My philosophy is to leverage, leverage, leverage in the early years. Let the renters pay your mortgages and/or appreciation. Only pay if off when you are really really old.
Thanks for the info. I believe 30 yr is the way to go also. My dad has 32 properties and they are all 15yr. He hasn't read much or been to sites like these. He did everything on his own and didn't benefit from anybody elses experience. So when he went through some tough times he almost considered bankruptcy when all he had to do was refi to a 30yr note. He never missed a payment though. He'll be happy when he gets it refinanced to a 30 yr note. It will probably at 10 yrs to his life..lol
I have a 40yr loan on one of my rentals. It is a variable interest rate loan with a fixed cap for monthly payment. If the interest rate drops than I pay into the principal. If it goes up then I negative amortize the loan -- meaning the interest gets added to the prinicipal. The advantage with this loan is I can fix my monthly payments to what ever I want to help cash flow needs.
My current strategy is to borrow 100%, keep it fully leveraged, get the tax deduction and wait for appreciation to happen. 10, 20 or 30 years from now I can sell couple of properties and pay off the debt for cash flow. I don't need cash flow now.
The most important part of investing is cash flow. If you can't afford the payments you will lose the property, if the payments are reasonable the renters make those payments for you while the property is appreciating. Cash flow allows you to invest in more properties. I would always recommend the longest amortization that you can get and the highest LTV because you are leveraging your investment and can invest in more properties. I am refinancing a man with 38 properties, about $2 mil in mortgages but with over $3.5 mil in real estate.
Net Operating Income is gross income less all operating expenses, including: maintenance, repair, taxes, insurance, management and a reserve for vacancy and uncollected rent.
All expenses except mortgage interest and principal.
This is the money you can use to pay off the loan.
If NOI is 1.2 to 1.5 times your loan payment - then you have the ablity to keep the property when the market drops - which it regularly does.
Thus you want a loan payment that is small enough to make this true.
You get the loan payment down by getting the best interest rate, the longest amortization time - interest only if you can -
and by making a big enough down payment so that the amount of money you borrow
does not push the payments too high.
The less the margin you leave between NOI and DbtSvc - the greater the risk that you will
lose the whole thing. Alternatively the bigger the margin the bigger the investment you need. Depending on the situation you might get by with nothing down or you might need to put down 30%.
Quote:
On 2003-09-25 12:42, kharikri wrote:
My current strategy is to borrow 100%, keep it fully leveraged, get the tax deduction and wait for appreciation to happen. 10, 20 or 30 years from now I can sell couple of properties and pay off the debt for cash flow. I don't need cash flow now.
Have fun!
Hi,
for non-primary residences, how much of the interest can you write off?
thanks
-Ariel
Quote:If NOI is 1.2 to 1.5 times your loan payment - then you have the ablity to keep the property when the market drops - which it regularly does.
Thus you want a loan payment that is small enough to make this true.
dickknox,
With your long term rental holdings, the value of the property at any point in time is irrelevant to the cash flow, especially when using fixed-rate financing. You want a Debt Coverage Ratio of 1.25 or better so that you have the cash flow to handle unplanned expenses as they arise without the risk of defaulting on your mortgage note.
Personally, I don't like 15 or 30 year mortgages for investment property. The 15 year reduces cash flow too much and the 30 year doesn't build up equity fast enough to build the cushion I like. Although most people are only familiar with the 15 and 30 year mortgages, lenders are fine with your asking for something else. Use a mortgage calculator (found all over the web) to figure out what works best for you. I have found the 20 year gives me excellent cash flow and a reasonably quick build up of equity.
The best thing about the 30yr mortgage is that you can always pay a little more each month if you want to.
Paying about one extra monthly mortgage payment each year turns the 30 year mortgage into a 22 year mortgage. Paying two extra monthly mortgage payments turns the 30 year mortgage into a 15 year mortgage.
Run into a cash flow crisis one month, don't pay anything extra.
