All Forum Posts by: Eric T.
Eric T. has started 1 posts and replied 9 times.
Post: How do you determine if a 10 / 15 / 30 year loan is best
- aurora, CO
- Posts 9
- Votes 1
@Steve Miller what kind of real estate are you currently investing in? Currently I have 2 town homes, but i'm not getting a 10% return on it like others are saying. Seems like the market kind of flatten the past 6 months, I was reading some other threads on here where people are purchasing 100-150k duplexes and triplexes and renting it out for 500-700 per room where that would be almost impossible in CO, as far as getting a triplex or duplex for that price.
Post: How do you determine if a 10 / 15 / 30 year loan is best
- aurora, CO
- Posts 9
- Votes 1
Originally posted by @Steve Miller:
@Eric T. What I'm saying is that if you invested $600 at 10% annually for 10 years, you would have $123k. My goal was to illustrate the value of having access to cash that can be reinvested rather than worrying about paying extra interest over the life of a 30 year loan.
ah gotcha steve, thanks. What is your take on investing into the colorado market as far as real estate?
Post: How do you determine if a 10 / 15 / 30 year loan is best
- aurora, CO
- Posts 9
- Votes 1
okay thanks for all the info guys, so from what i understand, the best play when investing is to take out a 30yr and let the tenant pay everything, i'm just fronting the down payment money, that way i can continue to get more properties. correct?
Post: How do you determine if a 10 / 15 / 30 year loan is best
- aurora, CO
- Posts 9
- Votes 1
Originally posted by @Alexander Felice:
Originally posted by @Eric T.:
Originally posted by @Alexander Felice:
Originally posted by @Eric T.:
as far as the interest part goes, i'm not sure if i'm calculating this correctly, but with a $180,000 loan @ 3.75%/10yr, the final interest would be $36,132, but if I roll it out to 30 years which also increase the interest rate by roughly 1%, that interest rate soars to $158,072. I understand that i can always pay down the principal whenever I feel like it. I guess with my personality i know i would not do that unless i was forced to. But i can see that if I took out a 30 year loan but planned on paying it off in 10 years anyways with the 1% higher rate, the total interest paid would be $46,471 which is only $10,000 more than the 10 years and it would give me wiggle room in the event i needed emergency funds or i lose my job.
I currently manage both of my properties by myself without management to save on some cost, at which point do you think its necessary to hire a management team? I guess ideally my end game was to own about 6 properties out right, where i can draw about $1000 from each property per month, I feel like 6 property is enough for me to retire if i choose to, but still small enough where i can manage it all myself.
thanks
180k
10yr
3.75
1801/month
324180 total
180K
30yr
4.75
938/moth
337680 total
Hamstringing yourself to save ~$13,500 over 30 years, hard pass
you must calculate property management in your deals. You don't save money by self-managing, you're just paying yourself the market rate (and hopefully as efficient as a professional PM which charges market rate). If you don't think over the next 30 years you're going to get sick of self managing you're wrong, and if you buy a deal that cant' support it, then the deal doesn't cash flow. Regardless if you pay yourself or someone else.
not sure if you're inputting the numbers wrong or I am.
180k 30yrs 4.75%
- Monthly Payment$938.97
- Total of 360 Payments$338,027.47
- Total Interest Paid$158,027.47
180k 10yrs 3.75%
- Monthly Payment$1,801.10
- Total of 120 Payments$216,132.29
- Total Interest Paid$36,132.29
showing alot more than $13,500 unless i'm understanding you wrong
I did the math wrong,
216,548 is the correct 10 year total
The total spread is 121K over 30 years
I still stand 100% by my position though. I don't care if it's 10Million in interest, if the tenant is paying the note, that means I can make even more by taking the longest term possible and leveraging the additional cashflow.
could you explain to me how that would be calculated? I understand that i'm not really the person paying the interest, the tenant is. But its going to take 30 years for them to pay it off and I might be able to maybe collect a couple hundred dollars a month in income after all the expenses, but if I did it in 10 years (taking into consideration that i'm losing cash flow because now i'm putting my own money in) at what point do i break even from the tenant paying interest? I mean the total money is going to the bank no matter what, but if i do it in 10 years, isn't it technically i'm the bank and they'll end up paying me anyways? sorry if my thoughts are jumbled up and hard to understand.
simply put, at the end of 30 year; the tenant could pay $1600 a month x 30 years which the bank would college every cent of it, or they could pay $1600 a month x 30 years which the bank would collect 10 years and i would collect 20 years. How would i calculate where the breakeven point is then?
