Finance Questions - Need Help With Some Numbers
hi all -
i would like some various opinions on how to finance a rental property. here are the current numbers:
approx $160k sales price
easy to rent at $1250, should be able to get $1350.
older home, but fairly well maintained.
i have a good chunk of cash to invest, and a good credit score.
i plan on picking up 3 or 4 more properties this year, some to rent and to rehab 1 or maybe 2.
with all that said, im wondering about maximizing cash flow with an arm, vs locking in these wonderfully good rates with a 30 year fixed.
if this property rents well, i dont see why i would ever sell it.
im more interested in building cash flow then banking on future appreciation, so im not adverse to putting higher percentage of cash into the down payment. higher down payments usually get you lower points on the loans right?
thanks in advance for recommendations!
Higher down payment only affects cash-flow & payments, not points....... I would say that it depends on just how much cash-flow you are looking for as to how much money you should put down and what type of loan you should be looking for. You can have positive cash-flow with 100% financing and a 30-year fixed but you would have alot more cash-flow if you put 20% down and took a 5-year Interest-Only ARM. It all depends on what your goals are and what you want to accomplish.
From your post I would reccommend putting 20% down and getting a 5 Year Interest-Only ARM. Your payments would be around $770/month including taxes and insurance, you would have 20% equity in the place and a positive cash-flow of $480-580/month.
The other option is a pay-option ARM @ 2% interest.......
Payment would be $630/month including taxes and insurance giving you a positive of $620-$720/month.
Contact me for more info.........
Have you done a cash flow analysis on this? This looks like it will be negative unless you come in with a large down payment or possibly some interest only financing.
i am planning on holding this property for an extended amount of time. i think at least for 5 years. also, i would like to increase the down payment for more cash flow. i found a pretty comprehensive excel spreadsheet which tracks expenses, debt service, capital gains, appreciation, etc., and i show around $300/month flow based on my numbers. i have a low vacancy rate, simply because its a college rental and the area seems to rent pretty well.
i am being conservative with this property, since it is my first purchase in this area (moved from the west coast). so i want to put more cash down, to make sure this property will ALWAYS stand on its own.
i am incentivizing the seller by getting him to rent it out at $1350. if he doesnt rent it that high, or i miss the first month, it will drop the sales price by $1350.
ramasan,
Here’s how I would analyze some of your options. The down payment will affect the points and/or the rate. With today’s rates for a conforming loan on an investment property you could get 5.875% on a 30 year fixed and 5.25% on a 5 yr fixed/1 year ARM.
On the 30 year at 5.875% the points would be 1% w/ 10% down, 1% w/ 20% down and 0.5% w/ 30% down.
On the 5/1 ARM at 5.25% the points would be 2.5% w/ 10% down, 2.0% w/ 20% down and 2.0% w/ 30% down.
Here is a table outlining three important numbers for each option. These important numbers are 1) The amount paid at closing in down payment and points (it’s assumed all other closings costs are significantly the same for each example therefore are left out of this analysis); 2) The amount paid per month for principal & interest and mortgage insurance; 3) How much is owed when the loan is paid off. You said you thought you might hold this property for at least 5 years so for this example it is presumed you pay the loan off in 5 years.
1) Outlay at closing (down pymt + points):
30 yr fixed 10% down: $14,400 + $1,440 = $15,840
30 yr fixed 20% down: $32,000 + $1,280 = $33,280
30 yr fixed 30% down: $48,000 + $ 560 = $48,560
5/1 ARM 10% down: $14,400 + $3,600 = $18,000
5/1 ARM 20% down: $32,000 + $2,560 = $34,560
5/1 ARM 30% down: $48,000 + $2,240 + $50,240
2) Monthly payment not including taxes & insurance (P&I + MI):
30 yr fixed 10% down: $852 P&I + $108 MI = $960
30 yr fixed 20% down: $757 P&I + $ 0 MI = $757
30 yr fixed 30% down: $663 P&I + $ 0 MI = $663
5/1 ARM 10% down: $795 P&I + $108 MI = $903
5/1 ARM 20% down: $707 P&I + $ 0 MI = $707
5/1 ARM 30% down: $618 P&I + $ 0 MI = $618
3) Balance when loan is paid off in 5 years:
30 yr fixed 10% down: $133,790
30 yr fixed 20% down: $118,924
30 yr fixed 30% down: $104,059
5/1 ARM 10% down: $132,695
5/1 ARM 20% down: $117,951
5/1 ARM 30% down: $103,207
Now that we have the necessary data we can proceed to a time value of money analysis. For example, if you want to compare the 30 yr fixed w/ 10% down with the 30 yr fixed w/ 20% down. Here’s the comparison:
The 30 yr w/ 20% down requires $17,440 more at closing ($33,280 - $15,840).
Saves $203/month ($960 - $757).
And results in $14,866 more in your pocket when you sell in five years ($133,790 - $118,924).
Input into a financial calculator to calculate the TVM on the larger down payment:
Present Value (PV) = -17,440 (Note this is a negative number, your outlay upfront)
Payment (pmt) = 203 (This is a positive number, your increased cash flow for your outlay)
Future Value (FV) = $14,866 (This is also positive, your increased equity in 5 years)
Term (n) = 60 (five years)
Compute i (interest) = 11.79%
So 11.79% is the monthly return on $17,440 invested as additional down payment and points to save $203/month for five years and then to receive $14,866 more when the property is sold and the loan is paid off.
Another way of looking at this analysis is if you took $17,440 and put it into a savings account paying 11.79% monthly interest and took out $203 every month, at the end of five years you would still have $14,866 in the account. So putting 20% down instead of 10% is a pretty good investment.
The return for putting another 10% down on the 30 year fixed (30% down compared to 20% down on the 30 yr fixed) is
-15,280 (PV); 94 (pmt), 14,865 (FV), 60 (n) = 6.9% (i)
So the return for putting another 10% down to get from 20% to 30% down isn’t bad but not as good as the 10% invested to get from 10% to 20%. What this shows is it’s certainly worth putting 20% down to avoid mortgage insurance.
Now if you’re pretty sure that you will only hold the property for five years, then a 5 yr fixed/1 yr ARM might be worth considering. Why pay more for 25 extra years of fixed interest you’ll never use?
Here’s a comparison of the 5/1 ARM to the 30 yr fixed with 20% down in each case:
-1,280 (PV), 50 (pmt), 973 (FV), 60 (n) = 45.6% (i)
With 20% down the 5/1 ARM in this case requires an extra point out-of-pocket, saves $50/mo and results in a $973 lower balance at the end of 5 years compared to the 30 year fixed. A whopping 45.6% ROI.
Bottom line, you should consider at least 20% down to avoid MI and a 5/1 ARM if you intend to only hold the property for 5 years.
money4re -
that was great! thanks for laying that out.
i do have the cash for 30%, and i think there is a decent chance that i will keep the house longer the 5 years. with the small difference in monthly payments between the arm and fixed @ 30% down, it seems most prudent to go with the fixed rate. i hate to pay the extra interest if i sell in 5 years, but it seems that there is not much way for interest rates to go except up. and i dont want to have a good property turn bad because of the rates jumping up.
when we lived in the bay area, we used to walk to coffee in the mornings, and there was this old italian guy who would pull up to his 14 unit complex in his black mercedes. he would just hang out and water the lawn. he bought that property over 20 years ago and just collected a LOT of rent free & clear every month. at some point you got to find some keepers, so hopefully in 20 years i will have all mine paid off and can just shoot the sh!t and water the lawn once a week.