All Forum Posts by: Marina Wong

@Shaun Reilly

Thank you for your thorough explanation and Happy New Year.

Band of Investment method verifies that the returns calculated in the scenario posted are as you said (though I got slightly different at 4.95% with the 25% down case). I am surprised too that all cash in this particular scenario would have a higher return than with mortgage. The explanation here is the original return is low (6%) compare to the interest rate of 5%. The mortgage constant in this case is larger than 6% (6% is also the cap rate when there is no leverage), therefore it does not give any leverage. In order for financing to have leverage, the mortgage constant has to be smaller than the CoC return without financing.

Band of Investment is used mostly in commercial mortgage to calculate what an acceptable cap rate is. Or at least verify if given cap rate used to calculate the value is reasonable or not. The rationale is you would never want your Coc to be lower than say bond or other not so risky investment. So in the above scenarios, if we were back in the days when bonds were yielding much higher, this would not be an acceptable investment alternative. I can use it to evaluate various mortgage scenario and find out what my Coc is.

Do you usually do a ROI on yr one for your own analysis or do you do it for multiple years? I see people throwing in annual appreciation with multi-year calculation.

http://www.ehow.com/how_4970377_calculate-mortgage-constant.html

The above link shows how to calculate mortgage constant : Mc

Then use the formula (LMc + (1-L)Ye) where L is the % of loan and Ye is the equity yield rate. So for example if you do 75% financing, the equation will become 0.75Mc + 0.25Ye.

The Equity Yield Rate is the investor's annual Cash on Cash Yield - the funds available to the investor after mortgage payments divided by his original Equity Portion of the investment. See http://www.commercialappraisalsoftware.dcfsoftware.com/boi.htm for explanation of Equity Yield Rate.

Band of investment has its short fall even though it accounts for financing. The above link explains this. So I wonder what people usually use to evaluate a deal, maybe the total ROI?

Thank you for the clarification Randy. I wonder if there is any info on what percent of buyer as for concession on closing costs? Are these mostly owner occupant buyers or even investors will ask for concession? Does HUD care about whether you make any mortgage or inspection contingency? In another word, is your bid more favorable if you do not have mortgage contingency vs. another similar one (maybe slightly lower offer) but without mortgage contingency? Thank you for any insight.

Just want to post a follow up on the topic:

We withdrew the offer and the listing agent told us there was a backup offer more than what we offered. So apparently the apartment is attractive. The listing is still active so we won't know what it will end up selling for at this time. At the mean time, I did a calculation using band of investment to see how the financing would change the price. Comparing 5% rate with 15% down payment (owner finance) vs. 4.625% rate with 25% down payment, the resulting cap rate actually is 0.7% lower. So if I use the 50% rule for expense, applying the respective cap rates to the NOI will give the seller financing more than $25K+ in value. However, a respectable cap rate will not justify the price. A very experienced multi-family owner will make this work at a higher price (one can manage a lot of things himself/herself and therefore lower the expense). I just feel I am not there yet.

I would like to know what other thinks about using this method to compare financing. Thanks.

@randy

I would like to get a clarification when you say net to HUD, do you mean you will deduct the fees they pay to the agents. So let's say the listing is $100K and 2% to listing, 2% to selling, they will not sell less than $88,542 (after paying commission (4% of $88,542) , they will have $85,000 left? (assuming 15% discount is bottom line in first round)

The listing agent said it should be 4.75%. A typo he never corrected. 4.75% is with 20% down (at a higher counter offer price too). 5% is with 15% down.

Thank you Will for your advice. I did what you said and came up with cap rates for the past 6 months' sale for 3 & 4 families. The only problem is there is no sale in that particular area of Lowell. I went to 2012 sales and there was one 4 family sale and one 3 family sale in that particular area of Lowell. The 4 family cap rate was 1% lower than the other 4 families in different neighborhood of Lowell and the 3 family cap rate was on the low end of the other 3 families. So if I use this info and extrapolate to this year's sale, then the cap rate would support the sale price. The problem is if I go with conventional financing, appraisal will not come to this value conclusion as there is no sale in the past 6 months in this neighborhood. The property is fully rented and deleaded. 2 long term tenant and 2 newer ones. Plus one of the unit is $200 under market rent. So is it a good idea to invest in a neighborhood that has lower cap rate than the other parts of the city?

Thank you all for such a quick response.

@Shaun Reilly

It is a 4 family. My other loan options are conventional loan with mortgage brokers with 25% down, 4.625% rate 30 yrs. I know there are other options out there that I am not aware of. Thank you all again.

I am a first time investor in multi family. In the process of purchasing a multi family in Lowell, MA. The seller is financing at 15% down, 5% interest rate, 30 yrs amortization, 15 yr balloon payment. Due to this, the cash on cash return is almost 20%. However, what we have negotiated is higher than appraised value (from a buyer whose deal fell through). The negotiated price is also on the high end of value using gross rent multiplier. While it seems like a good value through the special financing, the value will not be there otherwise. The property is updated and fully rented in a relatively desirable neighborhood. I am comparing the return with other properties using 25% down current rate of 4.625% - 5%. Are there other financing options available? It seems that Marlboro and Worcester multi families do not have as high gross rent multipliers. Am I comparing apple to orange? Thank you in advance of your help.