Help me define a few costs within the 50% rule & other newbie questions!

Help me define a few costs within the 50% rule & other newbie questions!

Rochester, NY · Member since 2014 · 83 posts · 19 votes

Hi everyone, looking to begin in the buying and holding world in either single family units or duplexes. I'm about 48 podcasts deep, here are a few questions I'm hoping someone can clarify for me. If location matters, I'm considering towns/villages outside of the Rochester, NY area. Thank you in advance:

When roughly calculating the 50% rule, specifically, principal and interest, do you always assume a 20% down payment?I'm curious how a conventional loan with a 5% down payment skews this rule?
Is there a rough percentage to use to calculate closing costs whether you are buying or selling?Does this include the cost of inspection(s)?
Is there a rough percentage to use to calculate insurance on say a $100,000 single family or duplex?
Can I purchase from a wholesaler if I plan to use conventional financing or do wholesalers only want to work with cash buyers?
Let's say I can save $20,000 per year and use this towards purchases. Do you recommend I purchase one unit per year for 4 years with conventional financing using it as a 20% down payment, or save up the $80,000 and start the train of buy in cash>re-fi out, repeat with the same $80,000...
How will purchasing a buy and hold property or two this year, affect my families ability to finance a move in the next 2-3 years for a new primary family residence?(not looking to "house hack": standard move from starter home, to "forever" home)

Thank you again!

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Matt Devincenzo
Investor · Clairemont, CA · Member since 2011 · 3k+ posts · 2k+ votes
11y
Originally posted by @Greg Baker:
Hi everyone, looking to begin in the buying and holding world in either single family units or duplexes. I'm about 48 podcasts deep, here are a few questions I'm hoping someone can clarify for me. If location matters, I'm considering towns/villages outside of the Rochester, NY area. Thank you in advance:

