All Forum Posts by: Zach Adams

@Zach Adams we have a club that meets at the El Camino Country Club on the third Tuesday of the month. No sales pitching, just networking and education. You can get more details at www.nsdrei.org

@Toyin Dawodu Seems like a guru whispered sweet nothings into your ear.

Rental income is passive and tax advantageous. Flipping is not passive and tax disadvantageous.

I don't think you analyzed your rental deals properly which is why you got burned. Further, I have my suspicions that you are analyzing your current deals properly as the example you gave is completely bogus - here's why:

If you are analyzing everything on the gross amount (pre-tax), you are doing yourself a disservice. Let's assume you are in the 25% tax bracket and you also have to pay self-employment tax of 15.3% - your $40k profit is now down to $23,880.

The rental was cash flowing $150/mo, which we will assume is tax free. Where I invest, that gets you a $70k property. Let's assume you 100% financed the property with a rate of 4.5% and term of 30 years. The monthly mortgage payment is $355, but the principal portion of that first payment is actually $92. So really, you are returning $242 per month which bring us down to a total of 98 months (8.2 years) to match $23,880. WOW you were way off dude.

Further, the principle portion of the monthly payment will actually RISE each month. If you throw all of this in a spreadsheet, you will see you actually match your $23,880 in 92 months (7.66 years). This assumes we never increase our monthly cashflow of course.

All that said, I would strongly consider building out solid spreadsheets that help you with the financial analysis of different decisions. This is the type of stuff that can make or break you. If you had to decide to buy/hold vs flip and you saw that the "break-even" was 7.66 years rather than 22 years, you may be jumping for the buy/hold.  

**Edit: Additionally, while your time is consumed fixing and flipping a home, the buy and hold guy is networking with private investors and closing more deals... 

I would preserve the capital and go with a slightly higher rate. The lender will ask for capital reserves and most want to see 6 months piti (principal, interest, tax, and insurance) for all loans. You can also use the unspent capital for another deal. The whole idea is to invest a reasonably small amount of money and get a high return for it. That counts as well in re. In addition, you might find out that you benefit better from your re investment if you sell it ways before the 30 years or inflation shoots up and with it rents and mortgage rates and suddenly the 0.25% difference in interest rate is marginal. Just my opinion.

@Zach Adams

Thanks.  2/3 lenders have already said 0 points at roughly 0.15% higher than lender that required 3 points.

We were looking at the same issue with our next purchase- I was given a rate of 4.875% with no points, and could get up to 3.99% by purchasing 4.28 points, $7700 extra due at closing in my case.  It would take 5-7 years to recover that cost depending on how you calculate it, and would save us $17k over the 30 year life of the loan.  Sounds like a good, guaranteed return on investment, right?  Buying the points will raise our cap a little and lower our cash on cash return slightly.

However, we plan to purchase another house pretty soon, so I would rather have that extra $7700 in my bank account than lower my payment/increase my cash flow by $94/ month at this time. 

Another thing to consider is whether you would refinance in the future to secure a lower percentage, and what the refi cost would be.  In my opinion, interest rates are pretty low right now, so I doubt they would get low enough to make a refi make sense.  Knowing that, we are committing to the 4.875% for the life of the loan or for the time we own the property, and at that rate the numbers work, and because we would like to put as little down as possible at this time.

Kelly 

Bill - this post came as close as I could to my question, so I thought I'd ask here before starting another thread. I'm looking to purchase my second investment property and the lender I was talking with said for investment properties 3 Points are mandatory. Is this the case? My credit is 770, very low DTI, with plenty of cash reserves. Do you know anything about this? Maybe a different lender?