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buying a townhouse for purposes of renting
Old 10-22-2011, 07:23 PM   #1
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buying a townhouse for purposes of renting

On a scale of 0 to 100 I am at about 5% of buying a 2nd house and I have some questions.

Are mortgage rates typically higher for investment properties?

Is there a down payment percentage that is required?

Thanks.
JD
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Old 10-22-2011, 07:36 PM   #2
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Yes at least 1% higher. Generally banks want 30% down for rentals, but I know they will do business at 20-25%.
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Old 10-22-2011, 07:59 PM   #3
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I am seeing .25% higher for investment property with 30% down.

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Old 10-22-2011, 09:20 PM   #4
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You could always move into the new house and rent out the old one, get an FHA loan requiring 5 percent or less down and get owner occupied rates.
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Old 10-23-2011, 05:21 AM   #5
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I own a few rental properties. So far very successfully. Although I studied the options and took a unique approach it has really worked well. I found that banks wanted .5% more and 25% down vs 20%. Might just be the bank I was dealing with, but they were the easiest to work with at the time. I have used the rentals for a couple different options. While I am working they provide some level of tax shelter although most paper losses are deferred as current income does not allow them. But that's OK as retirement income will and they will benefit me then. It provides two retirement options that I am still deciding which way to go. I can continue as now and just break even, get the tax advantages, and build the equity and at some point in the future sell them for the equity. Or I can accelerate the mortgage payoff and use the rental money as extra income.

I retire in 160 days or less (still working the final date) so I will decide which option when I see the retirement cash flow actually in place vs in a plan. Right now I believe I can live as planned and pay down those mortgages fairly fast, but need to get there to make sure it will work. If it does then I have both options in place. Monthly income and the ability to take a lump sum cash if needed.
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Old 10-23-2011, 07:57 AM   #6
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Why not take a mortgage or HEL on your residence, and use it to buy the rental property?

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Old 10-23-2011, 07:58 AM   #7
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I am actively buying townhouses as rental investments. I bought the first 5 with cash but with cash running low and investment options plentiful I'm now looking at financing as well. Just this week I put in an offer on a short sale townhouse that was accepted (still need bank approval). It's 100k and I'm getting a conventional 20% down loan at 5% with no points - so it's about 1% higher for an investor loan. I could certainly pay points and buy down the rate and might do that when it comes time to lock.

The nice thing about financing is that my ROI is actually better than the cash purchases since I'm using leverage. While I was getting 9-10% on the cash deals I'm projecting 16% on this one (assuming the bank approves it which is not a slam dunk).
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Old 10-23-2011, 12:18 PM   #8
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I own three rental properties, all purchased within the past 4 years with downpayments of 25-32%. The rents are paying the mortgages and management fees. Currently I have approximately 55% equity overall. My goal is to pay off 1 or 2 of these mortgages prior to ER and use the surplus to pay down the third mortgage faster, generating an income stream. Unlike an annuity, I keep my equity and have the option of selling it in the future. I can also refinance and realize a lump sum which would not be subject to tax.
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Old 10-23-2011, 12:51 PM   #9
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Quote:
Originally Posted by Fishingmn View Post
The nice thing about financing is that my ROI is actually better than the cash purchases since I'm using leverage. While I was getting 9-10% on the cash deals I'm projecting 16% on this one (assuming the bank approves it which is not a slam dunk).
I'm curious about the math on this statement. You mean that after subtracting the mortgage payment from the rent payment you'll be getting 16% return as opposed to 9% on the ones where you don't have a mortgage payment to subtract? That must be one hellacious rent payment, or an incredibly cheap house and mortgage.
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Old 10-23-2011, 04:19 PM   #10
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Why not take a mortgage or HEL on your residence, and use it to buy the rental property?

Amethyst
I currently have a mortgage on my primary. I rather have a fixed rate for anything I would purchase. I do have a LOC at prime minus a quarter, though.

I don't think I have enough cash for 20 or 30% down so I would have to tap my LOC.

There are a couple of townhouses I've been following that are about 5 mins from my house. They have been on the market for a while and the prices keep dropping.

