%100 financing good or not at these rates?

[rookieNYC]

Hello all,
   I'm new to this forum and I'm also new to RE investing and appreciate all the advice posted here..My question is this..I have a 2 family property that I have set my sights on but I'm curious as what to do about financing..I have the capital to put down %20 on this property but my question is being that rates for %100 financing are so high (8-10% on the first %20 down and %7 fixed on the last %80) and are adjustable is it still feasible to use this method?..I do understand that the less capital used on one property can be used to aquire another but at what cost..I figured it out and I should make %17 cash on cash on %100 financing (laying out only closing costs) and if I put down %20 I should make %13 cash on cash but I'm tieing up 70k that can be spread out amongst a few properties..Also can anyone tell me if I use the %100 financing can the smaller mortgage be a fixed rate and not adjustable?...Oh I forgot to say that I intend to hold this property for the cash flow long term (over 10 years)...Thank you for any advice...

[amusedtwinkle]

It all depends what you're plan is for the property, if you plan to hold you may consider putting a little down, if you plan to flip 100% CLTV is no problem....you could also do a 30yr Interest only Fixed. They are actually cheaper than an ARM loan right now. What it is a 10 yr Interest Only period at which time it reverts to a 20yr fixed...much better than an ARM because you can calculate your payments at that time.

[rookieNYC]

ty for the answer amusedtwinkle..I never considered or knew that interest only loans were designed for that length of time with that option to become a fixed rate in 10 years..Thanks again..

[amusedtwinkle]

no problem...it's a option lenders have rolled out with....MUCH more stable than ARMs for the long term hold...

[4EEM]

@"%20 I should make %13 cash"...if you are using realistic expense numbers in your calculation 13% cash on cash is not bad.  It's a better return than the average DOW or S&P returns over the last 10 years. Also, over 10 years you are paying down the principal balance on the loan and picking up an approx. gain of 30 - 50% in appreciation.

[rookieNYC]

4EEM,
   I could use all the help I can get..I'm posting the breakdown of my expenses,please tell me if I have covered everything..Based on %10 down on 350k,I pay closing costs out of pocket..
276k at %7=$1836 per month (30 year fixed rate)
 51,750 at %9=$416 per month HELOC?
taxes $4500 per year $375 per month
%5 of gross for vacancy $160 per month
Insurance 850 per year $75 per month
water 1000 per year or $85 per month
minor lawn care $20 per month..

Rent roll is $3200 per month expenses are $2982 per month..That leaves $218 per month x 12 months is $2616..

Cash out of pocket %10 down 18k and closing costs approx 8k..26k total out of pocket cash..That's about a %10.5 return and the rents should be a little higher..In all seriousness please critique my numbers, I want to know if I'm missing something..Better to know now than later..

[Dr.Dawn]

First of all, it sounds like you did some homework.  However, I'd check all of my resources!  There are three basic tiers of residential financing (primary residence, second homes and investment property)  All things being the same, the rates on your owner occupied primary residence are going to be the lowest, marginally higher (about .5%) will be a second home.  The reason that an investment property is at the highest of these interst rates, is that the bank views it as a higher risk, as you are not going to be occupying it.  Also, an investment property means that you are going to be seeing a positive cash flow and thus making money.  The scenerio that you outlayed for us provides for a first and second mortgage.  Typically with 100% financing, there are two mortgages of 80% and then 20% of the purchase price.  Spliting 100% financing into two loans allows you to bypass the PMI issue.  However, you need to closely examine you total monthly PITI expenditure.  What are the taxes annually?  What is fair market value for the rentals of both properties?  Are they currently tenant occupied?  Is the dwelling tenant ready or does it need some repair work before you are able to rent?  Before deciding how much, if any money should be put down on an investment property consider the following:  (For the purpose of illustration, I'll use a purchase price of 100,000)  What is the difference in your monthly mortgage payment by taking that 20K of liquid assets to put down on the property.  Multiply that by 12 months in the year.  Now, after taking into consideration full tax credits, are you able to make that same 20K yield you a greater return annually in other investments rather than putting it down on the subject property?  Not every situation is the same.  Thus, this is not a steadfast rule of Yes or No.  Rather, it is a case by case scenerio.  Hope this helps  feel free to reply or email.  Dr. Dawn

