Author Topic: What do you all think about this plan?  (Read 5853 times)

vreleven

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What do you all think about this plan?
« on: July 25, 2012, 10:21:46 PM »
Hi everyone, I have been turned on to you from a friend who claims to lurk in this forum.

Here is my situation/plan:

I recently bought a rental property a few months ago that was an extremely good deal. Positive cash flow, instant equity, and a great rate (3,750 for 30 years). Owner needed to sell and was more than willing to make this deal work. This in turn has me wanting to buy more properties.

We have paid 7.5 years on our current home at 6.5%, the home has about 90K in equity, which has been reduced by
the local appraisal district 7k for the last two years. Since I want to refinance and lower our rate, I'm thinking of taking a cash out refinance of ~50K (20 years at 3.775%, or 30Yrs at 3.875%) and use it in the following manner:

   1. I would like to rent our current home, I could easily rent it for 1,500.00 a month, Either term would generate a       positive      monthly cash flow.

    2.I would like to buy a newer home (foreclosed deals are abundant in this neck of the desert)

    3. Keep some cash for a rainy day/ wait for another opportunity to come knocking my way.

We have very little debt < 4k on CC's used mostly for points.

If this is a good idea, what term should we use for the refinance? is this a terrible idea?
I really don't know. We have not refinanced because I've tried to guess when the lowest possible rates were going to
be available and now seems like a good time. ( I don't expect them to be this low for a long time).

Best case scenario, We end up with two rental properties, each with built in equity, and we buy a newer home with a historically low interest rate.

Our credit should not be a problem we are both high 700 low 800's

Thoughts? Ideas?

Regards


gooki

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Re: What do you all think about this plan?
« Reply #1 on: July 26, 2012, 02:41:08 AM »
Sounds like a good plan, just make sure in a worst case scenario you can cover all three mortgages with your day job income, and you have suitable levels of insurance.

arebelspy

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Re: What do you all think about this plan?
« Reply #2 on: July 26, 2012, 08:14:05 AM »
The restrictions nowadays on cash out refis are many.

Actually look into the feasibility of this, then we can discuss the best way to go about it.

But go talk to a mortgage broker and see about a cash out refi first.
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vreleven

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Re: What do you all think about this plan?
« Reply #3 on: July 26, 2012, 09:53:11 AM »
Thanks for the responses.

I have done some DD and have spoken with some lenders.
The rates posted on the original post are the best i could find
After shopping around locally and online.

The LVR after the 50k is 71%, almost 10 points below the 80
% max allowed here in TX. I believe we can jump every hurdle
In this cash out refinance process.

Thanks

ShavinItForLater

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Re: What do you all think about this plan?
« Reply #4 on: July 29, 2012, 09:52:29 PM »
Regarding the refi--not sure it matters for you now, but wanted to mention that DW and I have refinanced probably 4-5 times over the last 15 years.  Each time we chose a refi deal with slightly higher than market rate interest, but with absolutely zero closing costs (maybe just an appraisal for a few hundred, but often even that was refunded at close).  If you have stellar credit and equity I don't think they are that hard to find.

Instant payback period, and no need to guess the bottom on rates.  If we could actually decide with certainty how long we would stay in our home we might have paid closing costs for a better deal, but really we're not paying more than 1/8 to 1/4 pt. "penalty" for the privilege of doing a refi every time rates drop, and not worrying if we'll be moving next year or never.  Our rate right now is 3.75% on a 30-year fixed.  Hard to imagine they'll go much lower, but if they did, well, we'd just refi again.

richschmidt

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Re: What do you all think about this plan?
« Reply #5 on: July 29, 2012, 11:06:28 PM »
If you refinance now, will your lender let you rent it right away?  Probably not, if your loan is an owner-occupied. You'll probably have to refinance as an investment property, which typically means a higher rate.

You'll want to cover that detail with your lending institution before diving in. Otherwise, they could call the loan when you move out and start renting it.

rusty

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Re: What do you all think about this plan?
« Reply #6 on: July 31, 2012, 05:34:20 AM »
I will be the cold water on this one.  Make sure you focus more on what could go wrong.  I have several clients that own property and those that did it with leverage are not looking so good right now.  One "owns" multiple properties and is in a panic each month with renters.  She often has to get someone in there ASAP and often ends up with bad tenants.  Those that took their time and grew their property from a cash position are much better off.  This older man could care less how often his properties are vacant.  He waits until he has the right tenant.  He advised me that if I finance a rental, that I should be getting 2x mortgage obligations for rent.   If you are above that and you have multiple properties, you could be in for a world of hurt when you have a vacancies.

