BiggerPockets

Hello,

I am getting all the numbers gathered for my first deal, rough total purchase price to be about $110,000 on a duplex. I will need to make some repairs to the foundation and replace the carpet in the entire house, I would estimate maybe $5k or $6k in repair cost. I will probably be applying for a FHA 203k remodel mortgage in which the repair costs can be factored into the mortgage. So, total mortgage will probably be around $120,000. It currently rents for $600 per side, although I will be moving into one. I think there is also an opportunity to raise rents after I complete the repairs.

I am considering the 50% rule to play it on the safe side factoring in operating expenses. The roof was recently repaired, all new windows last year, and a new furnace and hot water heater in one side last month.

When calculating in the 50% rule, what do you calculate as the standard downpayment (20%), or do you factor in the ACTUAL downpayment in each case? Obviously with only 3.5% down on FHA, my monthly mortgage payments will be higher, making it harder to achieve cashflow. Also a big component for me is that my PMI insurance will be around $150 per month due to only the 3.5% down/equity (with FHA, PMI insurance is required for 60 months unless I refinance).

Here are my current (rough) numbers:
(Please check and make sure costs look accurate)

Sale price = $110,000
Est. rehab costs (added into mortgage) = $6,000
Total property cost = $116,000
Closing costs added to mortgage (est. 5%) = $5,800
Total Cost = $121,800
Downpayment of 3.5% = $4,263
Mortgage on $117,537
Estimated PMI insurance = $150 /month
Estimated PITI (excluding PMI) @ 4.75% interest = $740 /month
Total monthly payment = $890 ($740 PITI + $150 PMI)

Currently rents for $600 per side.

In this case, I will only have roughly $600 per month of NOI (using 50% rule). Leaving me with a negative monthly cashflow of $290 per month until the PMI is paid off in 60 months bringing my cashflow to [negative] -$140 /month.

But again, this is only with 3.5% down and paying $150 in PMI monthly. Also, after I repair the property I am hoping to be able to raise rents $25 - $50 per month per side.

What do you guys think? I am overwhelmed with learning everything and trying to estimate all the numbers/cashflow/etc. and want someone's opinion?

Thanks in advance,
Craig

Thanks Uwe for your input. The property is listed at $115,000, so I was assuming negotiating to at least $110,000, but hopefully more. Also Uwe, there are several $120,000 duplexes in my area all 2 BR and about 960 SqFt per side.

Any other opinions from anyone else?

1) Do you investors focusing on long term buy & hold usually strive to put down exactly 20% to make your cashflow numbers work, or do you put down the necessary downpayment (20% or more) to achieve the initial cashflow you desire?

2) I see that many investors say that most rentals will get between $100 and $200 /month cashflow. Do you typically put down what it takes to achieve this cashflow?

3) Back to my original question I was interested in... When calculating the investment potential of a property and using the 50% rule, are you assuming a certain downpayment percentage, like 20%? It is hard to cashflow on any property with only 3.5% down and PMI insurance I would assume...

Ok thanks for clearing that up, seems like a dumb question now that I look back at it.

What is the best way for individuals to calculate an estimated mortgage payment, call the banker?

I have found calculators online, but they all seem to be different and have so many variables (especially with FHA that it get's confusing).

Does this calculator seem accurate: http://www.203kmortgagelender.com/fha-203k-calculator.php

bankrate.com and mortgageprofessor.com are two sites where you can calculate a mortgage payment.

Ok so I have enlightened my confused brain and think I am understanding this more clearly now.

So according to the 50% rule, 50% of gross rents is set aside for all operating expenses. Then debt service (being PMI, homeowners ins, and taxes) are deducted from the remaining 50% of what's leftover, correct?

I was getting the calculators confused because some were automatically factoring in taxes and/or insurance estimates. Now I realize that I need to find exact taxes and insurance (and PMI) on my own. The mortgage calculators are the exact same when oy considering principal and interest.

Here's my numbers:
Gross rents = $1,200 /month
X 50% = $600 NOI
Total mortgage = $125,000 (including Reno funds - FHA 203k)
Mortgage payment (principal and interest @4.75%) = $652

Then do the rest of the following expenses come out of the 50% rule allowance?
Monthly property taxes = $187.5 ($2,250 annual on current assessment)
Homeowners ins. = $58 /month (estimate)
PMI insurance = $150 /month (estimate for FHA)

Look at these numbers and let me know. Thanks!

So is PMI Insurance included/factored in properly in the 50% rule then? And I know the 50% rule is just that, a rule. It just seems that if I were to include the PMI insurance into the 50% versus not having PMI insurance in the deal at all, there is an obvious cashflow difference.

So according to my example above, here are my numbers:

Total mortgage = $125,000 (including Reno funds - FHA 203k)
Mortgage payment (principal and interest @4.75%) = $652

Gross rents = $1,200 /month

X 50% = $600
Less:
- $150 PMI ins
- $58 homeowner ins
- $187.50 taxes /month
= $204.50 (left over for all other expenses)???

X 50% = $600
Less:
-$652 for debt service
= ($52) monthly cash-flow

Does this now seem correct? I know the 50% rule is just a rule and maybe I am focusing too much on it as a working equation. The $204.50 left over for ALL other operating expenses seems like it might be low, but then again maybe not?

Also, when the PMI insurance is "paid off" at 20% equity, I am still getting more cash every month in my pocket, but it would technically not increase my rents or cashflow under the 50% rule then, is this correct? Seems odd as I would be putting $150 more into my pocket every month.

I am understanding this more little by little so thanks for all your help!

P.S. J Scott, easy and simple video! Thanks

Craig

@J Scott - Ok thanks for the help! Is there a sticky or something on this forum that shows literally all expenses and how they are factored into the 50% rule? If not, that might be helpful for me and other new investors to follow. I know there are several posts talking about the 50% rule, but I have not seen one with a completely exhaustive list of every expense that could be considered, and to which collumn it would fall in.

And to some of the more seasoned investors, how closely do you follow this rule? Do you just use it as a quick deal evaluation tool to see if a property is worth further analysis, or do you heavily stick to this rule as part of your overall investment decision?

@Jeff S., thanks for your reply and cost example. I see that over 20 years, your average monthly cashflow would equate to about $389 /month. This of course would not factor in paying debt service. Did you buy this free & clear or at least have positive cashflow?

Paid 25k with 2k down owner contract 9% interest. Did virtually no repairs for 13 yrs while section 8 tenant was there. One tenant during that time so cash flow all that time. When she moved I rehabbed it and changed the type of tenant and raised the rent. Had property paid off by the time rehab was done so borrowed some money to fix-up. Unfortunately the rehab was a real hassle and took 10 months and cost a lot. This was the only vacancy. Credit line used and paid off quickly.

Here is another. This is a duplex where I pay the water. Paid 52k. Same time period.

http://www.biggerpockets.com/files/user/Jeff1/file/income-and-expense