All Forum Posts by: Nate Garrett

I am currently refinancing a rental property that I own. The new loan will have a $77,000 principal balance and a 15-year amortization and term. The loan officer presented me with the following interest rate options:

3.75% with 0 points

-or-

3.25% with 1.29 points

-or-

3.0% with 2.43 points

Here is how I go about deciding whether or not to pay points to buy down the rate:

First, I need to think about some assumptions. In this case I assume that I will own the property for at least 15 years, during which time I will not refinance this loan (3-4 percent is a pretty amazing rate - I think we'll all be wondering how it was possible in 10 years!).

Next, I calculate the actual dollar cost to “buy” each rate:

3.75%: 0 points = no cost

3.25% : 1.29 points = $77,000 x .0129 = $993.30

3.0%: 2.43 points = $77,000 x .0243 = $1,871.10

I then calculate the principal and interest payment for each interest rate:

3.75%: P&I = $559.96 / month

3.25%: P&I = $541.05 / month

3.0%: P&I = $531.75 / month

Finally, I take the total annual savings of each lower interest rate and compare it with the 0 point option to determine a “rate of return” on my initial investment, the dollar cost of the points required to buy down the rate.

3.25%: $18.91 / month savings = $226.92 annual savings

$226.92 annual savings / $993.30 points paid = 23% annualized rate of return

3.0%: $28.21 / month savings = $338.52 annual savings

$338.52 annual savings / $1,871.10 points paid = 18% annualized rate of return

To make my decision, I compare the available rates of return on the points paid to my “opportunity cost of capital” or the rate of return I think I could attain on other similar investments. Since buying down an interest rate is a guaranteed (zero risk) investment - unless I were to sell the property - my opportunity cost of capital is very low, say 2-3%.

So I chose to pay 1.29 points for the 3.25% rate because the 23% rate of return exceeds my opportunity cost of capital and is higher than the 18% return offered by the 3.0% rate option.

It should be noted that if I assume I might own the property for a shorter length of time or refinance in the near future, that would change the decision making process and introduce additional variables into the decision.

What say you, fellow BP members? What other factors do you take into account? How do you go about choosing whether or not to pay points to buy down a rate?

Regards,

Nate 

@Ping W. 

Have you reviewed the residential landlord/tenant act in the state in which the property is located? It might be helpful in determining how to proceed.

If the property is in South Carolina I found this link.

Here in Oklahoma, if a tenant moves out prior to lease expiration, we consider the property "abandoned". We will try to get something in writing from the tenant stating that they have vacated the property and it is not their intention to return. We will also document by taking photos of the vacant house, etc. The tenant would still be responsible for paying rent until the end of the lease term, or until a new lease begins, whichever occurs first.

Each state is different when it comes to the law so you should review the applicable landlord/tenant act and consult with an attorney if you are still unclear on how to proceed.

Hi @Bill P. 

Background: We manage about 200 properties in Tulsa OK using Propertyware. We converted nearly two years ago. We use Propertyware for all management, maintenance, and trust accounting as well as marketing. We also had them build our website for us and host it with them. We still use Quickbooks for our corporate accounting, but we have become efficient at using the two programs in tandem. Overall we are satisfied customers.

Pros:

- Overall efficiency has improved dramatically. Workflow management and automation is first rate.

- Very full featured. Normally when I think to myself "I wish I could do..." I just look it up and find that Propertyware has implemented it. From all appearances Propertyware is in it for the long haul and take customer suggestions seriously.

- Marketing tied into our website makes listing a property on our website extremely easy: upload photos, narrative, click "Publish for Rent" in Propertyware, it is up on our listings page on our website.

- Accepting e-payments from tenants, direct deposits for owners, all within Propertyware. Bulk processing of owner draws, etc. Again, workflow is seamless and logical.

Cons:

- Their web development team can put together a nice looking website (at least we think it is!) but the backend "Sites" module does not permit much control from a SEO standpoint, so I have spent a lot of time coming up with workarounds. If you are a techie (or wannabe SEO guy like myself) and want full control of your website I would not recommend using their web development/hosting. You can still integrate the listing widget into your website, allowing you to quickly publish listings.

