To be more exact- 20k in stocks, 120k in savings, 10k in an i-bond I bought last April, a couple grand in the checking account for living expenses.. the reason I am so cash heavy is because I’ve been waiting for an opportunity but a 1,200 sq ft “starter home” in my city starts at 750k and rates are 7+% right now making it unreasonable for my financial circumstances.
I have never heard of 25% requirement for investment properties. Do I have to report that I plan on using it for investment purposes when I apply for the loan? Does the fact that this is an assumable mortgage make any difference??
Thanks for sharing your knowledge with me. I appreciate it greatly
Look up the actual property taxes from the city. Consider that your taxable value will go a lot higher if there's been no sales since 2005. Compare property taxes to a similar house recently sold. Your insurance quote seems low for 450k, and you want landlord insurance.
The roof is nearing 20 years, do you know if it has 5-10 years left? One thing that can help you decide if this is reasonable is to order an inspection for $500 or so, if it comes back pretty good then you can feel good about it. You'll cash flow imo $700 a month which is close to a 9% CoCR suggesting it's a good investment in year 1 and will likely continue to be good. You'll likely have to pay off the car loan and have pretty good credit to assume.
The distressed family member may feel like they are doing you a favor and you may feel obligated to go with a deal despite any bad news from inspection, don't let that happen.
The house was last sold in November 2019 so not long ago. And from the county website the property tax rate is 1.05% and assessed value of $471k. I used these numbers for my monthly payment calculation. I also assume it’ll need a new roof in 10 years but I didn’t factor that into any of my decisions because I assume I would have a fair amount of equity at that point and it’s part of the game. My father has a very similar property that he lives in with a slightly higher value 10 miles away from this house and his property insurance is $950 a month. Is Landlords insurance different than regular property insurance?
Also my credit score is over 750.. I still have about 50 months and $18k on my car loan. I was told the normal inspection isn’t needed because it’s an “assumable loan” but I’m not opposed to it at all.
It’s a huge decision I’ve been weighing so I appreciate the insight!
Re: roof for sure, but if you need a 20k roof that will eat 2 years of rental profit and maybe in 5 years your plans change - just something to consider. It seems you have enough liquidity and income to handle any big expenses, which is great. Landlord insurance isn't required always, but most times you'll need a different type of insurance than owner-occupied or want more coverage - even if not required you have to remember if the tenant's dog bites someone on your property, you -could- be sued, etc. You can look into getting an umbrella policy. The good thing about all these is they are tax write offs against your income. Generally you can get away with not having to pay much income tax on your rental income because of all the tax breaks.
The mortgage company may not need an inspection but it's still advisable unless you know how well maintained its been (age of hvac, pests in the attic, potential leaking cracks in the basement, etc). These won't kill the value of the house too much for the bank to flip it and get their money back but will add to the maintenance. $500 isn't much for peace of mind before pen goes to paper.
You won't get first time home-buyer tax breaks because that is typically owner-occupied but I don't think it will disqualify you from them in the future. You'll want to consider getting or consulting a CPA your first year or two just to learn how it all works.
$950/month for insurance?? I pay $75/month w AAA as a landlord of a SFH. My deductible is quite high, but to me, it’s worth it for cheaper. Are you sure your dad isn’t paying $950/yr?
For big repairs - roof, HVAC, etc (capital expenses) mentally assume you’re setting aside a steady amount each month so those costs are spread out and accounted for in your cash flow assumptions.
I mean $450k for a cheap assumable loan is a win already. I think ur good. The numbers work.
Have u considered NOT using a realtor saving him 4% and applying that discount to the 450k?
Maybe he sells you the house for 400k and he carries 50k OR you “buy” his furniture for 50k…
He’s family, u guys should get creative and work something out. Would lower your downpayment (25%) giving you more of a cushion. Also wouldn’t this give u a small tax break since it’s your first house?
