Investment properties Cash Flow - POLL

[DionEvalueMortgage]

I am not sure if this thread has been addressed but I am curious. I have recently ran into several (5) investors who had told me they take the utmost caution in making sure their properties cash flow. They were shocked to find that my paperwork from the finance side doesn't show them cash flowing.

The problem was the occupancy ratio that the bank wants to see. I am curious what some of the gurus here are using. The bank wants to see 75% or atleast that's the easiest from my stand point. When you factor that into the equation these guys acutally showed a loss on paper. This was hard for them to deal with because they then were no longer under the same loan documentation.

Now they all in realty cleared the red by a couple hundered dollars each month but it wasn't enough for bank paperwork. One gentleman does lease options based on all expense so technically he has 100% occupancy because he writes his lease immdiately after his acquistion.

Again, just curious if any of you guys, of which I respect tremendously ever attempt to balance against that occupancy ratio? Or direct me to the thread spoke about this.

I am not the investor, just the money guy! :SM137:

[Dan Auito]

Just my two cents Dion. But reality of the situation dictates that most investors play the standard 95% occupancy ratios for forecasting purposes, eternal optimists I guess you could say.

Obviously it is often the reality as you mentioned that the investors you have there are all cashflowing by a couple hundred and using their higher occupancy rates.

If everyone used the 75% figure they would be hard pressed to justify buy, hold and rent as an efficient investment model, granted appreciation and loan buy down along with some tax offsets would still make it an overall worthwhile plan.

75% is way to conservative for most folks!

[txrigdiver]

I don't even barely undersatand what you guys are talking about

[Dan Auito]

Hey Don, Don't feel bad neither do we! :icon_knab The bottom line here Don is that the banks play the devils advocate by using very conservative numbers when looking at the security involved when making their loans.

Investors have to be realistic based on what they know about there markets and their specific methods of achieving adequate returns.

A 5% vacancy rate is usually the figure used when calculating expenses involved in operating a rental.

Dion, are we on track here as far as what you had initially come out of the gate with :confused: Heh Heh Heh :icon_verw

[txrigdiver]

So, If someone wanted to buy a property as an investment, and turn it into a rental and go through conventional financing to do this (that seems reasonable) it has to be screaming good deal for a loan to be approved.
What would make the difference, high equity through good negotiating or putting a ton of cash down, or what else if not that?

[DionEvalueMortgage]

Hey Don, Don't feel bad neither do we! :icon_knab The bottom line here Don is that the banks play the devils advocate by using very conservative numbers when looking at the security involved when making their loans.

Investors have to be realistic based on what they know about there markets and their specific methods of achieving adequate returns.

A 5% vacancy rate is usually the figure used when calculating expenses involved in operating a rental.

Dion, are we on track here as far as what you had initially come out of the gate with :confused: Heh Heh Heh :icon_verw


Completely on track. My curiousity was to see what you guys use as a number to compensate for vacnancy/occupancy. Sounds like you use 95%. Well the bank uses 75%. Interesting!

I am going to have look into this from my side. But please more peole post information. Let's see what I can draw up.

[Pasquini]

Using 5% in your budgetary analysis is nuts. That is essentially one month of vacancy every two years. Yes, most lenders will use 75% occupancy and while that may be conservative they have the gold and therefore make the rules. I'm more comfortable using an approximate 10% vacancy factor, or the equivalent of one month per year.

I actually love talking with SFH landlords. They typically budget with a 0% vacancy factor, and usually a 0% maintenance/repair factor as well. They think if their rent covers their monthly piti they are breaking even. It is one heckuva educational session.

[Dan Auito]

It often depends on your local markets as well, I know in Florida I had at one time received 90 calls on a single for rent ad, never had a vacancy longer than a week! So the 5% was applicable in that case. Aldo up in Wisconsin on the other hand is a very seasoned landlord and due to the economics of his area is running at a 24% vacancy rate.

So when you factor your vacancy rate you try to base it on actual history and a little bit of future forecasting as well. If you're in a strong and healthy economic area and have been renting out good property to good people for a sustained period of time, referrals usually are enough to keep you full! :SM023:

[dealmaker]

Back when I was doing rentals in Houston I used 10%, that was for my purposes, not the bank's. In actuality my % in that market ran about 1-2%! I did it through a couple of things; better homes, better neighborhoods, better shape house when showing to prospects and MINIMUM TWO YEAR LEASE.

I figured I was pretty much repainting on move-out anyway so why not cut that time and money in 1/2. When I started this program my average tenant was staying for at least two years anyway. Cost at the time for 5 gallons of Navajo White was about $35, a day and a 1/2 off work and I was done. The beauty of the two year leases was that people ended up staying for 5 or more!

I've found that MOST SFH "investors" not only do the things you mentioned above, 0% vacancy and 0% maintenance, they're under the impression that putting more money into a deal improves the CASH FLOW. D'oh.

dealmaker

[DionEvalueMortgage]

So, If someone wanted to buy a property as an investment, and turn it into a rental and go through conventional financing to do this (that seems reasonable) it has to be screaming good deal for a loan to be approved.
What would make the difference, high equity through good negotiating or putting a ton of cash down, or what else if not that?


The difference what income shows on paper. At a 75% ratio that $200 a month in profit get's eaten up and actually shows a loss. On paper for the bank. So that means alternate documentation would be need for that borrower.

[David Leach]

The 75% rule doesn't mean that an investor loses his deal. I'll give you an example....

Price $200,000 / Down payment $20,000 / Loan amount $180,000

At 6% interest, this is a principle and interest payment of $1079/mo.