There is a learning curve and it will take some effort to convert from your old system to the new (it took us about a month to get everything up and running), but once established, we have found marked improvement in overall efficiency as a company.

You might check out their free trial. It has a sample database that you can manipulate to get a feel for the software and workflow.

Hi @Gustavo Martinez 

If you are interested in learning property management you might want to check out the National Association of Residential Property Managers (NARPM) and their educational offerings. Many of their courses are offered online and are a great start for someone new to the industry.

Best of luck!

Nate Garrett 

Hi @Natassha Brown 

I have been using Apex Title for several years and they do a great job. Stina Bennett is the staff attorney there and has caught several title issues for us over the years.

@Neda Navidnia 

You might want to check out the National Association of Residential Property Managers (NARPM) and their educational offerings. Many of their courses are offered online and are a great start for someone new to the industry.

Best of luck in your new business!

Nate Garrett 

Hi @Reuben Stone 

We manage about 200 properties in Tulsa OK using Propertyware. We converted nearly two years ago. We use Propertyware for all management, maintenance, and trust accounting as well as marketing. We also had them build our website for us and host it with them. We still use Quickbooks for our corporate accounting, but we have become efficient at using the two programs in tandem. Overall we are satisfied customers.

Pros:

- Overall efficiency has improved dramatically. Workflow management and automation is first rate.

- Very full featured. Normally when I think to myself "I wish I could do..." I just look it up and find that Propertyware has implemented it. From all appearances Propertyware is in it for the long haul and take customer suggestions seriously.

- Marketing tied into our website makes listing a property on our website extremely easy: upload photos, narrative, click "Publish for Rent" in Propertyware, it is up on our listings page on our website.

- Accepting e-payments from tenants, direct deposits for owners, all within Propertyware. Bulk processing of owner draws, etc. Again, workflow is seamless and logical.

Cons:

- Their web development team can put together a nice looking website (at least we think it is!) but the backend "Sites" module does not permit much control from a SEO standpoint, so I have spent a lot of time coming up with workarounds. If you are a techie (or wannabe SEO guy like myself) and want full control of your website I would not recommend using their web development/hosting. You can still integrate the listing widget into your website, allowing you to quickly publish listings.

There is a learning curve and it will take some effort to convert from your old system to the new (it took us about a month to get everything up and running), but once established, we have found marked improvement in overall efficiency as a company.

You might check out their free trial. It has a sample database that you can manipulate to get a feel for the software and workflow.

@Nathan J. 

8-10% monthly management plus 50-100% of one months rent leasing commission is a pretty common pricing structure. You probably will find negotiating room with larger portfolios or nicer properties that have higher rents.

Hi @Ryan Ahlgrim 

Why not offer them the $1000 to vacate now and terminate the lease early? Then you can put the property back into move-in ready condition and get it sold!

Marketing a property to owner-occupants is extremely difficult when tenants are in place.

Nate

@Nathan J. 

It's pretty common to see leasing commissions or tenant placement fees of 1/2 to 1 month's rent. I agree with the others that have chimed in that the amount of work involved in marketing, showing, screening, and leasing is often underestimated.

In my opinion, there are a few ways to determine if the property management company's interests are misaligned with the owners. For example, if a property manager wants to set the rent at the top of the market or includes substantial automatic rent increases in the lease, they might have high turnover (and a lot of leasing commissions). You may be able to find a tenant who will pay top of the market rent, but they probably won't stay very long when they start comparison shopping during the 1st year.

Tenants are shoppers. If they feel like they are getting a good deal, they will stay longer than if they feel like their getting squeezed. Consider setting the rent just a tad below market rent and getting rid of any automatic rental rate increases. If you have to raise the rent because the market has increased substantially, take the time to explain the increase at lease renewal time and have comps available to show the tenant you are treating them fairly.