East Nashville Buy and Hold

[JT Spangler]

I've been looking at investment properties casually for about 4 years, and seriously for about 10 months. Boy, do I wish I'd had my ducks in a row for some of the deals I saw before I knew enough to know what a good deal was. But, regardless, now is the time when I'm financially and emotionally ready to jump in, and now is the time I have. 

Nashville's a crazy hot market, and East Nashville (where I live) is crazy even by Nashville standards. This particular place spoke to me because (1) it's on a half acre fenced in lot (much larger than most lots in this area), and (2) it's permitted with a basement apartment already in place. The basement apartment has no bathroom roughed in, and not much kitchen to speak of, so it'll need a complete remodel. The 2bd/2br home upstairs is in pretty good condition though. Not perfect -- it'll certainly need some new paint, drywall, and bathroom updating before it'll get top rental dollar, but I can do that myself. 

So, the place was listed for 176k, reduced to 160k, and sat there for two months (in a market where pocket listings often come on the MLS already under contract, and most stuff lasts barely a week). I offered 135k and closing split equally between buyer and seller. They countered 153k, and I told them my highest offer was 145k and they cover all closing costs. My realtor just texted me, and they accepted! So the place is under contract.

Next step(s) is to set up inspection on the place, with the anticipation of them having to give me money to repair some inspection issues (they had a previous contract fall through after inspection, so I know stuff will turn up). To get my financing in order, I'll also have to have an appraisal ordered on my existing house, and get my (currently month to month) roommates to sign a lease. I'm not sure how much anyone in interested in the nitty gritty of the financing, but it's below.

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I have two conventionalfinancing options: investor financing, or owner occupant financing. Investor financing requires 20-25% down, has slightly higher rates, but I don't have to occupy the property ever. OOF requires less down (but with PMI), lower rates, and I have to occupy the property for 1 year*.

Since I don't have 20% down for this particular property, I went with OOF. I'm planning on 10% down, which means I'll have PMI until I can refi or build enough equity through payments. In order to qualify for the amount of money I'm being loaned, it's important that my current house NOT be listed as a debt. Since it hasn't had 2 years of rental income history, I can't call it an investment yet. The other option is if I have a signed lease for the person living there AND 30% equity in the house, they don't have to count it as a debt and include that mortgage payment in my debt to income ratio.

Translation: my roommates have to sign a lease, and I have to have a new appraisal done on my house, with the hopes that my improvements and the general appreciation in all of East Nashville (plus my 20% equity from my downpayment) will get me to 30% equity by the time we close. I'm hopeful the appraisal will tell me what I think, which is that my house is worth quite a bit more than I paid, and won't hold up financing on the new place.

**or, at least, I have to say I plan to, according to two different lenders I spoke to.

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So it's under contract, and I'm working on financing, appraisals, and inspection.

I'll post the numbers in the next post.

[Albert Bui]

Yes you take the rate up to absorb the MI premium (single/one time) or you pay it with cash at closing to avoid monthly MI pretty simply speaking.

Experiences with single premium:

- usually I get my buyers agent to negotiate this from the seller or we raise the price then ask back the same amount of concession - request to raise price from 200k to 206k then ask back 6k - net difference to seller is $0 - but now you've in effect financed 6k extra to avoid 225 a month in monthly MI (approx).

6k financed is about 55 dollars a month with 30 year fixed approx 4.25-4.50% so you in effect gain an arbitrage of 225 monthly MI - 55 = 170 dollars higher cash flow or less out of pocket per month

Since the tenant will eventually pay your mortgage anyway this debt is delegated to the tenant.

Single premium MI helps you increase your cash on cash return by lowering the perceived expense of putting less down payment in fear of paying monthly MI. Single premium curbs the effective cost of financing a property with little down payment.

Sound good?

Lots of other ways you can structure the MI too the above is just one way i've worked with agents to negotiate these purchase sale agreements - PSA.

Another way is to absorb the entire single premium through the rate so instead of taking a 4.125% you could take a 4.375 or 4.50% and not have to raise the sales price, pay cash, or rely on the seller concessions to absorb your cost.