All Forum Posts by: Kelvin He

@Kelvin He

So for $100 more per month you get to keep $4K more in your pocket. I would lean toward that one, however it depends on your cash flow and goals. Do you want more equity, or more $ in your pocket now to re-invest? Also, from a cash flow standpoint, that $100 could make or break a deal.

So my recommendation would be to project the property using both term options. To start, calculate your:

1. Cash flow

2. Cash on Cash Return (%)

IS this a rental?  What's the cash flow in either case?  Can't answer this question without that info.

Kelvin, I've been in banking (but not directly mortgage) for 10 years so I know enough about this to be dangerous. First question to you is, 3% down is this a FHA loan? I'm not sure that a conventional loan can be below 5% and if it's an FHA loan, you're required to keep PMI forever or refinance to a conventional loan in order to have it removed.

That said if the loan is conventional, you have a few options. PMI can be removed by writing a letter when the LTV drops below 78%. Most companies will charge you for an appraisal when you make the request and then remove the PMI if you make it. To get to this level, you could either pay down the loan through payments or make some improvements to the property that raise the value or wait for the market to appreciate on it's own.

In the future, you might want to look for a deal that is below market price so when you buy the property you just have to wait for the loan to season (1 year) and you can ask for the PMI to be removed or popular on Bigger Podcasts is BRRRR where you'd fix up the house, rent it out and then refinance so you can move to the next property.

Hope that helps and isn't too confusing.

No I would still do it for 2 reasons: 1) (If)You are in a good area of Austin it will almost always be in demand which means higher rents and higher valuation. 2) Plus in 2 years, the rents could be at the 2.2 mark you need. If I were you I would pay yourself extra, say $500/month in rent (don't actually pay this for accounting purposes, just set $300 aside) to build up a reserve which you should have anyway for unforeseen expenses. If nothing major happens you could expect to have between 4-5k saved up which could then help you make up for the lack of cash flow until you refinance or sell it. Alternate strategy: AirBnB-if it's close to 6th street or the river you could make more than 24k/year. 

Here are the issues you will run into: Property tax, its a killer in Texas and it will make your payment go up-protest every year. insurance, also a killer in Texas, shop policies every year or 2. Depreciation recapture: once you start renting it, your basis will start going down which will affect your profit when you go to sell. 

It is still a tight deal but if you are only effectively paying $500 in rent a month for 2 years, you could do well with the money saved. 

@Kelvin He I revise my last post now that I see you are living there. Do it. Especially if it is in a good area of Austin. You are living for $200/month! If that fact had been in your original post you probably wouldn't have got half of those negative responses. 

If/When it appreciates to the point that you have more than 20% equity, refinance so you can get out from under PMI and all the other crap attached to FHA loans. (i'm not saying FHA is crap, its a great program to help people get homes but there is a lot of extra insurance because the people applying for them present a bigger risk).

@Kelvin He

@Dennis M.

Dennis, I want to point out that Kelvin indicated that he is NOT BETTING on Appreciation.

What Kelvin is doing is betting that his 96.5% LTV loan of $240k of a $250k purchase will disappear in 30 years, which it will. That's just Math.

Additionally, he will take a $200 per month loss in the 1st year he rents it out entirely ($2,200 expenses but only approximately $2k in rents).

Let's just assume the above scenarios plays out for the entire 30 year holding period.

So Kelvin will lose $200 per month or $200 x 360 months = $72,000.

Assuming NO APPRECIATION, the mortgage disappears in 30 years.

If Kelvin then sells the property at the same price of $250k, his return would be $250k minus $72k minus $10k for down payment = $168k profit in 30 years.

Considering that Kelvin would only put in $10k as a down payment, $72k as payments towards the property over the 30 years, his investment is $82k which then returns proceeds of $250k.

If we did a non-compounding calculation of ROI we get $168k profit / $82k Invested = 204% in 30 years or 6.8% per year.

If we did a Compounded Rate of return, we get a 6.12% IRR over the 30 years. Here is the IRR Chart:

What Kelvin is saying is that this is the most pessemistic scenario where he will have ZERO Appreciation AND NO CASH FLOW INCREASES due to increasing rents versus expenses.

Kelvin can then come up with an optimistic senario, such as add 5% annual appreciation with 2% annual cash flow growth.

That would supercharge his IRR.

Aside from this, the danger, as others state, is that Kelvin cannot afford the negative 200 per month cash flow. BUT.... common guys... negative 200 per month?! I mean this doesn't kill anyone that I personally know who has disposable income to buy an investment, even for $10k savings like Kelvin.

Of course there are a ton of other considerations such as Capital Expenditures and Tax Savings, but we are not building a very complex and sophisticated spreadsheet just yet. If it were me, I would actually do it.

I would definitely look into the economic factors that are going to be driving the value of the properties in that area as well over the 30 years, however.

To me you can get the numbers completely correct, but if you don't know the economic trends that are happening, a good investment can turn into a nightmare no matter how much cash flow you are generating over the years.

There are too many examples of cash flowing properties that stopped cash flowing such as places like Detroit, Bethlehem, Allentown, etc. Generally one industry towns where the Industry dried up.

The economics is a necessity to long term buy and hold investing. If you are not doing that, good numbers can turn out bad.

But that being said, this is well within my risk tolerance level as long as there are no negative economics that will impact the next 30 years.