Which is better? Equity or cashflow or both? - Posted by Ivan

Posted by tom on October 02, 2003 at 09:19:28:

loans: full floating, interest rate changes with the index each month. 1/1 Arm changes yearly, 3/1 first change period 3 yrs then yearly…

you can get any of these NOO with payments of interest only. this frees up cash flow to reinvest in your properties or other business.

a bank will look at your property this way…
income 15600 (yr)
discount 25% (for vacancy and expenses…you can probably do a little better with experience)
NOI = 11700
if it is worth 155k
Cap = 7.6%
if you mortgage @ 80% LTV @ 5% interest only (5/1 @ current rates)
PMT = 6200
DSC = 1.9
cash flow = 5500
Equity = 31k
ROE = 17.7%

There will also be some tax shelter, depending on your situation.

this looks like a very good deal. i bet with doing your own rehab, you would not have that much into the deal so ROI (an unknown number) is going to be higher, and is potentially infinite. renting will also keep you hungry for doing another deal, and that is good motivation. flipping, the taxes are hell, and you have to pay. hold for at least a yr and taxes are much much less. you will make money on the hold as well, making it less desirable to sell.

Also, you could structure the deal to do the cosmetics first, get it rented (no holding costs), and finish up the furnace at a later time. i like what is happening in your area.
best,
tom

Which is better? Equity or cashflow or both? - Posted by Ivan

Posted by Ivan on October 01, 2003 at 09:35:42:

I’m going to contract on a SFH in two days. Its a 3BR 1 1/2 bth. Home needs repairs of about $10k. I’m leaving the closing with $25k in equity because the seller is very motivated. It’s not a NMD deal but its close. I’m putting in about $5k and seller is crediting me for my closing costs. The purchase is $98,500 but the as-is value is $125,000. Comps show $145-155 after repair value.

The dilema is do I live in it while I make the repairs, pull out the equity and rent it for the $300 cashflow? Or do I live in it avoid the landlord issues and sell it for the difference of what I paid. I know I’ll have to pay capital gains on that. Do I have to pay CG if I refinance and move out to rent it?

This is my first deal and so far its going well, but I’m having trouble deciding. My mortgage choices are a 2-year ARM which will allow me to sell early and not have prepayment penalties, but a 30-year fixed will allow me to rent it for a long period without having to worry about the adjustabe interest rate. Anyone have suggestions?

Re: Which is better? Equity or cashflow or both? - Posted by Ronald * Starr(in No CA)

Posted by Ronald * Starr(in No CA) on October 01, 2003 at 12:34:34:

Ivan-------------

This is an indivdual decision. In general, it is not smart to hold high-cost properties for rental properties as the ratio fo rents to property value is low. It is better to hold low-cost properties for cash flow. A value of about $145K seems to me to be bordline, it might go either way. The thing to do is to look at the marketplace where you are and see if their are cheaper properties where you can stomach the neighborhood. If so, that is where to hold rentals.

Now, when you say $300 a month cash flow, are you actually doing a compete and careful job of analysing this? Most beginners just subtract the PITI payment from the rent and consider that to be the cash flow. That is wrong. You need to allow for all the expenses, including a reserve fund for replacement or major expenses in the future, and for a vacancy factor. Have you done so? If not, you are probably being way too optimistic about the spendable cash flow you will have. In fact, it might be a negative cash flow if you have ignored all the costs.

Good InvestingRon Starr********

Re: Which is better? Equity or cashflow or both? - Posted by tom

Posted by tom on October 01, 2003 at 11:57:27:

you do not give us a lot of information on your current living status, nor rental rates you could get, nor a plan on the rehab, nor how many deals you think there are around you, nor what your market is doing in the next few years (this neighborhood in particular)…so my opinion is really just throwing darts.

if there aren’t many deals, then get the most out of this one (the plan above is a good one). if you can find lots of deals then shorter term holding makes a lot of sense. if you like dealing with people than landlording makes sense, especially if you think the market is going up in your area, or if your ROI is over 10-15% on cash flow alone.

regardless tho, i am not a big fan of 30 yr money. for your first few deals look at a Full Floating-1/1-3/1-5/1 ARM interest only. especially for fixer properties where you are investing cash flow back into the property. this will help your debt ratios if you decided to do a few deals per quarter. the time frame has more to do with your tollerance and outlook as well as financial resources.

best,
tom

Re: Which is better? Equity or cashflow or both? - Posted by TomC (MD)

Posted by TomC (MD) on October 01, 2003 at 10:18:53:

You don’t mention if you are willing to live in it for a while longer than it takes to repair…

If you were, you could live in it for 24 mos, then sell it. Any profit on the sale will be COMPLETELY TAX FREE!

Then take the proceeds and do it again.

TomC

Re: Which is better? Equity or cashflow or both? - Posted by Ivan

Posted by Ivan on October 01, 2003 at 13:23:22:

Well you’re right in that I was a little excited and after some added expenses it would be $189 and not $300 cashflow. I could rent it for $1200-1300 in my market. My CAP rate would be between 9-10%. I guess however, if I can rent it for 12-13 per month and its worth $155k based on comps then I’m getting less then 1% of rental income if I refinance and rent it. Its looking like selling and taking my profit is the better option. Analyzing it further, currently SFH in my market aren’t bringing in the best returns based on rent then multi-family props are.

Re: Which is better? Equity or cashflow or both? - Posted by Ivan

Posted by Ivan on October 01, 2003 at 13:22:36:

Well you’re right in that I was a little excited and after some added expenses it would be $189 and not $300 cashflow. I could rent it for $1200-1300 in my market. My CAP rate would be between 9-10%. I guess however, if I can rent it for 12-13 per month and its worth $155k based on comps then I’m getting less then 1% of rental income if I refinance and hold it. Its looking like selling and taking my profit is the better option. Analyzing it further, currently SFH in my market aren’t bringing in the best returns based on rent then multi-family props are.

Re: Which is better? Equity or cashflow or both? - Posted by Ivan

Posted by Ivan on October 01, 2003 at 13:54:39:

To answer some of your questions, I live in upstate NY. Its an old town with many old homes. There are a number of rehabs going on but there is also plenty to go around in this area. My rehab is mainly finish work that was not completed from a previous major renovation. The most complex job is installing a new forced-air furnace and water heater. They work but are old and will need replacing. My idea is to get a home improvment loan against my equity and fix it up. The rest of the rehab is cleanup, some new flooring in a few rooms, replacing a few windows, drop ceiling in kitchen, wall paneling, beefing up the insulation in some areas, and interior paint. The home has a new roof, gutters, porch, and siding. Repairs could take six months if I do some of the smallest stuff myself or two-three months if I get a small crew.

I could rent it for $1300 and not much more then that. Comps are $155k if I decide to sell.

My market is pretty hot. A rise of 40% in home values over the last 2 years with the rental market holding strong, but its starting to level off. Three years down the line is anyone’s guess.

At $1300 per month rent my CAP rate would be 10%.

What is a full-floating 1/1,3/1,5/1 ARM. Also when you say interest only are you saying a one year interest only mortgage with a balloon?