I'd only be interested if the price was right but I am new to this. I have lots of research to do.
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Old 10-23-2011, 06:54 PM   #11
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I'm curious about the math on this statement. You mean that after subtracting the mortgage payment from the rent payment you'll be getting 16% return as opposed to 9% on the ones where you don't have a mortgage payment to subtract? That must be one hellacious rent payment, or an incredibly cheap house and mortgage.
Townhouse #1 with cash

Purchase price - $105,000
Rent - $15,600/year
Expenses+Vacancy Projection - $5,885/year
Net Op Inc - $9,715

ROI = 9,715/105,000 = 9.25%

Townhouse #2 with only 20% down, 5% rate

Purchase price w/ loan costs - $106,300
Rent - $15,600/year
Expenses + vacancy projection - $6,443
NOI - $9,157
Debt Service - $4,815
Cash Flow - $4,342

ROI = 4,342/27,100 (my cash outlay) = 16.02%
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Old 10-23-2011, 07:10 PM   #12
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Quote:
Originally Posted by harley

I'm curious about the math on this statement. You mean that after subtracting the mortgage payment from the rent payment you'll be getting 16% return as opposed to 9% on the ones where you don't have a mortgage payment to subtract? That must be one hellacious rent payment, or an incredibly cheap house and mortgage.
Absolutely using leverage gives you a greater ROI. Also exposes you to more risk if the underlying asset goes down in value.
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Old 10-23-2011, 08:29 PM   #13
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Absolutely using leverage gives you a greater ROI. Also exposes you to more risk if the underlying asset goes down in value.
Not sure I agree totally with this statement. If the prices on both my townhouses go down $30k I still lose $30k either way. Yes, if I want to sell both I need to bring cash to the table on townhouse #2 but I'm out the same amount of money.

The more correct statement is that my ROI has much more variability in a leveraged deal - but that relates more to income and expenses.

What I mean is that if my market rent goes down from $1,300/month to $1,200/month my ROI on the all cash townhouse goes down by 1% but my ROI on the financed townhouse goes down by 4%. The impact of income and expenses in the financed deal are much more pronounced.
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Old 10-23-2011, 08:49 PM   #14
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OK, I guess I was confusing ROI with cash flow. Probably another reason I'm not a landlord.
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Old 10-23-2011, 09:03 PM   #15
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Originally Posted by Fishingmn View Post
Townhouse #1 with cash

Purchase price - $105,000
Rent - $15,600/year
Expenses+Vacancy Projection - $5,885/year
Net Op Inc - $9,715

ROI = 9,715/105,000 = 9.25%

Townhouse #2 with only 20% down, 5% rate

Purchase price w/ loan costs - $106,300
Rent - $15,600/year
Expenses + vacancy projection - $6,443
NOI - $9,157
Debt Service - $4,815
Cash Flow - $4,342

ROI = 4,342/27,100 (my cash outlay) = 16.02%
How does your vacancy protection work?
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Old 10-23-2011, 10:18 PM   #16
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Originally Posted by JohnDoe

How does your vacancy protection work?
Projection, not protection.. I.e. The amount of vacancy he expects to have, due to tenant turnover.
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Old 10-24-2011, 08:32 AM   #17
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Projection, not protection.. I.e. The amount of vacancy he expects to have, due to tenant turnover.
Here are my cost assumptions - yours may differ:

Vacancy Loss - 5% of gross rent/year (safer might be 1 mo/year)
Accounting/Legal - $300/year (build up a fund for legal actions like evictions)
Insurance - $100/year (I buy townhouses with Ins coverage so this is for $1M liability)
Repairs/Maintenance - 1 month's rent/year (I do most of my own repairs)
HOA dues - Insurance, outside maint, water/garbage (usually $160-200/mo)
Property Taxes

Tenant pays gas, electric, cable

I do my own property management so that saves the 10%/year a professional would charge.
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Old 10-24-2011, 03:45 PM   #18
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Projection, not protection.. I.e. The amount of vacancy he expects to have, due to tenant turnover.
Yea. I read that wrong. lol

Thanks.
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Old 10-25-2011, 11:53 AM   #19
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I wish I could find properties for 100K up here.
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Old 10-25-2011, 11:55 AM   #20
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Can't even get a garage for $100K in the DC area.
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