A very wise and experienced mentor of mine always says: “If we agree on the inputs of our investment equation then we cannot argue the outputs/outcome”. This investment strategy is mathematical and not emotional. We are building a Single Family Residential Rental Portfolio based on the following details:
- 12 houses in 12 months
- Purchase with cash and refinance
- Apply economies of scale in our target markets
As we are building your portfolio, we will utilize the Cash Flow Focus Calculator to generate the final product which is a long term wealth building solution with long-term team members. As the tenants pay rent and the notes are serviced by the collected rent, the sum of the excess cash flow is invested directly back into the portfolio and focused on the loan with the lowest principal or the highest interest rate. The first property should be paid off in 36-48 months and the twelfth property should be paid off in 165-212 months. So as long as we hit our minimum investment criteria, the solution will be reached.
Keep in mind that this is a long term investment. We are not including any appreciation of fair market property value OR increases in market rent. History has shown that both of these massive wealth building benefits will occur. These two massive benefits will override the stress of any unforeseen tenant or property challenges. Remember, these investment decisions should not be based on how you feel about the type, quality, condition, or area of the house. Trust the numbers. You are not living in this house.
Neighborhood Classifications allow us to focus on stable, developing and/or improving neighborhoods that are perfect for cost effective long term rental properties. Your acquisition team is focused on C+ or better neighborhoods. This classification is very similar to how we received letter grades in school. A is the best and F is the worst. Most neighborhoods will include a range of ratings. For example, it is great to locate C+ value-add opportunities in a neighborhood that ranges from A- to C+.
Cash Purchase
The Annualized Capitalization Rate (CAP RATE) is a great way to compare the cash outlay or deployed capital against other investments “apples to apples”. Although this rate of return does not include the time required like the Internal Rate of Return does, it is annualized. This means your NET passive income for the entire year is divided by your total cash outlay (purchase price, closing costs, repairs, etc.). Our minimum Cash Purchase CAP RATE will be greater than 7%.
Another percentage to keep in mind is the relationship of the total investment (purchase price plus repairs) compared to the After Repair Value (ARV). Worst case scenario, if you had to liquidate the property and sell it on the MLS with an agent, I want to make sure we are not losing money. To sell a property with an agent typically costs approximately 7.5% of the sale price. That means, we need to stay at or below 92.5% of the ARV. Also, if you purchase a price for more than the ARV, you might as well go find one that does not need any work!
Financed Purchase (or Refinanced)
Time to leverage! The purpose of leveraging the mortgage is to decrease the amount of capital you have invested in the property and in turn increasing your rate of return. On a financed purchase OR a cash out refinance, your Rate of Return ROI will increase by a minimum of 1.7 times and really it is more likely to double. This is why the Financed Purchase Return on Investment should be greater than 12%.
Not a binding condition but the Total Stacked Return is a number that give the investor a more “rounded” perspective of the return. There is more than just straight cash flow on these investments. When you have leveraged a mortgage, the tenant’s rent is used to service the note paying principal and interest. Thank you tenant. The principal paid is a direct paydown of the Loan Amount as well as a direct addition to the asset column on your personal financial statement, increasing your net worth. It is also noteworthy to consider the Principal and Interest relationship throughout the life of the loan repayment (see illustration below). In the beginning of the repayment process, the interest is very high and the principal paydown is very low. Look what happens as the repayment progresses. The principal begins to get larger and larger and the interest gets lower and lower. So as the repayment progresses, your Total Staked Return increases dramatically. The straight line depreciation of the property is also included in the Total Stacked Return. We like to see the Total Stacked Return greater than or equal to 30% in year 1.
Don’t forget about Equity! This is an additional return that is not accounted for in our projections and it is real money on your balance sheet. In value-add single family residential properties, it is very common to average $10,000 to $20,000 in equity on EVERY deal. This is real money that can be realized if you needed to sell the property or 1031 Exchange into another property.
Cash Flow! This is what we call the Monthly Net Income. Remember this NET income number is above ALL expenses and contingencies: the principal, interest, insurance, taxes, property manager, and utilities/HOA (if necessary) have all been paid. We even figure for 5% vacancy and 5% maintenance holdback in this number as well. At the end of the day, this is the conservative amount of monthly cash that you will see on your owner statement and automatically deposited into your bank account. The Monthly Net Income on a Financed Purchase should be greater than $200.