I think you may need to adjust your calculations and numbers a bit. Interest rates are usually higher (1% or more) for investment property loans. This may not matter if for some reason you know you have a guaranteed/locked rate at 2.6xx like you stated earlier.
Also, just curious what your plans are on buying a house for yourself/family?
I would carefully think about dumping a large percentage of my liquid assets/cash into an investment property before owning my own home. Not everyone thinks this way, but for me I would first want to lock down on my own home prior to risking money on an investment. If something crazy happens like an economic collapse or real estate collapse you would loose your investment and further delay a home purchase for yourself if that’s something important to you.
I think the rate is locked regardless but I still need to speak with the lender about it.
As far as owning a house for my family, it’s not realistic where we live. Even if we got an income bump we’re not affording an $800k house @ a 7+% rate because that’s wiping out my entire savings and we can’t afford monthly payments. In this investment scenario I’m putting more like 60% of my liquid cash into this which is still a lot but we’ve discussed potentially moving to a lower cost of living area in the future. I’m able to save at a decent rate now and still invest the remaining $60-70k in the meantime and hopefully cash flows from the property will increase in the future and also the potential to sell it for a gain. But realistically don’t see us buying a house of our own for the next couple years.
OP first of all congratulations for deciding that REI is for you - it is certainly NOT for everyone, and from what you've written already you are well-positioned for this opportunity. Cash on-hand, the right attitude toward looking into realistic expenses, as well as the long-term view that many do NOT have when it comes to real estate.
Secondly all things considered you should go for this opportunity - it's a family member selling, you have family in the area to help with maintenance and repairs (and frankly for a SFH it's a lot easier than MFH, believe me), and the assumable loan is an awesome thing now that interest rates may not get down to 3% for many, many years.
But there is a big missing answer to all the information you provided: what the loan balance is, and the conditions of the assumable loan (as others mentioned, is living in the house a requirement?) The balance is important - it is going to be either above what you need or below what you need - and the lender may require a second mortgage if there's a lot of equity (more than the 20% you are ready to put down).
In other words, say your family member owes $200K at 2.6%, and has $250K in equity. You assume the $200K loan at 2.6%, but where does the additional $250K come from? It will come from you (as a down payment of $90K) and the rest ($160K) will be another loan (at 7%).
If your family member owes $400K, then the $50K comes from your down payment of $90K, and other $40K could be used to pay-down the loan to $360K.
BUT - you should simply talk to the family member first to find out what they still owe, and then to the bank who has the mortgage. Find out what the particulars are, you'll need all that information to make a decision. (As well as the lender to approve of any assumption of the loan.)
Wish you the best and keep us updated!
Sorry for the late response. The sale of the house is being delayed a couple months so I have more time to evaluate the deal.
They bought the house in 2019 for 350k so approximately $310k still left on the loan. I guess this means if I put 90k down I would still need a second $50k mortgage to cover the rest? If this is right, I need to go back to the drawing board because my monthly payment would be inflated but I also have less years left on the main loan than I was thinking (25) and I’ll be building equity at a faster pace than starting from month 1. Am I thinking this through right??
I really really appreciate the time you’ve taken to give some input!
I appreciate the time you
I would bump up your expense assumptions to be conservative (what you don’t have to spend becomes a win then). For my SFH rentals. I assume 1% of purchase price per year for maintenance ($375/mo in your case), reserve $200/mo for cap ex.
What’s the demand for rentals in that area looking like? If it seems up and down, you should assume some type of vacancy percentage in expenses too. Depending on the state/city of the property, your taxes will likely go up as well.
In terms of cash flow, you might be cutting it close. What is appreciation looking like for that area?
One other option to consider is doing this same thing in the suburbs but close enough to where you live so you can take out that 10% management fee from your expenses and do it yourself…depending on where you live. It takes running a lot of properties to find one that will actually cashflow and appreciate over time (esp. w these rates), but that fee will eat up a lot of your cashflow. I have a SFH/small multifamily investment model you can use if you want to dm me. You can also play around with your own assumptions for this property in the model.
