What am I missing here..?

Question

Brent Coombs · Answer

@Jacob Wright Have another chat with your uncle. If your first figures are actually what your uncle meant (only requiring you to pay back $156k over 30 years), then, oh that we all could have uncles like that!

But if indeed he meant 20% interest per year, then, no-one needs an uncle like that! Ouch...

Account Closed · Answer

A few things here.. if you were to buy the building for $130000 and got a 30 year 20% loan, the monthly payment would be $2172.32 per month; if you had no expenses, with income only being $1400 per month, that would be a - $772 per month. You would have to raise rent for each unit $1086 per month (assuming you had no other expense), just to pay the note at 20%.

If the best rate you can get is 20%, based on the monthly income from the property of $1400 per month, the value of the property would be: (1400 * 12 ) / 20% = $84000. In reality this would be lower because there are other monthly expenses.

You have to know what the other expenses are per month to determine both the capitalization rate [yearly NET income / building cost ] and gross rate multiplier [Cost / Gross Rent per year]. Then compare the rates with what is 'standard' in the market where the property is located.

Ronald Perich · Answer

@Jacob  WrightIf you are interested in coming to the Metro East Real Estate Investors meeting in Collinsville this Monday, let me know and I'll send you the details.

Joe Villeneuve · Answer

I repeat.  If that was/becomes your interest rate...shoot yourself.

Joe Villeneuve · Answer

Did you uncle mean 20% interest (just shoot yourself now), or did he mean 20% ownership...as in a partnership?

Ronald Perich · Answer

I admit that I missed you were considering house-hacking this... That changes a lot on my assumptions above. Vacancies should be less, maint costs should be less, Cap Expenses stay the same, you'll manage the property and you'll just have to figure out how to get the best mortgage. There are a ton of options open to you since you'll be living on one side.

You can put very little down in this case, but don't neglect the cost of PMI insurance. It could run you $150/month or more.

Some quick and dirty numbers tell me the rent from the one side would mostly cover the mortgage. You'd be paying for everything else (PMI, maintenance, CapEx, etc).

Ronald Perich · Answer

@Jacob  WrightWelcome to BiggerPockets! It looks like you are from my area in Illinois. Glad you came here looking for information.

I think it's great that you are ready to jump in and want to make things happen! Awesome!

There's a great resource right on BiggerPockets called "How to Buy Rental Properties" that might have a bunch of answers you are asking yourself right now. And they are all in one place!

http://www.biggerpockets.com/renewsblog/2013/02/22...

Also, the Ultimate Beginners Guide to Real Estate Investing is a very easy read. You could probably finish it in one day. Make sure you highlight the links you want to visit.

http://www.biggerpockets.com/real-estate-investing

From what I could see, this looks like it's in an area with other duplexes, but the neighborhood looks really nice and well maintained. If it's the property I am looking at, it was last purchased in 2010 for $146K. You may be challenged to get it for $130K unless the seller is motivated. He owns a couple of other properties in that town and a couple of other towns from what I could gather. Maybe he's looking to dump them all?

Rents seem on par with others in the town. Built in 2002, so you might start seeing some Capital Expenses coming into play, especially if this was part of a slap-them-together development. 20-year roof, etc.

I'd take a really hard look at this one and run some numbers on it before I'd buy it. My assumptions: buying for $140K, 20% down, 5.25% 30-year mort, rents at $1420, taxes at $3500, Maint at 8%, Cap Ex at 5%, propt mgmt at 10%. Your first year would cash flow $279 (a cash on cash return of .5%). Your down payment would make more in a CD.

At 4.25% int rate, you'd make $1,089 for a return of 2%. If you self-manage, you can add $1,600 to your returns. But you'll have to make that 60 minute drive every time there's a call.

What's really interesting is the sales history on this property. It has seen zero appreciation... Sold in 2010 for $146K.

Elizabeth Colegrove · Answer

Where are you getting 20% from?. If it is an investment than you will have to put 20% down. If it is a personal you can put lower amounts down depending on the programs available.

The other thing you are missing is vacancy, repairs and other expenses. To simplify the question yes, if done right and other tenant inducing uler moments can be that easy.

Will McVeigh · Answer

I'm not sure for private lenders. You could look into FHA loans with only 3.5% down. You'd probably be looking somewhere between 3-6% rates currently. You could look into using your private money just for the down payment and not the complete loan.

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