Thanks Justin. Pages 18, 19, 23 are what I used cause I’m in LA, the property is under 100 units and the property is over 20 years old. The worst out of those 3 numbers is 43.1% of PGI. Factor back in when they used 12.6 % for salaries and personnel, 3.8% for management, and 2.1% for administrative since I will be doing that myself and I have expenses at 24.6% of PGI. Similar to what I calculated, and the number the lender uses. Maybe the % for property management is why me and Hooch’s numbers didn’t match.
Lenders typically only allow 75% of your gross rent to be used in computing your debt to income ratio. But if you look closer at the computation, the lender takes 75% of your scheduled rent, then also subtracts property taxes, insurance, and other recurring costs such as HOA fees and PMI.
When all the computations are done, the lender is a lot closer to a 50% expense and vacancy allowance than it might appear.
Amir,
The 50% Rule includes capital expenses and vacancy expenses (although these are not technically an operating expenses from an accounting perspective). Nonetheless, these ARE real expenses that you will incur if you are to stay in business. As far as management, salaries, administrative, etc, you are still incurring these expenses EVEN IF YOU DO THE WORK YOURSELF. I do all these tasks myself, but I certainly don’t work for free!
You can pretend that your expenses will be lower than the 50% Rule if you like. However, you’ll be the one to suffer when you finally discover the reality.
Good Luck,
Mike
Maybe the % for property management is why me and Hooch’s numbers didn’t match.
Sorry Amir, I didn’t know you work for free. Maybe you should just buy one of those properties based on the criteria of whether or not it has an upstairs or if it is one level. Or you could buy it based on the year it was built. Then after a couple years you can learn your lesson and come back here to ask us how to get out of it because it seems that no one wants to buy it from you at the price you will need to cover your loans.
We will then say, tough titty said the kitty when the milk ran dry. :biggrin
How many people do you need to tell you that you are wrong? Are you looking for that one person to say go do it? If you keep looking hard you will eventually find someone who will be willing to give you bad advice because they don’t know any better. BUT, you are talking to EXPERTS right now! Every single one of these people who have been answering you KNOW WHAT THEY ARE DOING!
Hooch, you have been really the only one that said I was wrong, a lot of the other people were reminding me of things to take into consideration. I’m not really looking for people to say go do it, actually I was more looking for people to criticise the property/investment so I can make sure I am taking into account everything and see if anyone pointed out things to dissuade me, but I’m still convinced on this property. Ok, if I use the 50% number (even though it’s a lot easier for me to handle managing my property than you guys because this is only my 2nd property):
Gross Income: 43,200
-Expenses50%: 21,600
265,375@5.5/30 yrs: 18,081
Cash Flow: $3519
Again, how is that negative cash flow Hooch? I don’t understand why you need to resort to making fun of me, especially when you didn’t prove the property doesn’t cash flow. Those other questions (age, 1 story/2story, busy street) affect desirability and future rent/appreciation, and they were things I was just seeking help/advice on their impact, this is a beginner’s forum remember? I think maybe you should look at it from the perspective of the property not being a fixer upper and putting less money down. With putting only 3.5% down, with the property being move in ready, and using the standard 10 year IRR calculation, the property yields an IRR of 45%! I still think this is a good investment.
Again, thanks so much everyone, including Hooch. Any more input before I have to make my final decision?
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I’m not intentionally trying to make fun of you Amir. No harm intended. I am just pointing out that you were not focused on the profitability of the property. And if you are interested in appreciation than look outside the ghetto. You will most often get appreciation at or below inflation. If you have a 5.5% loan over 30 years for non owner occupied property then buy it.
It’s cool Hooch. Yeah, I know profitability is key, but I was just wondering about those other factors when you are comparing properties with similar numbers to each other. Got some good help with that. And the advice and critique you and other gave helped a lot in my analysis and made me take a strong honest look at what I was doing. I really appreciate it.
Did you overlook the HUGE error I pointed out with your financing? With the financing you are looking at, you MUST occupy one of the units as your principal residence, which reduces your monthly cash flow to $2800 (or $2600 if you occupy one of the larger units).
Using $2800 monthly income, your annual gross now becomes $33600. If you take half of that for operating expenses, you have $16800 to pay the debt service. You come up a couple thousand $ short by my reckoning.
It’s not even that good Dave! For the purposes of calculating expenses, he’d still need to consider the gross rent $43,200 and the expenses $21,600. After all, he’ll still have all the expenses associated with the unit he’s occupying, except that he may not have to evict himself (LOL)!
The bottom line is that you’re right. He’s using an interest rate for an owner occupied property when he’s buying a NON-owner occupied property. Amazing how he glossed over that point!
Mike
I will qualify for oo fha because it will be my first fha loan and intend to occupy the place. After the occupancy requirement has been met, I could move for various reasons, and as long as I don’t try to get another fha loan for another place that is fine with fha. That’s why I am using the fulling rented out numbers because that will be the correct numbers for probably 99% of the time I will own the property. Sorry for not responding to that financing issue sooner. Thanks for pointing it out though. I still think it’s a good investment, considering the benefit of being able to put 3.5% down, the property being move in ready, and the cash flow and IRR numbers I calculated.