[rookieNYC]

Dr.Dawn,
   Thank you for your reply..Yes there are tenants there and the house needs little or no work believe it or not..I grew up the son of a contractor/carpenter so I was pleasantly surprised at the condition..The tenants were decently clean and the going rent for this size is 1700..So I honestly feel there is some room for raising rents,especially considering the condition of the property..I wouldn't be looking to stir the pot too soon by raising but it makes me feel better knowing that I think there is room in the event I want to..

As for the down money I'm not sure I feel comfortable locking myself into a HELOC..AmusedTwinkle acutally gave me a good idea with the interest only loan for the first 10 years and it turns fixed for 20 years then..I would have to check rates..

Dr.Dawn thank you for the help..

[Dr.Dawn]

Let me suggest a Pay Option Arm for this duplex.  It is how I personally finance my 2-4 unit investment properties.  It is a 30 or 40 year term.  For the first five years of the loan, I have a fully amortized payment based upon a 4.95% interest rate with PMI.  I purchase with NO money down and see a positive cash flow.  I either sell or refi the loan between months 36 and 60 due to market appreciation.  I want to make a 30% return on my investment.  Just food for thought


Dr. D

[christopher w]

Dr. Dawn,

After reading your post I was wondering if you could elaborate a bit on the option ARM you use. You say you have a fully amortized rate of 4.95% for the first five years. What index are you using and what is your margin? Also, from the way your post is worded it sounds as if you have that rate locked in and it does not adjust with the index. Is this the case? Please advise.

[Dr.Dawn]

Chris-

As you are aware the Pay Option Arms allow you to select the COFI, COSI, MTA or LIBOR index.   The initial start rate, using the MTA index for most banks, allows you select either a 1, 3, 6, or 12 month intial start term.  During which time, the minimum payment is fully amoritized.  This product allows you to select a 5year initial term over a 40 yr. term.  There after, it is based off of the MTA index.  The ppp on it is 3 years.  In today's market, I don't recomment a Pay Option Arm for greater than 4 or 5 years for a savvy investor only.  The product, due to it's neg. am. feature, can be a dangerous option for some borrowers.

Dr. D

[christopher w]

I agree it can be dangerous. I do however like that 12 month initial fixed term. I have not seen one with that long of a start term. We only offer a one month and a three month start term.

[4EEM]

Your expenses look lean.

I would use:
10% Vacany
7%   Management (even if you manage yourself)
5%   Annual Rehab
6%   Annual Maint

[rookieNYC]

4EEM,
  I have been actively looking at properties and if I used those numbers that you posted it would not be worth taking the risk for me..If I can't make 10-15% it's not worth my time managing these properties..I have a large business that pays me well but I'm trying to diversify and those numbers were a wake up call for me..On my estimates if I used your numbers I would make 0-5% which is not feasible for me...Thanks for the helpful dose of reality..

I did the numbers..Without using the %7 management fee because I'm just paying myself I would net $250 per year..LOL..Safe to say it's not worth it..But what I'm curious about is what state would this formula show profit??..After mortgage,taxes,water,insurance,%10 vacancy,%6 rehab?,%5 maintenance how can there be deals where there is still a monthly profit??..

[4EEM]

Good deals are not limited to any one state, but they can be more difficult to find in areas that have experienced some "irrational exuberation" and cash flow has been priced out in the expectation of continued high appreciation.

I would argue that even if you are managing the property yourself you should keep the management expense in.  Why?  You are wearing two hats, investor and property manager and you should be compensated for both.  As an investor try and make atleast 10% and as a property manager the average fee is 7% of gross rents.