All Forum Posts by: Craig S.

Joel Owens, thanks for the advice. This apartment for $825 does have the option for higher monthly rent on shorter terms--that might be an option. Do you know if Ohio is one of those states you mentioned where you cannot collect lost rent on a tenant that vacates when you release the property?

I have ants in my pants to get my first deal under my belt, but also don't want to get too aggressive and lose my pants completely-effectively losing the ants. Lol

Scott Limoges, yes I will definitely do my best to negotiate down. I was just using these numbers as a rough estimate. Also the regular FHA loan is only 3.5% interest, but the FHA 203k loan (for rehab) requires a higher interest rate at 4.75%.

William W., I am hoping that after 5 years I will have been able to not only remove PMI insurance, but also raise rents over that timeframe in order to have more cashflow than just $16. That was only based off of today's rent, etc. Also, this is using the 50% rule as a basis--because I will be managing the property myself and many other major CapEx have been paid already (furnace, windows), I would assume operating expenses will be less than average (using the 50% rule).

Grant Kemp, That is exactly what I would be doing, sorry if I didn't make that clear in my post. Actually all FHA properties must be owner-occupied. So yes, I would be living in one half and renting the other. Again, this would be to my advantage (while I live there), as my alternative is to pay $825 /month rent to another landlord so he can pay off his mortgage.

I will be having the masonry contractor come out next week to estimate repairs, this is already on the schedule.

But I do agree, there are better deals to be had, I am just in a time crunch and will end up paying the $825 rent to someone else for at least 1 year if I can't find a deal within the next 2-3 months.

Hi Joel,

Thanks for your reply. I used to work for this masonry company (who's giving me a quote) back in high school and am familiar with the level of work needed to be replaced, however I was not involved with pricing so we will see what they say on that.

The homeowner is age 70 and supposedly bought this house for his kids to move into but then they moved out of state this year so he has no need for it--not sure how true that story is, although I know he is 70 :) He is not an owner-occupant.

Assuming my numbers and estimates WERE correct or very close, what would you then think of this deal?

Also, what would be the big thing that scares you away from this deal, the foundation problem? Assuming that was not in need of repair, would you look further into this deal in my circumstances?

There is also another duplex about a quarter mile away from this one, almost identical setup for sale at $120,000. I will be looking at this one next week as an alternative consideration and/or comparison.

Hi All,

I am putting together some numbers for my first deal and would appreciate if you could look over my numbers so far and let me know what you think?

First off, let me explain my current situation and what I am looking to accomplish. I am currently living rent free in a family owned property, but I will be getting married in July (6 months) and will be moving out. My options are to rent an apartment owned by someone else for $825 /month (not including utilities), or purchase my own property. I have found a nice duplex for sale which is in a good location and I have been wanting to get into my first deal for about 6 months now.

The asking price of the duplex is $115,000. It needs new carpeting and some minor foundation repair, and does probably need some block fixed in the basement foundation. The foundation is leaking slightly when it rains very hard as I was told (didn't see any water when I was there). The downspout was not directed properly I was told which drained too much water onto the corner of the wall nearest the sump pump (where the biggest crack is). I am estimating total repair/rehab costs to be about $6,000 (as a current estimate). Although this I guess can change once I get final estimates.

I hope to negotiate the purchase price as low as possible, but feel confident I should be able to get it down to at least $110,000. The owner just purchased it for $109,900 last year in August 2011 but I guess he plans on moving out of state soon so wants to sell. According to records I looked up, he put down 25% on the property so had a mortgage of $82,425.

I will plan on obtaining a FHA 203k Streamlined renovation mortgage to cover the reno costs as well as only need 3.5% down. I will also have the seller pay/credit closing costs--therefore paying a higher sale price for the property.

The duplex currently gross rents for $1,200 ($600 per side). However there is 2 very similar duplexes down the street renting for $650 /month, so there is the opportunity to raise rents.

I contacted a good local lender and here are the numbers I was given:

Sale Price / Rehab = $116,000 (including rehab funds of $6k)
Loan Amount: $111,836
Interest Rate: 4.75%
APR: 5.813%
Payment = $923.66
Cash to close = $4,208.34 (downpayment of 3.5% on $16,000)

Payment Breakdown
P&I = $583.39
Property Tax = $161.36
Hazard Ins = $69.00
PMI = $109.91
Total Payment = $923.66

The duplex has brand new windows throughout, new furnace in one side, new hot water heater in one side, recent roof repairs, and new front door on one side. The only thing I would need to worry about really is the furnace on the other side (not sure of age yet) and replacing the carpet in at least one side, as well as the foundation repairs.

Using the 50% Rule - I would have a negative cashflow of ($93.30) /month initially. However when the PMI is removed (after at least 5 years required by FHA) I would have a positive cashflow of $16.61 (This is not considering the possibility to raise rents, lower purchase price, etc.).

On the other 50% (of the 50% Rule) for operating expenses I would subtract the $161.36 in monthly tax and $69 /month for hazard insurance leaving me $369.64 every month for ALL other operating expenses and reserves. I will be also managing this myself.

I am sure if I keep looking long enough there will be a better deal out there, and at this point these numbers are still estimates. I may be able to negotiate the purchase price lower and/or the rehab costs might increase or decrease after I get my estimates. This is just good timing for me and need to make a decision to buy or rent here in the next few short months.

Considering the fact that I would rather put my $825 /month towards my own purchase/investment instead of paying that in rent to someone else, I would be willing to have some negative cashflow initially--because overall I would be saving money compared to renting an apartment from someone else. This will also help me get my first deal under my belt and make it that much easier to get the ball rolling to start into the next deal, and the next, and next, etc.

Let me know your thoughts on this so far. Thanks!

Craig

Ok thanks guys for the information and sharing your knowledge! I now have a much better picture of how everything works. I also understand that the 50% Rule is just a rule and should not be used as THE only calculation for an investment. Further analysis should be done once I weed out all of the bad apples using the 50% Rule.

With my current deal, although in the short term there will be a negative cashflow of about $150 - $200 /month (mostly because of PMI), it is still a favorable deal for me so far. Because this will be owner-occupied by me, my other alternative is to spend $825 /month in rent (plus utilities) to live at another apartment owned by someone else. So although I will have initial negative cashflow, it will be made up by not spending the $825 rent of another apartment. After I meet the 20% equity (after 60 months on FHA) my PMI will drop off. I also think I can raise rents from $600 to $650 per side (duplex) with my minor rehab and upgrades. So at that point I will be slightly better than breaking even. I will also be managing this myself.

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?

@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?

Welcome Ben!

I am a relatively new member to the BP forum as well and am also age 23, located in Ohio. I'd give you advice, but I am still learning myself. Good luck and see you around the site!

Craig

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