Post: How do you determine if a 10 / 15 / 30 year loan is best
- aurora, CO
- Posts 9
- Votes 1
Originally posted by @Steve Miller:
@Eric T. again, keep the opportunity cost in mind. When you do those interest calculations, you neglect that the 10 year note model costs you $72,000 over 10 years in potential cash flow (very simply multiplying current monthly loss times the number of payments, I understand that this is overly simplistic). A recurring $600 payment at 10% cash return (again, ignoring the equal importance of appreciation and debt paydown on any incremental properties purchased) has an end value of $123,921 after that same ten year period. You would end up with significantly more property and with significantly greater returns if reinvesting the cash, it actually dwarfs the importance of the extra interest payment when you actually run the numbers.
While it may FEEL GOOD to pay down debt, and I agree with you that it feels good, it hardly ever makes sense to pay down a low interest rate if you have the discipline to continue investing. Dave Ramsey doesn't preach what he does (eliminating all debt as quickly as possible) because it's mathematically logical for a disciplined investor, he does it because most folks can't be trusted to dutifully reinvest.
Sorry let me explain to you what I think you're explaining to me so i can make sure I understand lol. What you're saying is instead of dumping $72,000 over 10 years into the property, that $72,000 could turn into $123,921 if i reinvested it with a 10% ROI correct?
Post: How do you determine if a 10 / 15 / 30 year loan is best
- aurora, CO
- Posts 9
- Votes 1
Originally posted by @Alexander Felice:
Originally posted by @Eric T.:
as far as the interest part goes, i'm not sure if i'm calculating this correctly, but with a $180,000 loan @ 3.75%/10yr, the final interest would be $36,132, but if I roll it out to 30 years which also increase the interest rate by roughly 1%, that interest rate soars to $158,072. I understand that i can always pay down the principal whenever I feel like it. I guess with my personality i know i would not do that unless i was forced to. But i can see that if I took out a 30 year loan but planned on paying it off in 10 years anyways with the 1% higher rate, the total interest paid would be $46,471 which is only $10,000 more than the 10 years and it would give me wiggle room in the event i needed emergency funds or i lose my job.
I currently manage both of my properties by myself without management to save on some cost, at which point do you think its necessary to hire a management team? I guess ideally my end game was to own about 6 properties out right, where i can draw about $1000 from each property per month, I feel like 6 property is enough for me to retire if i choose to, but still small enough where i can manage it all myself.
thanks
180k
10yr
3.75
1801/month
324180 total
180K
30yr
4.75
938/moth
337680 total
Hamstringing yourself to save ~$13,500 over 30 years, hard pass
you must calculate property management in your deals. You don't save money by self-managing, you're just paying yourself the market rate (and hopefully as efficient as a professional PM which charges market rate). If you don't think over the next 30 years you're going to get sick of self managing you're wrong, and if you buy a deal that cant' support it, then the deal doesn't cash flow. Regardless if you pay yourself or someone else.
not sure if you're inputting the numbers wrong or I am.
180k 30yrs 4.75%
- Monthly Payment$938.97
- Total of 360 Payments$338,027.47
- Total Interest Paid$158,027.47
180k 10yrs 3.75%
- Monthly Payment$1,801.10
- Total of 120 Payments$216,132.29
- Total Interest Paid$36,132.29
showing alot more than $13,500 unless i'm understanding you wrong
Post: How do you determine if a 10 / 15 / 30 year loan is best
- aurora, CO
- Posts 9
- Votes 1
Originally posted by @Josh C.:
I personally get 15 years. Yes I could get 30s and pay extra. But most people myself included don’t have the discipline to do that and like the idea of having free and clear assets just as much as 100 units. If something cash flowed really highly I’d probably get 5 year notes.
Another note, if your goal is cash flow those townhomes are not very good. If in highly appreciating areas and your goal is that then fine, but those numbers kind of stink for cash flow. Regardless of debt structure.
It’s really a personal decision. I personally don’t like the exposure of 30 debt and paying 80% of my mortgage payment in profits for the bank. 15 year notes tend to be about 50/50 for a while in terms of principle and interest. Which is easier to swallow.
ya currently the cash flow really locks me down as I'm putting about $800 a month to reimburse both properties, but i'm still young in my early 30s, so i figured i would rough it out while i still can. I'm just trying to look at the light at the end of the tunnel where i can have the asset and rent income once its paid off and i could roll that money into a 3rd property which could realistically be paid off in like 5 years if i put both the 1st and 2nd rental income into it.
I'm not sure if its a "highly appreciating area" but the Denver market has been crazy the past few years, the basic bottom price of any townhome is running high 100s to low 200s and most homes that get listed are under contract the same day, so its definitely slim pickings, but I also feel like i'm not experienced enough to explore outside of my home state at the moment. I guess i never really put much thought into the 15 year, always thought 10 or 30. Thanks for the info I'll keep that in mind.