In my area, this would rent for about $1400 per month. Using the 75% rule used by lenders, the net rent to the buyer is $1050/mo. While this is a "loss" on paper, the lender looks at this and says the property will only cost this buyer $29/mo.

This $29 is applied to the buyer's debt ratio. As long as the buyer isn't already too far in debt, this will work (debt-to-income ratio under 45%).

As a mortgage broker, I think the rule is a little conservative as well, but shouldn't hinder the deal.

Of course, this is using "traditional" money sources to buy a property and not "creative" money.

[Dan Auito]

Gee Dave, the above rationalization actually makes sense! I'm glad to see the lenders are using logic and not just restrictive policy. Any astute investor should be able to present a reasonable approach when armed with the information above doing those despised traditional finance deals! Thanks so much! Dan

[DionEvalueMortgage]

The 75% rule doesn't mean that an investor loses his deal. I'll give you an example....

Price $200,000 / Down payment $20,000 / Loan amount $180,000

At 6% interest, this is a principle and interest payment of $1079/mo.

In my area, this would rent for about $1400 per month. Using the 75% rule used by lenders, the net rent to the buyer is $1050/mo. While this is a "loss" on paper, the lender looks at this and says the property will only cost this buyer $29/mo.

This $29 is applied to the buyer's debt ratio. As long as the buyer isn't already too far in debt, this will work (debt-to-income ratio under 45%).

As a mortgage broker, I think the rule is a little conservative as well, but shouldn't hinder the deal.

Of course, this is using "traditional" money sources to buy a property and not "creative" money.

Dave spelled it out in better words than I. But my orginal question still stands, DO INVESTORS know? Dan states - no and use a 95%. So I guess my point is, it might benefit REI to know the formula to assist them in endevors.

[elnuk]

I've found that MOST SFH "investors" not only do the things you mentioned above, 0% vacancy and 0% maintenance, they're under the impression that putting more money into a deal improves the CASH FLOW. D'oh.

dealmaker

I am not sure i understand your comments on putting more money does not improve the deal. I would think that all things being equal, you would get better cash flow from a rental property if your down payment is higher. I mean the arithmetic does support the fact that you will have a better return if you put up a down payment of 20% as opposed to 10% or even 5% in these days of low down morguages?
Please help this :newbie: get a better grasp. It is bad enough to know that my calculation of low vacancy has been blown out of the water... :SM125:

[M Aron]

In my area, this would rent for about $1400 per month. Using the 75% rule used by lenders, the net rent to the buyer is $1050/mo. While this is a "loss" on paper, the lender looks at this and says the property will only cost this buyer $29/mo.

This $29 is applied to the buyer's debt ratio. As long as the buyer isn't already too far in debt, this will work (debt-to-income ratio under 45%).

I want to understand the debt-to-income ratio. In order for an investor to be approved for the 180K would he need to have an additional income of $1348/month?

The way I understand it, this is how I calculated the $1348:

DEBT (mortgage payment) to INCOME (effective gross income from rental + additional income needed, JOB) = .45 or less

mortgage payment = .45
[rental income + additional income]

1079 = .45 , x=$1348
[1050 + x]

Would $1348/month be the minimum amount an investor would need in order to get approved for the loan?

[JRB]

Putting more money down reduces your rates of return.

Same with appreciated properties the higher the equity grows the less you are getting for your money regarding cash flow.

Joel

[David Leach]

I want to understand the debt-to-income ratio. In order for an investor to be approved for the 180K would he need to have an additional income of $1348/month?

The way I understand it, this is how I calculated the $1348:

DEBT (mortgage payment) to INCOME (effective gross income from rental + additional income needed, JOB) = .45 or less

mortgage payment = .45
[rental income + additional income]

1079 = .45 , x=$1348
[1050 + x]

Would $1348/month be the minimum amount an investor would need in order to get approved for the loan?

You aren't applying the 45% correctly.

Debt would be the $29, plus the investor's other credit debt (CC, car payment, other mortgages). You wouldn't have to worry about the total mortgage payment on the investment property, because 75% of the rent offsets the payment.

So, let's say the borrower makes $5000/mo. 45% of that amount is $2250. So, you would take the monthly total of all other debts, plus the $29, and if that number is under $2250, this would make the DTI under 45%.

I hope this makes it clearer.

[M Aron]

That makes sense. So if I live with my parents and have my car paid for (I bought it myself in full with my job earnings), and don't have any expenses or debt other than gas and eating out, and have a part-time job, could I be approved for a loan like that? My expenses each month add to about $75 and my part-time job brings in $700. Under these circumstances, I would think I would be approved; however, because I am only eighteen, I lack established credit history and being at a job for a long time(I have had three jobs over the last two years). What do you think?

[David Leach]

That makes sense. So if I live with my parents and have my car paid for (I bought it myself in full with my job earnings), and don't have any expenses or debt other than gas and eating out, and have a part-time job, could I be approved for a loan like that? My expenses each month add to about $75 and my part-time job brings in $700. Under these circumstances, I would think I would be approved; however, because I am only eighteen, I lack established credit history and being at a job for a long time(I have had three jobs over the last two years). What do you think?

Living with your parents won't matter. Gas and eating out aren't debts (you only need to consider credit).

Being 18 doesn't matter, but your lack of credit history would prevent a loan. You need to have some credit background. Some lenders will require a credit history with 24 months experience. So, under your conditions, I don't think you could get the loan.

I would recommend using creative strategies (lease options and subject to) for getting started if I were you. These don't require credit or income. Just my opinion.

Best regards,

David