When roughly calculating the 50% rule, specifically, principal and interest, do you always assume a 20% down payment?I'm curious how a conventional loan with a 5% down payment skews this rule?
Is there a rough percentage to use to calculate closing costs whether you are buying or selling?Does this include the cost of inspection(s)?
Is there a rough percentage to use to calculate insurance on say a $100,000 single family or duplex?
Can I purchase from a wholesaler if I plan to use conventional financing or do wholesalers only want to work with cash buyers?
Let's say I can save $20,000 per year and use this towards purchases. Do you recommend I purchase one unit per year for 4 years with conventional financing using it as a 20% down payment, or save up the $80,000 and start the train of buy in cash>re-fi out, repeat with the same $80,000...
How will purchasing a buy and hold property or two this year, affect my families ability to finance a move in the next 2-3 years for a new primary family residence?(not looking to "house hack": standard move from starter home, to "forever" home)
Thank you again!
I'll take them down in the same order you had them:
- The 50% rule says nothing about financing. It is that (over the long term) your expenses (tax, insurance, repairs, vacancy, cap-ex, utilities during vacancy, maintenance, professional fees, management) will be about 50% of the market rent. The remaining 50% is for debt service (principal and interest) and cash flow.
- Yes, but it will be area dependant. I can guestimate what it will be in the area I buy in FL. I know there are certain fixed costs that will be on every house no matter the purchase price (processing, inspection if I get one, document preparation fee, survey) and some variable fees that I have a % worked out (title insurance, doc stamps on mortgage ect). I'd call a title company and ask if they could give you an idea of fees would look like on a transaction, or see if you can find a few people that would share their HUD-1 with you and you'll start to see the trends on costs.
- Sort of. First again area dependant, in FL insurance is higher than in say GA. Also I'd say that the cost of the home may not be your best indicator. For the insurance company I use I have a per square foot estimate worked out. The policy is based on the cost to rebuild, which whether it's 500 sf or 2000 sf, sticks and bricks cost the same.
- Probably not...though not impossible. First real wholesale deals there is a great price because of a situation, and you can likely not "fix" that situation with conventional financing. Time to close will be too long, or property will fail a lender's required inspection ect. Also lender's (generally) won't fund the transaction if there is an assignment fee shown so you have a problem there. None of the 5-7 wholesaler's whose lists I've received would even consider conventional financing, though I know I saw one post here on BP about getting an assignment closed to a conventional buyer.
- Sure go for the 4. Nothing stops you from refi-ing those too if you have some appreciation or principal pay down to use in continuing the "train" and having the cashflow adding together to make it go faster.
- No real way to say without knowing your specific financial condition, expected house search requirements. But in general shouldn't be an issue at all. If the homes are actually cash flowing (not Rent-PITI= cashflow but actual cash flow) then it will show a profit so the debt is serviced and won't be harming your DTI ratios.
Hope that helps!
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Mark UpdegraffBusiness Member
Real Estate Broker · Rochester, NY · Member since 2010 · 1k+ posts · 713 votes
11y
Originally posted by @Greg Baker:
Hi everyone, looking to begin in the buying and holding world in either single family units or duplexes. I'm about 48 podcasts deep, here are a few questions I'm hoping someone can clarify for me. If location matters, I'm considering towns/villages outside of the Rochester, NY area. Thank you in advance:
When roughly calculating the 50% rule, specifically, principal and interest, do you always assume a 20% down payment?I'm curious how a conventional loan with a 5% down payment skews this rule?
Is there a rough percentage to use to calculate closing costs whether you are buying or selling?Does this include the cost of inspection(s)?
Is there a rough percentage to use to calculate insurance on say a $100,000 single family or duplex?
Can I purchase from a wholesaler if I plan to use conventional financing or do wholesalers only want to work with cash buyers?
Let's say I can save $20,000 per year and use this towards purchases. Do you recommend I purchase one unit per year for 4 years with conventional financing using it as a 20% down payment, or save up the $80,000 and start the train of buy in cash>re-fi out, repeat with the same $80,000...
How will purchasing a buy and hold property or two this year, affect my families ability to finance a move in the next 2-3 years for a new primary family residence?(not looking to "house hack": standard move from starter home, to "forever" home)
Thank you again!
1. I don't use the 50% rule. I take 35% (PM, Capital Reserve, Vacancy Reserve, Repair reserve) off the gross rents and then subtract out operating costs. I divide this cash flow by the cost of acquisition plus rehab. This gives a cash on all cash return. By always comparing properties this way I can mentally rank them. When dealing with financing scenarios, I run my particular scenario (lender fees, origination fees, PMI, interest, etc). A cool thing here, is that if your financing is cheaper than your cash on all cash return, you don't have anything to worry about. If your cost of financing is higher than your cash on all cash return it will negatively effect your return. By evaluating like this you can red light green light very easily and create benchmarks to quickly eliminate the losers and see the winners rise to the top.
2. Closing costs on a cash transaction are about 2k in NYS. You should have an attorney. Call them and review all the costs associated with closing. Call your lender and do the same. I tell people that are financing to expect ~3k in closing costs plus the money they need down. Here are a few of the associated costs with closing. Attorney fee, title insurance, lender fee, recording fee, transfer tax. Again, always consult with a local attorney. They will be happy to review the numbers. Also consult with your lender to get a handle on their fees. This does not include inspection, which is ~$300 - get a licensed engineer and not a home inspector. They cost the same, and the latter will refer your to an engineer if their are structural concerns. Better to just get the engineer from the get go.
3. Insurance costs will vary with your policy. Some people that are risk adverse spend 1k, others spend 400. It will depend on if it is replacement cost versus market value (replacement has a higher cost because it costs more than market to replace). It will also depend on your deductible, and policy limits. Call an agent and have them walk you through your options. I would say you should be able to adequately insure a SFR that costs 50k for about 400-500 and insure a duplex that costs 100k for 800-1k. Again, it will depend on your level of insurance. Best way to get the answer is to get a quote.
4. If the wholesaler needs to assign the contract you may not be able to perform quickly enough. If he owns the property it should not be a problem.
5. IMO prices and interest rates are on the rise. I would buy as much RE asap personally.
6. If you purchase correctly it should help your ability. Banks look at Debt to income ratios. By purchasing a cash flowing rental you will be improving your ratio.
Happy Holidays!
Mark in ROC
Podcast Guest on Show #112
Updegraff Group Realty4.742 Reviews
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