I would have to argue the opposite of most of you, because I am young and I want to retire when I'm 35-40, so I'd be inclined to go with 15 yrs, save all cash flow for market fluctuactions and repairs, live like you don't have the properties (i.e, actively invest, rehabs etc but don't spend the cashflow) and let your renters buy you a huge portfolio of fully paid for properties for when you want to retire financially free! That way instead of taking in a couple grand in cashflow a month which you'd piss away, you build up equity. Also, if cashflow is decent on most of your properties, you'll generate some good savings there as well. I always like to say, pain now, gain later. Quick example, you own 30 properties like someone said above,worth 150K each say, in 15 years on a 30 yr, they're still there, a pain in your ass but bringing in a nice cashflow which you piss away on car payments and vacations, OR in 15 years you have the lovely task of selling 30 homes at probably almost double what you bought them for, but wait....you didn't buy them, your renters did, but you own them! Now they're say 300K a piece, multiply by thirty and it makes the whole ordeal wothwhile <IMG SRC="images/forum/smilies/icon_eek.gif"> <IMG SRC="images/forum/smilies/icon_lol.gif"> [ Edited by Cohiba_Man on Date 10/05/2003 ]
I'm inclined to agree with you, however, that might not be feasible for everybody.
Where I live the average 3\2 house sells for 280k. The averege rent rates for a 3\2 house is about 1700-2000/mo.
Lets assume you have excellent credit, 100% financing and able to get the same rate on all your properties. Right now 15yr best rate is 5%, 30yr is 5.625% o/o. Payments on 15yr 5% 280k is 2215/mo, 30yr 5.625% 280k is 1615/mo. This does not include tax and insurance.
With those numbers in my area, if someone where to go w/ a 15yr, they would have a 200+/mo negative cash flow. Now times that by 30 properties. Your looking a 6000+/mo negative cash flow. And thats if you can get the best rent possible and not taking tax and insurance into consideration. If you can afford that great, go with 15yr and retire sooner.
I think choosing b/w 15yr and 30yr depends on the investor, what they can afford and their plans, as well as their area.
If you take out a loan for 280k at 5.625% interest rate amoritized over 30yrs, your payments would end up to be about 1600/mo. and you would end up paying 580260 for the life of the loan. 280k principle + 300260 in interest.
I started this whole post a long time ago. I've learned a lot since this began. I believe i agree with jimbroker though. It depends on the investor and the situation. I'm young like the other guy that posted and I would love to get my stuff paid off too, but right now I need cash flow. I'm in college and I have no job. So far I have not used any of my rental money. But I need it there in case I do. I can always pay extra. Thanks for all the info.
- Get a 30yr mortgage.
- Pay it like it's a 15yr. mortgage.
- If there's a downturn, you get laid off, or just happen to have a difficult month or two, you can revert to paying it at the 30yr level and you'll have some cash flow to tide you over during the tough months.
- If everything's great, then you can pay it off in 15yrs or 12yrs or 10yrs or whatever is comfortable for you.
- But why would anyone want to commit themselves to higher payments, if they can commit themselves to lower payments and still make the higher payments by choice rather than by necessity?
There are even some interest only options out there for investment loans. Integrated Mortgage offers them IO for 10 years - this can really help cash flow.
Basic rule of thumb, money you have locked in equity is money you are stuffing under a mattress, earning a big fat 0% return. If you can use that money for investment opportunities elsewhere, you should do it.
I am a Loan Officer for a Mortgage Broker.
the best financing I know of for REI is the "payment option loan", aka "interest only" or "negative amortization" loans.
they work like this:
on each statement you get four payment options. the highest being 15 yr amortized, then 30 yr am, then interest only, then a low minimum payment that can result in negative amortization (principle going up).
these are great loans to protect cash flow .
Get it as long as you can, so if you run into a problem you can use the cash flow to help you out.
You can always prepay if you want to.
I am speaking from experiance, you can lose everything you work for if you have no cash flow.
I've heard from a friend of mine in Dallas, Texas who has about 25 properties that 30yr mortgages usually are not possible for investment purposes. He has an LLC that he buys under to shield some of his risk. Could this be why the mortgage people won't give him more than 15yr? I agree that 30yr mortgages would definitely be better for cash flow purposes, but are these only available if you are getting a mortgage under your name or as a second home? Thanks for the insight!
---------------------------------------------------
Your question is straying outside the scope of this forum. It would be better to post your question as a new topic in the Commercial Forum[ Edited by DaveT on Date 10/20/2003 ]
30 yr.
You can always pay like it is 15 yr.
However, if you have a 15 yr, you can't pay like it is a 30.
My philosophy is to leverage, leverage, leverage in the early years. Let the renters pay your mortgages and/or appreciation. Only pay if off when you are really really old.