My point is to find someone close to you that owns property and learn from their hard knocks.  I befriended several and they have helped me tremendously with getting good tenants/contracts/etc.  I trust them enough to even ask them to help me evaluate a property if I needed to. 

I have watch people new to rental property look at all the rosy parts and not truly understand the risk they are taking on.  Rosy pictures don't last very long in the rental market.

Either way, good luck to you.

arebelspy

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Re: What do you all think about this plan?
« Reply #7 on: July 31, 2012, 10:03:06 AM »
He advised me that if I finance a rental, that I should be getting 2x mortgage obligations for rent.   If you are above that and you have multiple properties, you could be in for a world of hurt when you have a vacancies.

Absolutely.  This is the 50% rule of thumb every RE investor should be familiar with.
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eldub

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Re: What do you all think about this plan?
« Reply #8 on: July 31, 2012, 08:52:53 PM »
Are you saying that you should be getting twice as much money in rent per month than your mortgage payment costs?  Where on earth is this even possible?

I live in a high-priced market so I'm finding this hard to believe. I guess you're saying wait until you have a large enough down payment to bring the mortgage payment down to half of the rent - in my area that would be about 50% down.

Would you say that rule still applies in high-priced markets? I guess since it's a safety net you'd say it applies even more...

vreleven

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Re: What do you all think about this plan?
« Reply #9 on: July 31, 2012, 09:07:31 PM »
All,

Thanks for all your insight.

After all your advise we will probably do the following;
We will probably do a cash out refinance, take some
of the equity out and lower our rate while waiting for another good rental deal and
stay in OUR current home.

I have to say that even though I am good with my hands and wouldn't mind
doing the property management, I decided to keep the previous owners PM company
to make it a seamless transition for the tenant for our current rental; this has turned
out to be the best decision  we could have made.  Its amazing when one works with professionals.
They have saved me tons of time and have given me good advice as to where
the good rental areas are in town.


Thanks

grantmeaname

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Re: What do you all think about this plan?
« Reply #10 on: August 01, 2012, 05:54:07 AM »
I live in a high-priced market so I'm finding this hard to believe. I guess you're saying wait until you have a large enough down payment to bring the mortgage payment down to half of the rent - in my area that would be about 50% down.
No. Another rule is that if a property doesn't work from a cashflow standpoint, don't force it to work by putting more money down. After all, you could justify rents vs. mortgages in New York City by putting 80% down.

What it means is that you live in a market where being a landlord doesn't make sense right now. It may in a couple of years as renting gets more expensive relative to homes, or it may behoove you to purchase a rental house in another market. Or you could explore atypical situations, like renting to college students.

arebelspy

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Re: What do you all think about this plan?
« Reply #11 on: August 01, 2012, 09:23:40 AM »
Are you saying that you should be getting twice as much money in rent per month than your mortgage payment costs? 

Yes. At least.  More, if you want to profit.


I guess you're saying wait until you have a large enough down payment to bring the mortgage payment down to half of the rent - in my area that would be about 50% down.

No, no no.  That's assuming 100% financing, 0% down.  (Which you don't actually want to do, but you use for comparison's sake).

Any down payment is "forcing" cash flow.  It should profit regardless of that.
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arebelspy

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Re: What do you all think about this plan?
« Reply #12 on: August 01, 2012, 09:34:55 AM »
Are you saying that you should be getting twice as much money in rent per month than your mortgage payment costs?

You should only count the principal and interest (P&I) payments in this, not your whole mortgage payment (typically PITI - principal, interest, taxes, and insurance), as taxes and insurance are separate expenses from the mortgage.  Although they get lumped together because your lender wants to make sure they get paid, they aren't actually part of your mortgage.

And it counts in property management in that rule of thumb, so you will make more if you manage it yourself (but that's a return on labor, not a return on capital, so you shouldn't count that in your ROI).

So - for example - here are the numbers on the last few houses I bought:
Rents: 900, 1000, 800
P&I: 286.91, 256.51, 223.65
HOA: 0, 52, 0

Avg. cash flow of based on 50% rule & HOA: 177/mo.

This gives me ~10% cash on cash return (and then principal is being paid down, plus gain depreciation and interest write-off and any potential appreciation).

And then I get an extra 10% of rents/mo for managing them (so an extra 90 each per mo on avg). 

So yes, you definitely want your principal and interest to be less than half your gross monthly income.  The more you have to put down to lower that P&I to half or less, the lower your return will be (because you're putting in more money to get the same profit).

Some areas are not worth investing in from a profit standpoint (NY, SF, etc.).