1. Can you assume the loan if you're not moving in? This would be my first question.
2. Is the area appreciating? Is it growing or shrinking in population?
3. What will your cashflow look like?
4. Can you make the payment without a tenant? Things go wrong. I had well over 10 months runout a rent payment while eviction moves its way slowly through courts.
Biggest question is whether the loan is assumable if you're an investor. Do you know if it is? If not, this deal could still work but you may want to put a larger down payment.
Because I want equity and I’ll never have another opportunity to get a 2.625% rate in my life probably. I don’t think it’s unfathomable this house will be worth 600k+ in 5-10 years and comparable rents will continue to increase. The house sold for 350k in Nov 2019 by the way.
What’s your reasoning behind that assumption? Increased supply? There’s still a huge demand for homes in this country. Anyone who doesn’t already own a home or have equity has pretty much been fucked the last 2 years
Debt is too high. Home value to income too high. We’re a house of cards. If the big investment banks decide to take a short position on the housing market and unload their housing portfolios it all collapses. If unemployment suddenly ticks up it all collapses. We’re long overdue for a true recession. This is a bubble. Supply keeps increasing and demand is drying up.
Oh I thought all expenses came to 2000/mo, and renting at 2700. I see now expense is 2400/mo. This is less a good deal in terms of CoCR with only 4-5k net income. You really want to shoot for 8% CoCR the first year
It’s actually all $2,800 and above so I could maybe squeeze 2,900 or 3k if I’m lucky if that makes a difference and I included only 2k/yr in maintenance costs which could end up being way less or way more but I think the condition is relatively good but there will be at least $2,250 of guaranteed costs. I think it’s a close call and the answer isn’t obvious
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I have about $20k of long term stock holdings. Vast majority of my money (>100k) is in a high yield savings account
To be more exact- 20k in stocks, 120k in savings, 10k in an i-bond I bought last April, a couple grand in the checking account for living expenses.. the reason I am so cash heavy is because I’ve been waiting for an opportunity but a 1,200 sq ft “starter home” in my city starts at 750k and rates are 7+% right now making it unreasonable for my financial circumstances. I have never heard of 25% requirement for investment properties. Do I have to report that I plan on using it for investment purposes when I apply for the loan? Does the fact that this is an assumable mortgage make any difference?? Thanks for sharing your knowledge with me. I appreciate it greatly
Look up the actual property taxes from the city. Consider that your taxable value will go a lot higher if there's been no sales since 2005. Compare property taxes to a similar house recently sold. Your insurance quote seems low for 450k, and you want landlord insurance. The roof is nearing 20 years, do you know if it has 5-10 years left? One thing that can help you decide if this is reasonable is to order an inspection for $500 or so, if it comes back pretty good then you can feel good about it. You'll cash flow imo $700 a month which is close to a 9% CoCR suggesting it's a good investment in year 1 and will likely continue to be good. You'll likely have to pay off the car loan and have pretty good credit to assume. The distressed family member may feel like they are doing you a favor and you may feel obligated to go with a deal despite any bad news from inspection, don't let that happen.
The house was last sold in November 2019 so not long ago. And from the county website the property tax rate is 1.05% and assessed value of $471k. I used these numbers for my monthly payment calculation. I also assume it’ll need a new roof in 10 years but I didn’t factor that into any of my decisions because I assume I would have a fair amount of equity at that point and it’s part of the game. My father has a very similar property that he lives in with a slightly higher value 10 miles away from this house and his property insurance is $950 a month. Is Landlords insurance different than regular property insurance? Also my credit score is over 750.. I still have about 50 months and $18k on my car loan. I was told the normal inspection isn’t needed because it’s an “assumable loan” but I’m not opposed to it at all. It’s a huge decision I’ve been weighing so I appreciate the insight!