I am never getting old…
[addsig]
Thanks for the info. I believe 30 yr is the way to go also. My dad has 32 properties and they are all 15yr. He hasn't read much or been to sites like these. He did everything on his own and didn't benefit from anybody elses experience. So when he went through some tough times he almost considered bankruptcy when all he had to do was refi to a 30yr note. He never missed a payment though. He'll be happy when he gets it refinanced to a 30 yr note. It will probably at 10 yrs to his life..lol
Thanks
I have a 40yr loan on one of my rentals. It is a variable interest rate loan with a fixed cap for monthly payment. If the interest rate drops than I pay into the principal. If it goes up then I negative amortize the loan -- meaning the interest gets added to the prinicipal. The advantage with this loan is I can fix my monthly payments to what ever I want to help cash flow needs.
Have fun!
From all opinions above, is it better not to pay off the loan?
My current strategy is to borrow 100%, keep it fully leveraged, get the tax deduction and wait for appreciation to happen. 10, 20 or 30 years from now I can sell couple of properties and pay off the debt for cash flow. I don't need cash flow now.
Have fun!
The most important part of investing is cash flow. If you can't afford the payments you will lose the property, if the payments are reasonable the renters make those payments for you while the property is appreciating. Cash flow allows you to invest in more properties. I would always recommend the longest amortization that you can get and the highest LTV because you are leveraging your investment and can invest in more properties. I am refinancing a man with 38 properties, about $2 mil in mortgages but with over $3.5 mil in real estate.
I was going to trow out my two cents on the table...but JaneSherman drop a nickle before me...good post!
Loongest amortization possible. If it is a short term deal for you try to get interest only.
[addsig]
Net Operating Income is gross income less all operating expenses, including: maintenance, repair, taxes, insurance, management and a reserve for vacancy and uncollected rent.
All expenses except mortgage interest and principal.
This is the money you can use to pay off the loan.
If NOI is 1.2 to 1.5 times your loan payment - then you have the ablity to keep the property when the market drops - which it regularly does.
Thus you want a loan payment that is small enough to make this true.
You get the loan payment down by getting the best interest rate, the longest amortization time - interest only if you can -
and by making a big enough down payment so that the amount of money you borrow
does not push the payments too high.
The less the margin you leave between NOI and DbtSvc - the greater the risk that you will
lose the whole thing. Alternatively the bigger the margin the bigger the investment you need. Depending on the situation you might get by with nothing down or you might need to put down 30%.
Quote:
On 2003-09-25 12:42, kharikri wrote:
My current strategy is to borrow 100%, keep it fully leveraged, get the tax deduction and wait for appreciation to happen. 10, 20 or 30 years from now I can sell couple of properties and pay off the debt for cash flow. I don't need cash flow now.
Have fun!
Hi,
for non-primary residences, how much of the interest can you write off?
thanks
-Ariel
Quote:If NOI is 1.2 to 1.5 times your loan payment - then you have the ablity to keep the property when the market drops - which it regularly does.
Thus you want a loan payment that is small enough to make this true.
dickknox,
With your long term rental holdings, the value of the property at any point in time is irrelevant to the cash flow, especially when using fixed-rate financing. You want a Debt Coverage Ratio of 1.25 or better so that you have the cash flow to handle unplanned expenses as they arise without the risk of defaulting on your mortgage note.
Personally, I don't like 15 or 30 year mortgages for investment property. The 15 year reduces cash flow too much and the 30 year doesn't build up equity fast enough to build the cushion I like. Although most people are only familiar with the 15 and 30 year mortgages, lenders are fine with your asking for something else. Use a mortgage calculator (found all over the web) to figure out what works best for you. I have found the 20 year gives me excellent cash flow and a reasonably quick build up of equity.
Kent
The best thing about the 30yr mortgage is that you can always pay a little more each month if you want to.
Paying about one extra monthly mortgage payment each year turns the 30 year mortgage into a 22 year mortgage. Paying two extra monthly mortgage payments turns the 30 year mortgage into a 15 year mortgage.
Run into a cash flow crisis one month, don't pay anything extra.