Hope that helps clear some stuff up!
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If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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tooqk4u22

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Re: What do you all think about this plan?
« Reply #13 on: August 02, 2012, 01:35:10 PM »
I live in a high cost/high tax area and single family housing for rental just doesn't make sense - to me they usually pencil out to about a 4% cash on cash return assuming 10% vacancy, taxes and other expenses.  No way, not worth it.  It gets better with triplexes and fourplexes, but not many come to market.  Given my market is more stable I would take less than 10% return and would probably be comfortable with 6% CoC - but you just can't find it.

OP and Arebelspy - I realize in that in certain markets (mostly the bust markets - NV, AZ, FL) right now the rental story is great - low purchase price, low taxes, decent rent.  But in these markets there is enormous amount of supply sitting lenders books (past dues, short sales, foreclosures) that could result in more competition.  Plus at some point the buy vs. rent equating comes into play which could depress demand/rents.

What are your thoughts about this in your type of market - we could put this discussion in another thread.

Another Reader

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Re: What do you all think about this plan?
« Reply #14 on: August 02, 2012, 02:30:53 PM »
What you are describing is the so-called shadow inventory.  You are correct in that there are a lot of delinquent loans on the books of the GSE's and private holders of RMBS.  However, it has been demonstrated many times that there is very little inventory currently owned by the GSE's or the bank servicers in Maricopa County (the Phoenix market).  Because so much information in Arizona is public record, ownership is very easy to track.

The for sale inventory in Phoenix is at near record lows and the market could easily absorb another 1,000 listings a month, because the buyers are there.  Prices are up over 30 percent over last year.  These increases will not continue at the same pace, but it's obvious there is unsatisfied demand.  However, I do not think we will see large numbers of properties dumped on the market.

After several years of fighting a stalling action to avoid a collapse of the entire system, the GSE's and the servicers have regained control of the situation.  What will happen over the next few years in places like Phoenix is a carefully regulated release of the properties with incurable defaults through short sales and foreclosures.  As the market improves, fewer people will be underwater and eventually the overall problem will cure itself.  It will take at least another 5 years, maybe as many as 10 to return to a "normal" market.

With regard to your underlying question, I can only give you my perspective as a long time resident of a very high-cost area (Bay Area) and as an investor for over 15 years in the Phoenix market.  Phoenix has been a rapidly growing inexpensive alternative to California, both as a place to do business and as a place to live.  The problem is there is no limit to the supply of buildable land.  Rent or price too high?  Go a little further out.  That constrains increases in rents and prices.  At the same time, people are fleeing the problems of California.  They bring their high wage, heavy regulation attitude with them.  That, along with the rising prices of materials and manufactured products, makes Phoenix an increasingly expensive place to operate rental property.  The biggest risk to a buy and hold investor is the combination of increasing operating expenses and stagnant rents.  That's exactly what has been happening in Phoenix for at least the last 10 years. 

In very high cost, high demand areas, your initial investment makes no sense.  Your operating expenses will increase with every new regulation or material price increase, pinching your already meager or non-existent cash flow.  However, over a LONG time, your rents should increase at least as fast as your expenses.  In areas with high demand and serious supply constraints, both rents and property values may increase faster than operating expenses.

So the question really is, what kind of investor are you?  If you are patient and not in need of a significant cash return today, buying property in high cost, high demand areas might be something to consider.  Many of the Bay Area rental markets are dominated by Asian buyers, who think in terms of generations, not next month's rent check.  However, if you want a good cash on cash return today, buy in less expensive markets with diverse and growing economies and have an exit strategy for when your returns drop below an acceptable level.  That's what I'm doing in Phoenix.

Make sense?

tooqk4u22

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Re: What do you all think about this plan?
« Reply #15 on: August 02, 2012, 02:58:17 PM »
Great response, thanks.

hardworkingpenguin

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Re: What do you all think about this plan?
« Reply #16 on: August 03, 2012, 11:19:43 AM »
Having invested in many properties, I think it is best that if you can get a loan to purchase a cashflowing property. If you are not too comfortable with landlording try to shoot for nicer areas and take your time in finding a good tenants. Single family homes are ideal as tenants there can stay for a very long time. Even if you have vacancy, just think that every month your payment is going towards your mortgage payment. As for moving to a new place, if the new place can get you a higher rent, you should stay in your old home. If your home gets a higher rental income compared to what you are moving to, then perhaps you should move. In any case, this is the best time (well 2011 was the best time) to purchase cash flowing properties and if you do it through a bank loan you're looking really good.