Thanks for your reply! responses below!
Probably not silly questions. I'm new to many of these concepts myself. I recently bought my first investment property, but tried to do a LOT of learning before I got there. This site and particularly BiggerPockets were great resources, but I found that you simply have to start reading, and reading, and reading, absorbing information over time. There's very little out there in the way of a "first timers guide to real estate investment." I found that most books were interesting, but spoke too generally to be of much use to me. I had to absorb the details by reading a lot of BiggerPockets forum threads.
Quote from: sandandsun on January 14, 2015, 07:02:20 PM
-when I get the mortgage, why wouldn't I apply for it as though I will be occupying the home? Since it is being built next door, it's feasible that I might want to build a newer home for myself and then maybe I change my mind after it's built and stay put (with mortgage already in place at that point)?
This would be mortgage fraud. Ultimately you're going to occupy one and rent the other. You would probably have to endure some very pointed questioning in trying to get a loan to get the property built. I'm sure it happens all the time, but it is technically a crime.
Quote from: sandandsun on January 14, 2015, 07:02:20 PM
- you wrote "When I use 4.5% mortgage, 10% vacancy, 2% repair/reserves, $800/year in insurance, $2000/year in property taxes (1%), I get a cash return of 6.62% on a rent of $1800. Not negative cash flow, but also a little worse than just sticking the investment in an index fund. Total ROI is 12.48% after equity accrued. Doesn't even hit the 1% rule, let alone 2% (.79%)."
The property taxes on my own home (also valued around 200k) are about 1100/year. Insurance you are probably correct - mine is 75/month on owner occupied... What do you mean by "2%" rule?... Sorry If that's a dumb question - I'm new to this and don't really know the basics of what to look for re: ROI on rentals...
- also, I can't stick the down payment/equity in the market if that equity is in the lot I already own (although I'm still not clear if that equity can be used to meet 20% down?)... In that case it's a decision between doing nothing w equity/lot or using it as DP on mortgage. I am guessing the lot is worth close to 40k- so I am guessing that I would only need to add a small amount of cash, if any, to get to 80% LTV ratio...
I suspect what you'd actually need would be a construction loan, not a mortgage, but it's probable that you could refinance that into something more traditional once the building is done. Since I haven't done exactly what you're proposing, I think what you're looking at is:
1) Go to a lender requesting a construction loan for the cost to build the home, offering the land and other assets as collateral. Get approval.
2) Get house almost built, and apply to have the construction loan converted to a traditional mortgage. At this time, it's likely the land and house would be packaged into a single "product," at which point the land value does actually become equity.
That's correct- I have confirmed that I will need a construction loan that will be converted to a traditional mortgage at, or near, completion of the home.
Regarding your questions of the 2% rule, there are basically two rules that real estate investors commonly use to evaluate the merits of a potential investment: the 50% rule, and the 2% rule.
The 2% rule states that monthly rental should be 2% of the property's purchase price. This is very, very hard to hit in some markets, and easy to hit elsewhere. There are a lot of successful landlords who only hit 1.5% or even 1%. Your deal looks to be about .79% (and that's without even counting the purchase price of the land itself). This tells us that the same money invested in a 2% property would probably have much higher returns.
Wow- I don't think I would ever be able to hit that in the South/Southeast... so, on a 200k property, the rent would have to be 4k/mo? or even on a 50k property, would need to be 1k? that's never gonna happen around here... 50k properties might gross 600/mo...
The 50% rule states that operating expenses for the property (maintenance, utilities, etc.) will average out to 50% of the rents collected in the long run. Thus:
(Rent Collected / 2) - PITI = Cash Flow
that seems crazy high- I know a rental has more wear and tear, but that just seems more than I would ever spend on upkeep... does that include taxes/insurance?
Both rules are very simplistic, and there are exceptions to every rule. They're just quick tools that RE investors can use to identify properties that are very likely to be good investments.