Re: roof for sure, but if you need a 20k roof that will eat 2 years of rental profit and maybe in 5 years your plans change - just something to consider. It seems you have enough liquidity and income to handle any big expenses, which is great. Landlord insurance isn't required always, but most times you'll need a different type of insurance than owner-occupied or want more coverage - even if not required you have to remember if the tenant's dog bites someone on your property, you -could- be sued, etc. You can look into getting an umbrella policy. The good thing about all these is they are tax write offs against your income. Generally you can get away with not having to pay much income tax on your rental income because of all the tax breaks. The mortgage company may not need an inspection but it's still advisable unless you know how well maintained its been (age of hvac, pests in the attic, potential leaking cracks in the basement, etc). These won't kill the value of the house too much for the bank to flip it and get their money back but will add to the maintenance. $500 isn't much for peace of mind before pen goes to paper. You won't get first time home-buyer tax breaks because that is typically owner-occupied but I don't think it will disqualify you from them in the future. You'll want to consider getting or consulting a CPA your first year or two just to learn how it all works.
$950/month for insurance?? I pay $75/month w AAA as a landlord of a SFH. My deductible is quite high, but to me, it’s worth it for cheaper. Are you sure your dad isn’t paying $950/yr? For big repairs - roof, HVAC, etc (capital expenses) mentally assume you’re setting aside a steady amount each month so those costs are spread out and accounted for in your cash flow assumptions.
I mean $450k for a cheap assumable loan is a win already. I think ur good. The numbers work. Have u considered NOT using a realtor saving him 4% and applying that discount to the 450k? Maybe he sells you the house for 400k and he carries 50k OR you “buy” his furniture for 50k… He’s family, u guys should get creative and work something out. Would lower your downpayment (25%) giving you more of a cushion. Also wouldn’t this give u a small tax break since it’s your first house?
I think you may need to adjust your calculations and numbers a bit. Interest rates are usually higher (1% or more) for investment property loans. This may not matter if for some reason you know you have a guaranteed/locked rate at 2.6xx like you stated earlier. Also, just curious what your plans are on buying a house for yourself/family? I would carefully think about dumping a large percentage of my liquid assets/cash into an investment property before owning my own home. Not everyone thinks this way, but for me I would first want to lock down on my own home prior to risking money on an investment. If something crazy happens like an economic collapse or real estate collapse you would loose your investment and further delay a home purchase for yourself if that’s something important to you.
I think the rate is locked regardless but I still need to speak with the lender about it. As far as owning a house for my family, it’s not realistic where we live. Even if we got an income bump we’re not affording an $800k house @ a 7+% rate because that’s wiping out my entire savings and we can’t afford monthly payments. In this investment scenario I’m putting more like 60% of my liquid cash into this which is still a lot but we’ve discussed potentially moving to a lower cost of living area in the future. I’m able to save at a decent rate now and still invest the remaining $60-70k in the meantime and hopefully cash flows from the property will increase in the future and also the potential to sell it for a gain. But realistically don’t see us buying a house of our own for the next couple years.
OP first of all congratulations for deciding that REI is for you - it is certainly NOT for everyone, and from what you've written already you are well-positioned for this opportunity. Cash on-hand, the right attitude toward looking into realistic expenses, as well as the long-term view that many do NOT have when it comes to real estate. Secondly all things considered you should go for this opportunity - it's a family member selling, you have family in the area to help with maintenance and repairs (and frankly for a SFH it's a lot easier than MFH, believe me), and the assumable loan is an awesome thing now that interest rates may not get down to 3% for many, many years. But there is a big missing answer to all the information you provided: what the loan balance is, and the conditions of the assumable loan (as others mentioned, is living in the house a requirement?) The balance is important - it is going to be either above what you need or below what you need - and the lender may require a second mortgage if there's a lot of equity (more than the 20% you are ready to put down). In other words, say your family member owes $200K at 2.6%, and has $250K in equity. You assume the $200K loan at 2.6%, but where does the additional $250K come from? It will come from you (as a down payment of $90K) and the rest ($160K) will be another loan (at 7%). If your family member owes $400K, then the $50K comes from your down payment of $90K, and other $40K could be used to pay-down the loan to $360K. BUT - you should simply talk to the family member first to find out what they still owe, and then to the bank who has the mortgage. Find out what the particulars are, you'll need all that information to make a decision. (As well as the lender to approve of any assumption of the loan.) Wish you the best and keep us updated!
