All Forum Posts by: Ronald Perich

An example of why banks may decide to call a Due on Sale clause...

Right now, the Prime Rate is 3.50%. It's gone up 25 basis points in a year. No big deal. In November of 2006, the prime rate was 8.25%, 475 basis points higher.

Most banks lend at some factor of Prime, so let's just look at the difference a 475 basis points makes.

On a $100,000 loan, the higher interest 30 year loan will earn the bank over $100,000 more in interest payments.

If you think banks aren't going to spend a few minutes reviewing their lowest-interest loans when (not if, but when) rates rise, think again. This will be easy pickings for them. They can call the loan due and either have you refinance (which gives them cash they can deploy at higher rates) or foreclose (which gives them a high-equity property, easy sold, to then have cash to lend at higher rates).

And I agree that an LLC per property, especially SFH, is overkill unless you have some really expensive houses. Bundle a bunch together into one LLC. Try to mix high and low equity homes together if possible so the entity is a less juicy target. And just do what's right by your residents. That's the best protection you can buy.

You would not believe how busy my Wednesday was. And I only get notified once per day. 

This is a wonderful idea. I do something similar with my rentals, although not to this scale. 

Each December, I send each resident a check equivalent to one percent of their on time rent payments - must be on time.

I then match that with a donation to a local charity specifically working in the emergency housing area. This year is Catholic Charities of Madison County.

It's a win for everyone.

Wish the @ sign worked on Android. If you plan in them appreciating at the same rate, then you can take appreciation off the factors to consider. Whatever cash you're using will have the same return from your original investment. Then it's about which will cash flow better.

I'll bite on the math and leave everything else out. 10% appreciation in five years. I assume you mean you think the properties under consideration will appreciate at 10% a year for five years. Don't know if that's possible, but whatever.

Option 1: Negative cash flow of $3,600 a year. Sell at end of five years. Total profit (w/o closing costs) = $378K, a 102% ROI.

Option 2: Positive cash flow of $3240/yr. Total profit (w/o closing costs) = $120K, a 182% ROI.

My answer is option 2.

Let's do the math a different way. Option 1 appreciates at 10% a year for five years (speculative) while option 2 appreciates at 3% a year for five years (more reasonable). In that scenario, Option 1 is your best ROI at 102% versus 1.83%.

The break even on appreciation under this scenario is where Option 1 is 10%/yr and Option 2 is at 7%/yr. Both are pretty speculative in my eyes, but that's what the math says.

Option 3: Buy four homes at $162,500, each cash flowing $225/mo. They appreciate at 5% a year. That's the break-even point. Your return is about the same but you are taking significantly less risk at exit.

Let's go to Option 4: 16 unit Multi-family with 2.5% appreciation per year and $2400/mo in cash flow. That's the break-even point. For significantly less risk, you could buy a 16 unit building with positive cash-flow and make the same amount of cash as a single property that has to appreciate at 10% per year.

Your comment about a larger principle payment is misleading. If you get the same terms on the loan, your ROI is not impacted at all. Just the amount of money in play. Think about it like this. If you bought four homes at $162.5K instead of one $650K home, your principle pay-down is the same.

To your investing success,

Ron

P.S., please correct my math if I am wrong. I just woke up :)

@Ryan G., you are correct. Using the money to buy another property will increase your debt as well. I'm just trying to point out there may be a better use of the equity versus keeping it in your current house.

I tried figuring out how you arrived at your $2K/mo cash flow, but I didn't have enough details. So let's just look at the primary house for right now.

Let's say you were going to buy some brand new rental property. 

Option 1 is buy a home appraising for $190K. It rents for $1,700/mo. You need $38K down for the purchase of this house plus $2K for closing costs (made up). Assuming expenses at 45% of rent, and a loan at 4.5% for 30 years, you'll end up having free cash flow of $203/mo. Your Cash-on-Cash return is 6.09%

Option 2 is to buy one house for $90K and one house for $100K. Rents are $1,300 and $1,400 respectively. (I based these on some quick numbers I pulled from the internet). You'll need the same $38K for down payment but $4K for closing costs. Assuming same expense ratios and mortgage terms, you'll have free cash flow of $715/mo. Your CoC is 20.4%.

Maybe Option 2 is in a more challenging area or the houses are much older, so your expenses are at 55%. Your cash flow is still at $445/mo and your CoC is 12.7%.

You see what I am getting at? Just because you already have a property doesn't mean it's meant to be a good rental from a cash flow perspective. There may be better uses for the equity that's tied up in that property. 

In my example, Option 1 equates to you keeping your current home and renting it out. Option 2 is selling your current home and buying two more houses as rentals. Again, it's all about what your goals are. If you want less work, maybe Option 1 is the best thing for you and your family. Maybe it has better chance for appreciation. Maybe having only one house is much easier to manage.

Again, it's up to you to decide. You asked for ideas :)

To your investing success,

Ron

@Ryan G.,

You'll probably get some flak when purchasing the new house if you've just taken another loan against your current primary residence. The lender will see a high debt to income ratio and may not allow you to get a loan, or they'll give you one at a higher rate, charge you points, etc.

I applaud your efforts and creative thinking. I'm curious why you are thinking of renting out your current primary residence? 

I realize your plan will cash flow after it's all in place, but the house on its own seems pretty thin. Assuming some standard numbers, you're looking at a refinance PITI of around $1,200/mo. That's about 70% of your rental income. Is there really enough left to make that property, on its own, cash flow? Or are you hedging that there will be property appreciation?

If you're doing a HELOC, then you actually have two mortgage payments to cover. That will make it even more difficult to cash flow on the primary house. I realize you're getting payments off the mobile homes you move onto your lots, but what happens if there are issues getting them rented or approved by the city/county? Can you cover the original primary, then HELOC, and the mortgage on your new primary residence?

Honestly, I'm not trying to dissuade you. But if you are looking to maximize your cash flow, then keeping and renting your current primary residence might not be the best use of that equity. Selling it and using the cash might allow you to buy something that cash flows better. Or use the HELOC to get things started but don't move into a new house.

I'm not the one who needs to make the decision. It's your preference and goals that matter. 

I looked through what I thought were the relevant city ordinances and couldn't find anything that would remotely back up what they told you other than for permits. 

@Marvin Meng, great idea!

 Don't thank me yet. I was just corrected that Florissant, MO passed the ordinance, not Ferguson. That said, there was no way you were going to get $1,300 a month for the property. 

I personally think Ferguson isn't a bad area. They have really done a lot to try and keep that community vibrant and there are some very nice homes, shopping, and eating choices in that town. And some of the older homes have beautiful style and architecture.

 I can't believe I screwed that up. Thanks for pointing out the error.