[quote=Scarlett]Davelj, when does it make sense, though, even with those assumptions, to pencil out as an investment?
[quote=davelj]
when calculating the interest-only payment I’d use (…) the RATE assuming 20% down (but applied against the entire cost of the house – as if you’re putting zero down). Hope that makes sense. And, this is looking at buy vs. rent, not looking at it as an investment. Just to be clear.
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Thanks, Dave,that is actually a good and simple way to calculate – using the best rate (at 20%down) but with the loan value = sales/purchase price (like a 100% LTV).
If you figure out what mortgage payment WOULD be with the assumptions above (the good rate,but the whole purchase price loan), for an investment I guess you want to be at least a couple hundred bucks better off paying that THEORETICAL P&I and HOAs and MRs than rent income – or HOW MUCH MORE? (assume no PMI, because you WILL put 20% down at least). In REALITY, one would put 20% down, on which he would lose any return, even a safe 3%, but get a lower total P&I. Or there isn’t a rough number?[/quote]
4plexowner – I assume he owns a 4plex or two? – is a better one to answer this question, but… the basics are that you’d take your total rental income and subtract out operating costs including vacancies, which generally amount to about 35% of rental income. Then you apply a cap rate to that net operating income (NOI) – these days 7%-10%, depending on the property, and that yields a value. Now, one of the checks is that this value also has to ensure that your debt service coverage (DSC) on your loan is 1.2x or greater or you won’t get that loan. In this day and age, I’d probably look for a property where you can apply a 10% cap rate and have at least 1.35x DSC and a 65% LTV. That’s gonna be pretty cheap with a pretty big margin of safety. But, again, I’m assuming that 4plex does this for a living, so he can offer you better insights into buying these things as investments.
