First Time Home Buyer vs. First Time Investor - Posted by Mark

import · July 22, 2004, 2:44pm

Posted by Mark (NY) on July 23, 2004 at 12:46:56:

Thanks for breaking down the basics for me, that is one thing that I was in need of.

The other part was trying to make a decision on whether or not to waste my first time home buyers perks on a property that I will not live in (i.e. an investment prop.) or go for a place that I will live in for a couple of years.

In the first instance I would look for an opp that would give me a Positive cash flow but I would be using my down payment that I would have had avail for our primary home for the investment. Thus I would then be waiting for the equity to build in the investment before using it for the primary home, which could take years.

Or I could use what I have now for a down payment, bundle that with the FTHB perks (i.e. low down payment) and shoot for a Duplex that will generate more rental income after I move out.

Thoughts?

import · July 22, 2004, 2:44pm

First Time Home Buyer vs. First Time Investor - Posted by Mark

Posted by Mark on July 22, 2004 at 14:44:41:

I am just starting out in REI and trying to get a handle on positive cash flow and finding good deals. I know the latter is a matter of getting out there and looking but without some basic knowledge it is little daunting and confusing.

I am still a renter and wondering if I should start out with a 2-family home, of which my family would live in one apt and the rent the other. As far as I can see this would generate a negative cashflow because I need to cover the difference on the mortgage payment and rental income. OR should I continue to rent and find a property, much less expensive (i.e. 100K 2-3BR) that I can rent for $200-$300 more than the mortgage payment, per month.

It may sound like a no brainer to the seasoned guys but since I never purchased a home I am a first time home buyer and heard there are some perks alloted to us but then I have to live in the home. Hence back to the 2-family.

So in one situation I can deal with a negative cashflow where I have to depend on my income to make 1/2 if not 2/3 of the mortgage but retain the perks (i.e. low to no down payment which is very important for me). Or go for a property say in FL that is cheap and rent it out for a positve cashflow.

I know there is so much more to this but I need to be explained a little better and possibly pointed in the right direction.

Thanks for your time.

import · July 23, 2004, 9:40am

Re: First Time Home Buyer vs. First Time Investor - Posted by Gregory (VA)

Posted by Gregory (VA) on July 23, 2004 at 09:40:38:

When renting houses you want to at least break even, and preferably have a positive cash flow. Let’s say the sellers are asking $150k for the duplex.

The first step to determining a deal is to figure out what fair market value rents are for the property you intend to purchase. Let’s suppose that your duplexes FMV rents are $800 per unit. This gives us rental revenues of $1,600/mo and $19,200/yr.

The next step would be determining your expenses. Estimate your personal property tax (if any), home insurance, utility bills, and set aside accounts for maintenance, vacancy and management (if you don’t manage them yourself). A rough estimate of your expenses will be between 35% and 45% of your gross rental revenue.

Now, figure out how much you have to put down and what the terms of the loan are. Let’s just say you have 20% ($30k) to put down and you get a $120k 20-yr loan at 6.5%. This gives you a mortgage payment of $895/mo.

Here is how the numbers would work out for you:
Rental Revenue: $19,200
Expenses (40%): 7,680
Mortgage: 10,736
Rental Income: 784
ROI: 2.61%

Now you may be thinking that this isn?t very good. But you?re forgetting something: EQUITY. Let?s say over the course of the year the house appreciated 3%. That $150k home is now worth $154,500 or $4,500 more than when you purchased it. Don?t forget that your renter also paid one years worth of mortgage payments for you; the loan on the home went from $120,000 to $116,975, a difference of $3,025. Add $4,500 + 3,025 and you have $7,525 in Equity in this home. If you were to sell this house at the end of 1 year (forgetting about the costs to sell), you would have made a total of $9,309, or a ROI of 27.7%.

There is obviously a lot of due diligence issues that I did not cover. This was merely a superficial analysis of a property and assumed there were not major repairs that needed to be done right off the bat.