Post: How do you determine if a 10 / 15 / 30 year loan is best
- aurora, CO
- Posts 9
- Votes 1
Originally posted by @Steve Miller:
Hey Eric, welcome. I have a few concerns with the approach:
1) 10 year note leaves you extremely exposed and illiquid in the scenario you proposed above. Any change in personal situation or the market puts you in a really tight spot. As other posters have suggested in the past, you never lose the opportunity to pay down extra principal if personal circumstances make it worthwhile, I just wouldn't want to be yoked to a disproportionate large payment in a downturn or if I lost my job.
2) Home loan rates are extraordinarily low right now when compared to the reinvestment value of the cash. Let's say you can reasonably get metro Denver to yield 6-12% CoC right now. When you say that you're concerned about the interest you're paying, what you're ignoring is the opportunity cost of the reinvested cash flow (which likely triples the rate paid on the mortgage, and that's ignoring debt paydown and appreciation of the new property)
3) Depending on your income situation, you may be ruining your chances of qualifying for additional loans by screwing with your debt to income ratio. The bank I use primarily in Colorado will count 75% of my projected rental income towards the debt when I buy a new property, so in the case you're providing above, you're creating a nearly $1000 liability for yourself from a DTI standpoint every time you buy a property. I'd guess it wouldn't be long before you couldn't get a loan approved at that rate, again depending on your W-2 situation.
Basically any extrapolation (assuming cash flow is reinvested) using current rates and trends favors a 30 year. I could think of a few scenarios (perhaps a monster W2 income where you're getting completely hosed on taxes and expected it to continue for the next 10 years) where it MIGHT make mathematical sense to eliminate any cash flow, but I doubt it, even then. Don't get me wrong, I love the idea of being free and clear as rapidly as possible (and you still can!), I'd just be disinclined to tie myself to it.
thanks that makes sense, another concern of mine was having too many properties which would increase the risk. But what you're saying does make a lot of sense that if i had lost my job or run into a financial situation it could get ugly real fast.
as far as the interest part goes, i'm not sure if i'm calculating this correctly, but with a $180,000 loan @ 3.75%/10yr, the final interest would be $36,132, but if I roll it out to 30 years which also increase the interest rate by roughly 1%, that interest rate soars to $158,072. I understand that i can always pay down the principal whenever I feel like it. I guess with my personality i know i would not do that unless i was forced to. But i can see that if I took out a 30 year loan but planned on paying it off in 10 years anyways with the 1% higher rate, the total interest paid would be $46,471 which is only $10,000 more than the 10 years and it would give me wiggle room in the event i needed emergency funds or i lose my job.
I currently manage both of my properties by myself without management to save on some cost, at which point do you think its necessary to hire a management team? I guess ideally my end game was to own about 6 properties out right, where i can draw about $1000 from each property per month, I feel like 6 property is enough for me to retire if i choose to, but still small enough where i can manage it all myself.
thanks
Post: How do you determine if a 10 / 15 / 30 year loan is best
- aurora, CO
- Posts 9
- Votes 1
Hello, I'm new here, a little bit about myself; I currently have 2 investment properties (town homes) and I'm considering to expand my portfolio. I have a little knowledge about investing in real estate as thats what my mom does, but she does it for fun, not a have to kinda thing, so she does deals based on her experience. I want to see the other side of the picture with data and facts to see if I'm doing it right or wrong.
How do you determine how long you want a loan for? Obviously 30 year would give the best cash flow, but you're also paying a lot of interest to the bank. I have been reading a few of the sticky about COC, NOI and some other stuff to calculate how to determine what a good deal is, but it seems like that what i figured would be a good deal, a majority of people do not feel the same. I feel like a big part of that equation is the years financed into the loan, seems like a majority of investors are doing 30 year loan so bring down the mortgage and to bring up the cash flow; the problem with this is that obviously you're paying more interest to the bank also in this process. So what makes it better to have mortgage it at a 10 year vs a 30 year?
The way I was taught was, if possible always do 10 year loan instead of 30, that way you can have more cash flow sooner and you save interest and currently thats how both of my properties are structured. The rent does not cover the cost of the mortgage, but the beauty of it is that in 10 years, it'll be paid off.
I would like to present this example to see if anyone can tell me if i did this correctly or if 30 year would have been a better option.
I purchased a town home this past year, the purchase price was $235,000, I put a 25% down. The mortgage on it is $1895 (10 year note) and the HOA is $285. So the total cost monthly is $2180, I currently rent it out for $1600, I pay the difference out of pocket every month. The way i see it is, in 10 years, i will hopefully be sitting on $235,000 (assuming it does not depreciate) and have a monthly income of $1300 after i pay the HOA. Now if I did the mortgage at 30 years, I'm sure i would not have to pay out of pocket every month, but it will then take me 30 years to have it paid off and to get any kind of actual income monthly. I understand that if i mortgaged it out 30 years, i would also be able to invest is more properties as I would not have to reimburse the mortgage myself.
I would greatly appreciate any comments, either positive or negative, i'm just trying to gain more insight into this.
thank you for taking your time to read this