I’m closing on a house Wednesday. Purchase price 133,900 seller pays 2k in closing. Loan is 0 down at 8.75 b/c credit scores a 630. P and I is 1053, insurance is 700 annually, and 1200/year taxes. This house might get 1150 in rent. Appreciation is 4.54%. Did I just screw up?
Thanks
Gil - still a wannabe
What is the appraised price?
the 8.75% seems high, even with a credit score at 630. I guess there could be other things going on, but that still seems high right now. I would want to see some other info before telling you that you screwed up. I would want to see the appraised value most definatly.
Put the hammer down on that one racn1WRX !! Sorry, I couldn’t help myself. From one speedster to another, I agree with the guys previously. We need some more info. to assess your position.
Are you looking to hold or flip this piece of property? I won’t say you screwed up with the info you have given us but if you intend to hold it, you will be somewhat upside down on cash flow before taxes. It’s a thinner cash flow than I would be willing to take in most instances.
Hey, look at it this way, if it turns out to be a “screw-up”, let it be a learning experience. I would venture a guess that it will cost you less than some of these seminars being offered to people who will take them and never learn. At least you doing something ! It may not be ideal, but that will come. You’re paying your dues.
Good luck, and don’t wrap that wrx around any poles !!!
Ken
Seems steep to me, too. I pay about 6% for 80% LTV NOO. They start with a basic rate, add for lower credit scores, add for anything above 70% LTV, add for NOO, etc.
To answer your basic question, in my opinion (you know what they say about opinions!)…YES. Here’s why:
PI = $1,053
Taxes = 100
Insurance = 58.33
Maintenance = 50
Management (5%) = 57.50
Vacancy (5%) = 57.50
Total = $1376.33
Rent = $1150
Cashflow = -226.33 ($2,715.96 per year)
This is an alligator. You have neglible appreciation at 4.5% (BTW - how do you know that “Appreciation is 4.54%”? Based on what? Last year? The last 5 years?).
For a “buy and hold”, this one doesn’t get it for me. You indicate (by listing a rental price) that is what you plan to do with it. And, oh yeah – what about MIP? The lender is going to want mortgage insurance if you are over 80% LTV…
My two cents. For buy and hold, it really doesn’t matter what the appraisal is – CASHFLOW IS KING!
Keith
Howdy Keith:
Great analysis. Here is how they used to sell these to investors. Deduct the negative cash flow at the 35% tax bracket and you save $950 of the $2716 every year. Now you get to deduct the accelerated depreciation of $5000 the first year and you save another $1750 on your taxes giving you a positive of $16 per year. And if you put that into a money market account at 10% you will earn another $1,60 per year before taxes. Something like that. That was before the 86 tax reform act. Doctors and lawyers were buying this stuff left and right but with better numbers. I agree with you Keith but doing something is better than sitting on the sofa. Had I bought and kept 20 or so of these in 88 after the crash I would be writing this from the Bahamas or my jet. LOL
I concur with Ted that inaction will cost you more dearly in the long run than a wrong action!
I would, however, approach this carefully and with full knowledge!
Keith
a word of caution on the tax benefit of losses. those losses are capped at $25k/yr (total amoung all properties) and start phase out at incomes above $100k and are completely suspended at $150k. Granted you can release these losses if you have a low year of income or you sell the property.
So I use the numbers to evaluate the overall investment, but one has to be careful about including them in the cash flow analysis.
I don’t really concern myself with the tax write-off portion too much as it applies to reducing my income (though $25K can cause a significant cut in money being pumped into the dry-well that we call Washington) until tax time…if it does reduce my taxes, I consider it “found money” and not part of the bigger plan.
Keith
I agree with you Keith. However, there are some “gurus” out there that will tell you not to “worry about negative cash flow because it will all be offset in the end.” They tell you this because they can’t find or don’t know how to find good deals and want you to buy through them. Negative is negative. How many properties can you carry at -$100/month before you can’t carry them all? Sure you get money back at tax time IF YOU QUALIFY, but in the mean time do you have money to eat and cash flow to invest in more properties? No cash flow = drain on current reserves = less opportunity to invest.
Some wll tell you that a little negative is OK as long as there is good appreciation. I say “BUNK”! If you negative (even a little bit) and hoping for appreciation, you are speculating, NOT investing. I say “Gimme both”!
You’re right on the money! I look for AT LEAST $125 per month ($1,500 per year) positive. There is nothing magical about that number, just one that works for us. So far, so good!
Keith
With just the #s you gave it is a negative cash flow of $61 per month. You need to also consider utilities, (if owner pays) water, trash, repairs, & any yearly lic. fee, or any managemnet fee if you don’t manage yourself. I wouln’t have even looked at this property.
And yes, cash flow IS king
Wow, yall’ve been busy past two days. Thanks for all the responses guys I’ll try to add some information. I live in the cul-de-sac that this house is located in. I’ve lived in this neighborhood for three years. I bought a house just like this one two months ago and moved into it. That’s how I know the rate of appreciation is 4.54 over three years. The purchase price is the same as the appraisal. I had to do that b/c I did’nt really have any money for closing. I’m purchasing this house as owner occupied b/c it hasn’t showed up on my credit yet that I’ve moved next door. BTW, I’ve got my first house rented out at 950 on a 710 payment. I also just closed on this house today and got a call from someone who wants to look at it which takes a little pressure off. Now I own three out of the six houses in my cul-de-sac. I am looking to hold for rent both houses.
I’m purchasing this house as owner occupied b/c it hasn’t showed up on my credit yet that I’ve moved next door.
Wow. I’m impressed. You commit a federal crime (LOAN FRAUD), and then are proud enough about it to post it on a nationally read website.
Sure hope for your sake that the Government boys aren’t reading this forum this week.
Raj
I agree with Roger. Why can’t people do honest business? How much are you saving yourself and is it worth the risk?
Obviously not saving all that much because the interest rate is 8.75%!
I agree with Roger and Diane. I absolutely refuse to perform any real estate dealings in anything less than 100% honesty. To do otherwise is just plain wrong. In some cases, it can actually deprive deserving people of maybe their only chance at home ownership.
Do to others as you would wish they do for you.
Keith
I was under the impression owner occupied was a very common purchasing technique for investors who have little cash. The amount I saved is 10% down obviously a sum of money so large I can’t ever imagine saving that much. I have a single income of 46k a year. I used a broker and he assured me this was a common practice.
8.75% Rate for Owner Occupied is really high. You might want to check with your broker and see if he is in fact giving you a non owner occ rate.
Maybe he has figured out that you can’t do an owner occ on this one and does not want to look bad. If in fact your rate is 8.75 and you are going the owner occ rate, then you may want to talk to a few more lenders.
[/b]Do not let them pull your credit report.[b] Just talk to them, give them your score and your scenerio and make a decision from there.
Good Luck 
PS Buying property close to you is a great idea. I like your strategy.
Your broker can assure you all he wants. If you get caught, it won’t be him that goes to jail.
There are many ways to buy property with little to no money down, all without breaking the law. Read up on the various techniques and see which will help you the best.
Raj
If your broker told you this is common practice then I would dump him HE is crooked!