The Total Loan Amount plays a major role in determining how fast the loan will be paid off. We want to see the Total Loan Amount less than or equal to $130,000. It also must be less than or equal to 80% of ARV to make sure we stay below the allowable limits of the lenders’ Loan To Value LTV. Some lenders allow you to go up to 90% LTV but that percentage often challenges other conditions such as the Loan Amount, Actual Cash Invested, ROI, and Monthly Net Income. If Total Loan Amount is greater than $130,000 and all other conditions are met, we will consider the proportionate increase of Monthly Net Income to determine if the deal makes sense.
There is a very interesting situation that occurs when you refinance value-add real estate opportunities. It’s called “air equity”. This is the difference in Appraised Value or ARV and the total amount of capital invested. For example, you purchased a property for $100,000 and you invested $25,000 in the renovation. Now this property has been appraised for $150,000. “Poof” you just make money out of thin air; $25,000 in air equity. The interesting part is that the air equity, “money on paper”, offsets the down payment required reducing your Actual Cash Invested. In this example, you would be required to have a $30,000 down payment, 80% LTV, for the house that appraised for $150,000. Now you can decrease that amount by the equity you “forced” into the property by completing the repairs and it leaves you with $5,000 Actual Cash Invested. We will target Actual Cash Invested less than or equal to $25,000 but will consider the proportionate increase of Monthly Net Income when all other conditions are met.
Our purpose is to acquire properties that the insurance companies want to write policies on and the lenders want to utilize as collateral to loan money. One way an investment property is attractive to a lender is how well the income covers or “services” the principal and interest payment of the loan. This is called the Debt Service Coverage Ratio DSCR. A standard DSCR value to keep is greater than 1.20.
Goals
Ultimately we want to keep the ROI and Monthly Net Income HIGH AS POSSIBLE; the Loan Amount and Actual Cash Invested LOW AS POSSIBLE. Something called Infinite Return occurs when you can borrow (pull more money out) more money than what you have invested in the property – THIS IS GOOD!
CAP RATE: greater than 7%
Percent of ARV: less than or equal to 92.5%
Return on Investment ROI: greater than or equal to 12%
Total Stacked Return on Investment: greater than or equal to 30%
Monthly Net (Financed Purchase): greater than or equal to $200.00
Loan Amount: less than or equal to $130,000.00; less than or equal to 80% of ARV; if greater than $130,000 and all other conditions are met, consider the proportionate increase of Monthly Net Income to determine if the deal makes sense.
Loan to Value LTV: less than or equal to 80% of ARV
Actual Cash Invested: less than or equal to $25,000; need an option to see the solution if a larger Actual Cash Invested amount is required (i.e. Cash Invested=$33,000 and all other conditions are met)
Debt Service Coverage Ratio DSCR: greater than 1.20
A very wise and experienced mentor of mine always says: “If we agree on the inputs of our investment equation then we cannot argue the outputs/outcome”. This investment strategy is mathematical and not emotional. We are building a Single Family Residential Rental Portfolio based on the following details:
- 12 houses in 12 months
- Purchase with cash and refinance
- Apply economies of scale in our target markets
As we are building your portfolio, we will utilize the Cash Flow Focus Calculator to generate the final product which is a long term wealth building solution with long-term team members. As the tenants pay rent and the notes are serviced by the collected rent, the sum of the excess cash flow is invested directly back into the portfolio and focused on the loan with the lowest principal or the highest interest rate. The first property should be paid off in 36-48 months and the twelfth property should be paid off in 165-212 months. So as long as we hit our minimum investment criteria, the solution will be reached.
Keep in mind that this is a long term investment. We are not including any appreciation of fair market property value OR increases in market rent. History has shown that both of these massive wealth building benefits will occur. These two massive benefits will override the stress of any unforeseen tenant or property challenges. Remember, these investment decisions should not be based on how you feel about the type, quality, condition, or area of the house. Trust the numbers. You are not living in this house.
Neighborhood Classifications allow us to focus on stable, developing and/or improving neighborhoods that are perfect for cost effective long term rental properties. Your acquisition team is focused on C+ or better neighborhoods. This classification is very similar to how we received letter grades in school. A is the best and F is the worst. Most neighborhoods will include a range of ratings. For example, it is great to locate C+ value-add opportunities in a neighborhood that ranges from A- to C+.
Cash Purchase
The Annualized Capitalization Rate (CAP RATE) is a great way to compare the cash outlay or deployed capital against other investments “apples to apples”. Although this rate of return does not include the time required like the Internal Rate of Return does, it is annualized. This means your NET passive income for the entire year is divided by your total cash outlay (purchase price, closing costs, repairs, etc.). Our minimum Cash Purchase CAP RATE will be greater than 7%.