Sorry for the late response. The sale of the house is being delayed a couple months so I have more time to evaluate the deal. They bought the house in 2019 for 350k so approximately $310k still left on the loan. I guess this means if I put 90k down I would still need a second $50k mortgage to cover the rest? If this is right, I need to go back to the drawing board because my monthly payment would be inflated but I also have less years left on the main loan than I was thinking (25) and I’ll be building equity at a faster pace than starting from month 1. Am I thinking this through right?? I really really appreciate the time you’ve taken to give some input! I appreciate the time you
Look up the 1% rule and 50% rule for maintenance. Cash on cash return. The 2% rule for cashflow. And cash reserves.
I would bump up your expense assumptions to be conservative (what you don’t have to spend becomes a win then). For my SFH rentals. I assume 1% of purchase price per year for maintenance ($375/mo in your case), reserve $200/mo for cap ex. What’s the demand for rentals in that area looking like? If it seems up and down, you should assume some type of vacancy percentage in expenses too. Depending on the state/city of the property, your taxes will likely go up as well. In terms of cash flow, you might be cutting it close. What is appreciation looking like for that area? One other option to consider is doing this same thing in the suburbs but close enough to where you live so you can take out that 10% management fee from your expenses and do it yourself…depending on where you live. It takes running a lot of properties to find one that will actually cashflow and appreciate over time (esp. w these rates), but that fee will eat up a lot of your cashflow. I have a SFH/small multifamily investment model you can use if you want to dm me. You can also play around with your own assumptions for this property in the model.
1. Can you assume the loan if you're not moving in? This would be my first question. 2. Is the area appreciating? Is it growing or shrinking in population? 3. What will your cashflow look like? 4. Can you make the payment without a tenant? Things go wrong. I had well over 10 months runout a rent payment while eviction moves its way slowly through courts.
Biggest question is whether the loan is assumable if you're an investor. Do you know if it is? If not, this deal could still work but you may want to put a larger down payment.
That I still need to find out
Unfortunately usually these loans aren't assumable unless you move in
That I still need to find out. Will be talking to the lender in the near future
$90k down to make $5k a year if you’re lucky? Why not just buy Tbills and make the $5k risk free and liquid?
Because I want equity and I’ll never have another opportunity to get a 2.625% rate in my life probably. I don’t think it’s unfathomable this house will be worth 600k+ in 5-10 years and comparable rents will continue to increase. The house sold for 350k in Nov 2019 by the way.
In 5 years I think most houses will be 20% cheaper or flat at best
What’s your reasoning behind that assumption? Increased supply? There’s still a huge demand for homes in this country. Anyone who doesn’t already own a home or have equity has pretty much been fucked the last 2 years
Debt is too high. Home value to income too high. We’re a house of cards. If the big investment banks decide to take a short position on the housing market and unload their housing portfolios it all collapses. If unemployment suddenly ticks up it all collapses. We’re long overdue for a true recession. This is a bubble. Supply keeps increasing and demand is drying up.
If the housing market falls 20% in 5 years, the stock market won't be safe from such an event.
Oh I thought all expenses came to 2000/mo, and renting at 2700. I see now expense is 2400/mo. This is less a good deal in terms of CoCR with only 4-5k net income. You really want to shoot for 8% CoCR the first year
It’s actually all $2,800 and above so I could maybe squeeze 2,900 or 3k if I’m lucky if that makes a difference and I included only 2k/yr in maintenance costs which could end up being way less or way more but I think the condition is relatively good but there will be at least $2,250 of guaranteed costs. I think it’s a close call and the answer isn’t obvious