I would have to argue the opposite of most of you, because I am young and I want to retire when I'm 35-40, so I'd be inclined to go with 15 yrs, save all cash flow for market fluctuactions and repairs, live like you don't have the properties (i.e, actively invest, rehabs etc but don't spend the cashflow) and let your renters buy you a huge portfolio of fully paid for properties for when you want to retire financially free! That way instead of taking in a couple grand in cashflow a month which you'd piss away, you build up equity. Also, if cashflow is decent on most of your properties, you'll generate some good savings there as well. I always like to say, pain now, gain later. Quick example, you own 30 properties like someone said above,worth 150K each say, in 15 years on a 30 yr, they're still there, a pain in your ass but bringing in a nice cashflow which you piss away on car payments and vacations, OR in 15 years you have the lovely task of selling 30 homes at probably almost double what you bought them for, but wait....you didn't buy them, your renters did, but you own them! Now they're say 300K a piece, multiply by thirty and it makes the whole ordeal wothwhile <IMG SRC="images/forum/smilies/icon_eek.gif"> <IMG SRC="images/forum/smilies/icon_lol.gif"> [ Edited by Cohiba_Man on Date 10/05/2003 ]
I'm inclined to agree with you, however, that might not be feasible for everybody.
Where I live the average 3\2 house sells for 280k. The averege rent rates for a 3\2 house is about 1700-2000/mo.
Lets assume you have excellent credit, 100% financing and able to get the same rate on all your properties. Right now 15yr best rate is 5%, 30yr is 5.625% o/o. Payments on 15yr 5% 280k is 2215/mo, 30yr 5.625% 280k is 1615/mo. This does not include tax and insurance.
With those numbers in my area, if someone where to go w/ a 15yr, they would have a 200+/mo negative cash flow. Now times that by 30 properties. Your looking a 6000+/mo negative cash flow. And thats if you can get the best rent possible and not taking tax and insurance into consideration. If you can afford that great, go with 15yr and retire sooner.
I think choosing b/w 15yr and 30yr depends on the investor, what they can afford and their plans, as well as their area.
Yeah, my area I can get a prop for 100K that rents for 1500 so its much more feasible for me.
Those numbers seem weird, $1600/mo for 360 months (30 years) is $576,000, not $280,000 plus 5.6% interest. Am I missing something?
If you take out a loan for 280k at 5.625% interest rate amoritized over 30yrs, your payments would end up to be about 1600/mo. and you would end up paying 580260 for the life of the loan. 280k principle + 300260 in interest.
I started this whole post a long time ago. I've learned a lot since this began. I believe i agree with jimbroker though. It depends on the investor and the situation. I'm young like the other guy that posted and I would love to get my stuff paid off too, but right now I need cash flow. I'm in college and I have no job. So far I have not used any of my rental money. But I need it there in case I do. I can always pay extra. Thanks for all the info.
- Get a 30yr mortgage.
- Pay it like it's a 15yr. mortgage.
- If there's a downturn, you get laid off, or just happen to have a difficult month or two, you can revert to paying it at the 30yr level and you'll have some cash flow to tide you over during the tough months.
- If everything's great, then you can pay it off in 15yrs or 12yrs or 10yrs or whatever is comfortable for you.
- But why would anyone want to commit themselves to higher payments, if they can commit themselves to lower payments and still make the higher payments by choice rather than by necessity?
There are even some interest only options out there for investment loans. Integrated Mortgage offers them IO for 10 years - this can really help cash flow.
Basic rule of thumb, money you have locked in equity is money you are stuffing under a mattress, earning a big fat 0% return. If you can use that money for investment opportunities elsewhere, you should do it.
I am a Loan Officer for a Mortgage Broker.
the best financing I know of for REI is the "payment option loan", aka "interest only" or "negative amortization" loans.
they work like this:
on each statement you get four payment options. the highest being 15 yr amortized, then 30 yr am, then interest only, then a low minimum payment that can result in negative amortization (principle going up).
these are great loans to protect cash flow .
chip
Get it as long as you can, so if you run into a problem you can use the cash flow to help you out.
You can always prepay if you want to.
I am speaking from experiance, you can lose everything you work for if you have no cash flow.
RK
I've heard from a friend of mine in Dallas, Texas who has about 25 properties that 30yr mortgages usually are not possible for investment purposes. He has an LLC that he buys under to shield some of his risk. Could this be why the mortgage people won't give him more than 15yr? I agree that 30yr mortgages would definitely be better for cash flow purposes, but are these only available if you are getting a mortgage under your name or as a second home? Thanks for the insight!
---------------------------------------------------
Your question is straying outside the scope of this forum. It would be better to post your question as a new topic in the Commercial Forum[ Edited by DaveT on Date 10/20/2003 ]