Another percentage to keep in mind is the relationship of the total investment (purchase price plus repairs) compared to the After Repair Value (ARV). Worst case scenario, if you had to liquidate the property and sell it on the MLS with an agent, I want to make sure we are not losing money. To sell a property with an agent typically costs approximately 7.5% of the sale price. That means, we need to stay at or below 92.5% of the ARV. Also, if you purchase a price for more than the ARV, you might as well go find one that does not need any work!
Financed Purchase (or Refinanced)
Time to leverage! The purpose of leveraging the mortgage is to decrease the amount of capital you have invested in the property and in turn increasing your rate of return. On a financed purchase OR a cash out refinance, your Rate of Return ROI will increase by a minimum of 1.7 times and really it is more likely to double. This is why the Financed Purchase Return on Investment should be greater than 12%.
Not a binding condition but the Total Stacked Return is a number that give the investor a more “rounded” perspective of the return. There is more than just straight cash flow on these investments. When you have leveraged a mortgage, the tenant’s rent is used to service the note paying principal and interest. Thank you tenant. The principal paid is a direct paydown of the Loan Amount as well as a direct addition to the asset column on your personal financial statement, increasing your net worth. It is also noteworthy to consider the Principal and Interest relationship throughout the life of the loan repayment (see illustration below). In the beginning of the repayment process, the interest is very high and the principal paydown is very low. Look what happens as the repayment progresses. The principal begins to get larger and larger and the interest gets lower and lower. So as the repayment progresses, your Total Staked Return increases dramatically. The straight line depreciation of the property is also included in the Total Stacked Return. We like to see the Total Stacked Return greater than or equal to 30% in year 1.
Don’t forget about Equity! This is an additional return that is not accounted for in our projections and it is real money on your balance sheet. In value-add single family residential properties, it is very common to average $10,000 to $20,000 in equity on EVERY deal. This is real money that can be realized if you needed to sell the property or 1031 Exchange into another property.
Cash Flow! This is what we call the Monthly Net Income. Remember this NET income number is above ALL expenses and contingencies: the principal, interest, insurance, taxes, property manager, and utilities/HOA (if necessary) have all been paid. We even figure for 5% vacancy and 5% maintenance holdback in this number as well. At the end of the day, this is the conservative amount of monthly cash that you will see on your owner statement and automatically deposited into your bank account. The Monthly Net Income on a Financed Purchase should be greater than $200.
The Total Loan Amount plays a major role in determining how fast the loan will be paid off. We want to see the Total Loan Amount less than or equal to $130,000. It also must be less than or equal to 80% of ARV to make sure we stay below the allowable limits of the lenders’ Loan To Value LTV. Some lenders allow you to go up to 90% LTV but that percentage often challenges other conditions such as the Loan Amount, Actual Cash Invested, ROI, and Monthly Net Income. If Total Loan Amount is greater than $130,000 and all other conditions are met, we will consider the proportionate increase of Monthly Net Income to determine if the deal makes sense.
There is a very interesting situation that occurs when you refinance value-add real estate opportunities. It’s called “air equity”. This is the difference in Appraised Value or ARV and the total amount of capital invested. For example, you purchased a property for $100,000 and you invested $25,000 in the renovation. Now this property has been appraised for $150,000. “Poof” you just make money out of thin air; $25,000 in air equity. The interesting part is that the air equity, “money on paper”, offsets the down payment required reducing your Actual Cash Invested. In this example, you would be required to have a $30,000 down payment, 80% LTV, for the house that appraised for $150,000. Now you can decrease that amount by the equity you “forced” into the property by completing the repairs and it leaves you with $5,000 Actual Cash Invested. We will target Actual Cash Invested less than or equal to $25,000 but will consider the proportionate increase of Monthly Net Income when all other conditions are met.
Our purpose is to acquire properties that the insurance companies want to write policies on and the lenders want to utilize as collateral to loan money. One way an investment property is attractive to a lender is how well the income covers or “services” the principal and interest payment of the loan. This is called the Debt Service Coverage Ratio DSCR. A standard DSCR value to keep is greater than 1.20.
Goals
Ultimately we want to keep the ROI and Monthly Net Income HIGH AS POSSIBLE; the Loan Amount and Actual Cash Invested LOW AS POSSIBLE. Something called Infinite Return occurs when you can borrow (pull more money out) more money than what you have invested in the property – THIS IS GOOD!
CAP RATE: greater than 7%
Percent of ARV: less than or equal to 92.5%
Return on Investment ROI: greater than or equal to 12%
Total Stacked Return on Investment: greater than or equal to 30%
Monthly Net (Financed Purchase): greater than or equal to $200.00
Loan Amount: less than or equal to $130,000.00; less than or equal to 80% of ARV; if greater than $130,000 and all other conditions are met, consider the proportionate increase of Monthly Net Income to determine if the deal makes sense.
