Is this right?

Question

The original plan, and hopefully still is to cash out refi current home. I can cash out 90%. Currently owe 101k and would refi at 135k with 3.73% APR. Leverage equity into another property down the line after getting tenants. Reuse VA for a primary residence.

The Mortgage+ Tax&Insurance=$770 monthly

Projected rent $1100 monthly

Monthly total for later maintenance and vacancy 15%

$1100-770-15%=$3366

$3366/135k= 2.49% CAP ?!?!?!?!

Home is currently worth $150k

Did I do this right? Is it even worth it?

Please help.

Steve Vaughan · Answer

Hey @Josh Williams .  I see you want to re-use a VA loan, so you must refi out of it to do that.  It that wasn't an  issue, you may be able to obtain a HELOC.  Less initial cost, but higher and variable rates.  About your cap rate number, your ratio is correct but you need to exclude debt service.  NOI is the number (effective gross income minus expenses) you divide by value (or price).  It doesn't mean much with single-families, but is always good to practice!

Charles Marchiondo · Answer

Every investor has to decide what they are willing to accept as a return in any particular market, area, or time period.  There is no one formula that works all the time.

3 years ago, we could buy a house for $50k cash and make $1,000/month, no problem.

Today, we are buying the same house for $150k cash and making $1,300/month.  Sounds pretty crappy, right?  Except thanks to the IRS 1031 rule, we are selling a property making $895/month for $200k and we are rolling that money, tax-deferred, into another property making much more and have money to spare to buy another one that cash flows better, as well.

We have a lot of cash sitting on this side not earning anything right now, but if a deal pops up, we expect to see a rent of around $1400/month for a $140k home.  If we can see that, then we wait.

Josh Williams · Answer

Bought it at 108K paid down to 101K. Refi 90% cash-out 135K, values at 150K and climbing.  3.5 years since remodeled.

Steve Vaughan · Answer

@Josh Williams  Oh- to get to the NOI, you take effective gross income (gross- vacancy & collection loss) minus all expenses (management, maintenance, repairs, taxes, insurance, utilities, cap ex). So $1100 - 5% vacancy - 2% collection loss (tenants don't always pay) = Effective gross.  I think it's confusing for you because you're not separating out taxes & insurance because it's included in your debt service payment.  NOI is just everything, not including P & I.  For simple cap rate, divide your NOI by the purchase price.  How much did you buy the house for?

Josh Williams · Answer

@Steve Vaughan So it would be 8.31%?  Im really confused and don't yet have all the lingo and formulas on lock.

$1100(rent) X12 = $13200 -15%(maintenance 10% vacancy 5%)=$11220 NOI?

$11220/135K= 8.31% CAP?

Thanks in advance

Is this right?

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