All Forum Posts by: Nathan Emmert

@Nancy L. 

All sellers carry about is the "net" generally... rolling closing costs in will stress the appraisal some, but such is life.

Essentially if I know my closing costs are $5,000... and I know the seller needs $200,000 to accept my bid... I can bid $205,000 with seller to pay $5,000.  As long as the appraisal comes in at $205,000 or higher, it's transparent to the seller (they net $200,000).

The difference to you is instead of paying 25% of $200,000 ($50,000) plus $5,000 in closing costs $55,000 total... you pay 25% of $205,000 or $51,250 saving yourself $3,750 in cash.

On higher priced properties it's not such a big deal... but on properties in the $60 - $80k range where you're closing costs are upwards of 25% or more of your down payment it can swing things.

If you're in A/B areas my guess is you eventually run into DTI issues with lenders as pulling out the equity will likely result in 75% LTV and about 1% rents ($75k financed on $100k appraised generating $1,000 in rent). I'm not sure 1% rents are enough to allow you to buy indefinitely before your W2 financials are too weak to support the debt.

It sounds like you're essentially trying to flip houses to yourself and refinance out your cash position to rinse and repeat. Lots of people try to do it or even succeed but it's far from simple... you're complicating the flip process (getting all in for 75% of ARV or less) with trying to predict rents at 1% or above of ARV (when I did my math I was looking for at least 1.2%). I couldn't make those numbers work in A areas... and while I haven't finished looking at the B areas, it wasn't looking promising. In A areas, I was renting a $380k house for $2,600 a month before moving... in in A- area $150,000 houses were renting for $1,200 a month... looks like the B area has houses around $100,000 that would rent for $900. Where I am, that math doesn't work... C areas can get a $60k house rented for $800 - 900 a month... but getting all in on a $60k house at 75% is rough... and you're in a C area.

So without understand CAPEX, how are you determining that you are buying at a discount from market?

Also realize, for SFHs, the equity has NOTHING to do with income.  Finding a home rented for $300 a month that should rent for $800 a month is worth the exact same rented for $300 a month as it will be rented for $800 a month to the banks lending you money.  For residential properties, they use comparable sales for appraisal value, not an income based approach.

The reality is you have to invest for both.

If your area isn't appreciating long term, it's dying... if the area is dying, your property is dying, your cash flow is dying.

So invest in a place where the numbers work not only this year, but the forecast is the numbers will work long term.  I fully intend to own these homes in 50 years and eventually passing them along to the kids.

The problem I have with appreciation is... what do you do with it?  Hey, I just got $100k in extra equity?!  Great... you can't cash it out and still cash flow... you could sell the property... but now what are you going to do with the $100k... go buy new properties?  In your market, all the other properties have probably had similar increases so it doesn't really add anything.  Sure, you could try to time the market... buy low in CA... sell high in CA... then go invest in cash flow in Indianapolis... but that's just gambling and market timing IMO.

They are all metrics that help define cash flow so I'm surprised you're asking... frankly they are all different ways to skin the same cat.

You can't just look at cash flow... "hey! this property cash flows $1,000 a month!!  What a STEAL!!!!!!!!!!!!!!!!"... well maybe not if the property cost $1,000,000 in cash out of your pocket.

It's also good to have exit strategies.  If you're paying $80,000 for a property that generates $1,200 in rent... and everyone else in the neighborhood paid $60,000 for properties that generate $1,400 in rent... you're going to have a hard time selling and/or possibly refinancing.  The numbers may still work for you so you can put on your cash flow blinders and ignore the rest... but most people want to know they are getting a "relatively" good deal... 

No, in this case the 50% rule won't work, you're at 18% alone just for the property taxes... add in utilities which can be a killer and you'll likely be closer to 60 - 65% expenses which is probably why the price is where it is.

Call every small bank and credit union in your area and ask... easy peasy.  I had a lender out in Utah that would do exactly what you described and I have heard of local lenders even doing 100%... you won't know til you start dialing.

This is a business... you're selling a "doo-dad"... you're simply trying to find "doo-dads" that have the best spread of rent versus price point you can when weighted against the risks of the traits of that particular "doo-dad" (i.e. location, age of house, schools, crime, etc).

Remove the emotion... while there can be some pride in ownership and I get that... at the end of the day, you're doing this (mostly) to make money.  Buying cause it's pretty is like buying stock FUN because the ticker is cool!

Roll your closing costs into the loan and you'll bump up that CoC return another 2% or so.

Honestly, these are the types of deals I tend to look for.  Solid returns and pretty easy to find.

The bank will do that internally.

Generally speaking they will ask for the rent roll and some of the fixed expenses (such as property taxes). The banks will have their own metrics on what % of the income will be used for CAPEX/Repairs/etc and will do their own DTI analysis on the property stand alone.

This should all be part of the bank loan application, they generally have an income/expense worksheet for each of your rental properties.