Duplex 3/1 1/2 x 2
Rent $650 per unit plus utilities
Purchase Price: $100,000.00
Closing Costs:$5,000.00(will have to be paid by borrower at close regardless)
1st Mortgage:$80,000.00 @ 7.50 for 30 yr
2nd Mortgage:$20,000.00 @ 9.50 for 15 yr
PMT 1 = $559.37
PMT 2 = $208.84
No MI because 80/20
Taxes = $2,500/12 = $208.33
Insurance = $500.00 = $41.66
Reserves of 5% = $65.00
Advertising = $200.00/12 =$17.00
Vacancy @ 1 month per unit = $1300/12 $108.33
Total expenses = $1,208.53
Total Cash Flow = $1,300.00
Net CF Per Mo = $91.47
There are probably more expenses I could have added but being that this is a duplex I am thinking it will be self managed, and self maintained as far as lawn care and snow removal. For the rest there are the reserves which won’t last long either at only $65 a month.
Some may argue the the rents are to low for a 3 bedroom 1 1/2 bath which may be true for your area and also may be high for others. The same may be said for taxes. All this post is meant to do is show new investors that 100% financing is not the way to go even if you can get it. The $91.47 positive cash flow can turn negative very fast. Some months will be negative because I averaged the expenses over the 1 year term.
The old adage that you make your money when you buy it is correct. Build your capital before you buy. Get others with money involved. Read and understand the process before you buy.
propertymanagers 100% of cost financing is different so do not get it confused. This is based on the 100% financing of market value.
Ok so let’s assume you are wanting to make an offer on this property and these are the numbers that you come up with. I have a simple solution—lower you’re offer or don’t buy the property. I could make examples all day long of deals that don’t work 100% financed, it all depends on the numbers that you are using. What if I used your same scenario but changed the purchase price to $50,000? What a good deal I have now, and 100% financed!
“propertymanagers 100% of cost financing is different so do not get it confused. This is based on the 100% financing of market value.”
No it’s not! 100% financing is 100% financing. Say you’re buying a property for $70K that appraised for $100K, if the bank gives you $70K you are 100% financed and that’s all propertymanager does. Read his post, he says himself he gets 100% financing.
Truthfully, you’re putting way too much thought and explanation into this. All 100% financing means is that you have loans totalling 100% of the acquisition price, that’s it, 100% CLTV.
Don’t you kind of contradict yourself when you say, “Get others with money involved.” If the bank gives you 80% and you “get others money involved” you still have to pay them pack, so again you’re 100% financed!
I figured on at least one response such as yours. The answer is is no. We are talking about a home with a market value of a $100,000 not $50,000. You will never get a home for half it’s market value without substantial deferred maintenance or some other issue such a a distressed owner financially etc… I agree the numbers would be great at $50,000 but the probability of such an out come is slim to none without one of the former extenuating circumstances. Lets say you could get in for $50,000 could you still get the same rents? Probably not with out some sort of remodel and then you didnt get it for $50,000. My whole intention was to show the beginner a cookie cutter scenario of how 100% financing of market value negatively effects the cash flow of a property. Not a far fetched what if scenario such as yours.
1.) "Truthfully, you’re putting way too much thought and explanation into this. All 100% financing means is that you have loans totalling 100% of the acquisition price, that’s it, 100% CLTV.
CLTV = Combined Loan to Value. If I paid 50,000 for a 100,000 property then I have a 50% CLTV. The former brings up more problems with a bank but I’m not going to go there in this post. Not to mention in that scenario you would not need a second at that LTV.
2.) Don’t you kind of contradict yourself when you say, “Get others with money involved.” If the bank gives you 80% and you “get others money involved” you still have to pay them pack, so again you’re 100% financed!"
I could have used better language here but what I was saying is other investors friends, family etc…
You’re right, unless a deal of the decade comes along you aren’t going to get a $100k property for $50 without having to do some work to it. I was just trying to make the point that the premise of your topic was that the scenario you posted would not work with 100% financing and that if that deal didn’t work at that purchse price then you need to lower your offer.
Back to CLTV. This goes back to our previous discussion concerning LTV being weighted against appraised value vs. purchase price. When I mention LTV, I am speaking with regards to the lower of the two items. So in my deals the stated $50K on a $100K property is what the LTV is based on. My lenders loan on which is lower, therefore, for example they would loan 80% ($40k) and I would come up with 20% ($10k) for a total 100% financing. Trust me when I say this, I totally understand the argument that the LTV should be based on what the property is worth, but unfortunately for myself, and most borrowers, the LTV is based on the lower of the contract price or the appraisal. Bummer!
Here’s another point to think about. No matter what the purchase amount is let’s assume your bank is going to lend you 80%. You actually have 20% cash to put down on the property, most would say that you’re 80% leveraged. By now some people are probably screaming, “What about opportunity cost!” Some people calculate into their cash flow analysis a percentage lost to opportunity cost of those funds. I guess in you subscribe to that line of thought you are ALWAYS 100% financed in a way. Kind of an interesting thought to ponder I guess.
It’s true that you are financed at 100%. You as the investor demand a return for the use of your capital (equity). But leveraged at 100% is different than financed at 100%. Every investment in financed to 100% in one form or fashion. Leverage is the use of another parties capital to finance part or all of the investment. If you have positive leverage you will have a higher return on your capital than you would get with 100% your funds. You can get into negative leverage too, Which is what you want to avoid, and 100% LTV, CLTV increases the probability that you will have a negative leverage situation on your hands.
We are talking about a home with a market value of a $100,000 not $50,000. You will never get a home for half it's market value without substantial deferred maintenance or some other issue such a a distressed owner financially etc... I agree the numbers would be great at $50,000 but the probability of such an out come is slim to none without one of the former extenuating circumstances.
HELLO! That is the rental business. If you don’t find a desperate seller and buy at a HUGE discount, you’re not going to be in this business for very long. Cash flow is KING in the rental business and you’re not going to get that paying anything close to market value in most markets. This is EXACTLY why the vast majority of newbies fail and why there is such a high churn of rental properties.
You guys are both right. Buying a rental property with 100% LTV (loan to value) is suicide if you’re going to be in the rental business (as opposed to speculating on appreciation, converting to condos, etc). Buying with 100% LTC (loan to purchase price) is a great way to run your business IF you buy at a BIG DISCOUNT.
You're right, unless a deal of the decade comes along you aren't going to get a $100k property for $50 without having to do some work to it.
I totally disagree with that. Buying a property for 50 cents on the dollar is a once in a month type of deal. Buying an 7-unit, $230,000 apartment building for $30,000 was a once in four year deal for me (it does need paint and a little maintenance, but not more than $3,000 or $4,000 worth). All it takes is finding a DESPERATE seller that is in serious pain.