.175% return.

Obviously it's a much better deal at $27,000, but I don't see how you can count the $34,500 and still count the monthly P+I payment.

Either it's the down payment as the denominator for ROI, or it's the 54,500 and you ignore the cost of the P+I payment. Do the latter and your monthly profit moves to $333. Multiply by 12 and divide by $54,000 and you get 7.4%.

The former approach is found in the Investing in Real Estate book by McLean and Alread on page 85.

The latter does not make sense to me because it ignores the time value of money implicit in borrowing.

Can I put $20k in a mutual fund and get better than 6.175% for the same amount of risk? That's the big question.