Loan to Value LTV: less than or equal to 80% of ARV
Actual Cash Invested: less than or equal to $25,000; need an option to see the solution if a larger Actual Cash Invested amount is required (i.e. Cash Invested=$33,000 and all other conditions are met)
Debt Service Coverage Ratio DSCR: greater than 1.20 A very wise and experienced mentor of mine always says: “If we agree on the inputs of our investment equation then we cannot argue the outputs/outcome”. This investment strategy is mathematical and not emotional. We are building a Single Family Residential Rental Portfolio based on the following details:
- 12 houses in 12 months
- Purchase with cash and refinance
- Apply economies of scale in our target markets
As we are building your portfolio, we will utilize the Cash Flow Focus Calculator to generate the final product which is a long term wealth building solution with long-term team members. As the tenants pay rent and the notes are serviced by the collected rent, the sum of the excess cash flow is invested directly back into the portfolio and focused on the loan with the lowest principal or the highest interest rate. The first property should be paid off in 36-48 months and the twelfth property should be paid off in 165-212 months. So as long as we hit our minimum investment criteria, the solution will be reached.
Keep in mind that this is a long term investment. We are not including any appreciation of fair market property value OR increases in market rent. History has shown that both of these massive wealth building benefits will occur. These two massive benefits will override the stress of any unforeseen tenant or property challenges. Remember, these investment decisions should not be based on how you feel about the type, quality, condition, or area of the house. Trust the numbers. You are not living in this house.
Neighborhood Classifications allow us to focus on stable, developing and/or improving neighborhoods that are perfect for cost effective long term rental properties. Your acquisition team is focused on C+ or better neighborhoods. This classification is very similar to how we received letter grades in school. A is the best and F is the worst. Most neighborhoods will include a range of ratings. For example, it is great to locate C+ value-add opportunities in a neighborhood that ranges from A- to C+.
Cash Purchase
The Annualized Capitalization Rate (CAP RATE) is a great way to compare the cash outlay or deployed capital against other investments “apples to apples”. Although this rate of return does not include the time required like the Internal Rate of Return does, it is annualized. This means your NET passive income for the entire year is divided by your total cash outlay (purchase price, closing costs, repairs, etc.). Our minimum Cash Purchase CAP RATE will be greater than 7%.
Another percentage to keep in mind is the relationship of the total investment (purchase price plus repairs) compared to the After Repair Value (ARV). Worst case scenario, if you had to liquidate the property and sell it on the MLS with an agent, I want to make sure we are not losing money. To sell a property with an agent typically costs approximately 7.5% of the sale price. That means, we need to stay at or below 92.5% of the ARV. Also, if you purchase a price for more than the ARV, you might as well go find one that does not need any work!
Financed Purchase (or Refinanced)
Time to leverage! The purpose of leveraging the mortgage is to decrease the amount of capital you have invested in the property and in turn increasing your rate of return. On a financed purchase OR a cash out refinance, your Rate of Return ROI will increase by a minimum of 1.7 times and really it is more likely to double. This is why the Financed Purchase Return on Investment should be greater than 12%.
Not a binding condition but the Total Stacked Return is a number that give the investor a more “rounded” perspective of the return. There is more than just straight cash flow on these investments. When you have leveraged a mortgage, the tenant’s rent is used to service the note paying principal and interest. Thank you tenant. The principal paid is a direct paydown of the Loan Amount as well as a direct addition to the asset column on your personal financial statement, increasing your net worth. It is also noteworthy to consider the Principal and Interest relationship throughout the life of the loan repayment (see illustration below). In the beginning of the repayment process, the interest is very high and the principal paydown is very low. Look what happens as the repayment progresses. The principal begins to get larger and larger and the interest gets lower and lower. So as the repayment progresses, your Total Staked Return increases dramatically. The straight line depreciation of the property is also included in the Total Stacked Return. We like to see the Total Stacked Return greater than or equal to 30% in year 1.
Don’t forget about Equity! This is an additional return that is not accounted for in our projections and it is real money on your balance sheet. In value-add single family residential properties, it is very common to average $10,000 to $20,000 in equity on EVERY deal. This is real money that can be realized if you needed to sell the property or 1031 Exchange into another property.
Cash Flow! This is what we call the Monthly Net Income. Remember this NET income number is above ALL expenses and contingencies: the principal, interest, insurance, taxes, property manager, and utilities/HOA (if necessary) have all been paid. We even figure for 5% vacancy and 5% maintenance holdback in this number as well. At the end of the day, this is the conservative amount of monthly cash that you will see on your owner statement and automatically deposited into your bank account. The Monthly Net Income on a Financed Purchase should be greater than $200.
The Total Loan Amount plays a major role in determining how fast the loan will be paid off. We want to see the Total Loan Amount less than or equal to $130,000. It also must be less than or equal to 80% of ARV to make sure we stay below the allowable limits of the lenders’ Loan To Value LTV. Some lenders allow you to go up to 90% LTV but that percentage often challenges other conditions such as the Loan Amount, Actual Cash Invested, ROI, and Monthly Net Income. If Total Loan Amount is greater than $130,000 and all other conditions are met, we will consider the proportionate increase of Monthly Net Income to determine if the deal makes sense.
There is a very interesting situation that occurs when you refinance value-add real estate opportunities. It’s called “air equity”. This is the difference in Appraised Value or ARV and the total amount of capital invested. For example, you purchased a property for $100,000 and you invested $25,000 in the renovation. Now this property has been appraised for $150,000. “Poof” you just make money out of thin air; $25,000 in air equity. The interesting part is that the air equity, “money on paper”, offsets the down payment required reducing your Actual Cash Invested. In this example, you would be required to have a $30,000 down payment, 80% LTV, for the house that appraised for $150,000. Now you can decrease that amount by the equity you “forced” into the property by completing the repairs and it leaves you with $5,000 Actual Cash Invested. We will target Actual Cash Invested less than or equal to $25,000 but will consider the proportionate increase of Monthly Net Income when all other conditions are met.
Our purpose is to acquire properties that the insurance companies want to write policies on and the lenders want to utilize as collateral to loan money. One way an investment property is attractive to a lender is how well the income covers or “services” the principal and interest payment of the loan. This is called the Debt Service Coverage Ratio DSCR. A standard DSCR value to keep is greater than 1.20.
Goals
Ultimately we want to keep the ROI and Monthly Net Income HIGH AS POSSIBLE; the Loan Amount and Actual Cash Invested LOW AS POSSIBLE. Something called Infinite Return occurs when you can borrow (pull more money out) more money than what you have invested in the property – THIS IS GOOD!
CAP RATE: greater than 7%
Percent of ARV: less than or equal to 92.5%
Return on Investment ROI: greater than or equal to 12%
Total Stacked Return on Investment: greater than or equal to 30%
Monthly Net (Financed Purchase): greater than or equal to $200.00
Loan Amount: less than or equal to $130,000.00; less than or equal to 80% of ARV; if greater than $130,000 and all other conditions are met, consider the proportionate increase of Monthly Net Income to determine if the deal makes sense.
Loan to Value LTV: less than or equal to 80% of ARV
Actual Cash Invested: less than or equal to $25,000; need an option to see the solution if a larger Actual Cash Invested amount is required (i.e. Cash Invested=$33,000 and all other conditions are met)
Debt Service Coverage Ratio DSCR: greater than 1.20
A very wise and experienced mentor of mine always says: “If we agree on the inputs of our investment equation then we cannot argue the outputs/outcome”. This investment strategy is mathematical and not emotional. We are building a Single Family Residential Rental Portfolio based on the following details:
- 12 houses in 12 months
- Purchase with cash and refinance
- Apply economies of scale in our target markets
As we are building your portfolio, we will utilize the Cash Flow Focus Calculator to generate the final product which is a long term wealth building solution with long-term team members. As the tenants pay rent and the notes are serviced by the collected rent, the sum of the excess cash flow is invested directly back into the portfolio and focused on the loan with the lowest principal or the highest interest rate. The first property should be paid off in 36-48 months and the twelfth property should be paid off in 165-212 months. So as long as we hit our minimum investment criteria, the solution will be reached.
Keep in mind that this is a long term investment. We are not including any appreciation of fair market property value OR increases in market rent. History has shown that both of these massive wealth building benefits will occur. These two massive benefits will override the stress of any unforeseen tenant or property challenges. Remember, these investment decisions should not be based on how you feel about the type, quality, condition, or area of the house. Trust the numbers. You are not living in this house.
Neighborhood Classifications allow us to focus on stable, developing and/or improving neighborhoods that are perfect for cost effective long term rental properties. Your acquisition team is focused on C+ or better neighborhoods. This classification is very similar to how we received letter grades in school. A is the best and F is the worst. Most neighborhoods will include a range of ratings. For example, it is great to locate C+ value-add opportunities in a neighborhood that ranges from A- to C+.
Cash Purchase
The Annualized Capitalization Rate (CAP RATE) is a great way to compare the cash outlay or deployed capital against other investments “apples to apples”. Although this rate of return does not include the time required like the Internal Rate of Return does, it is annualized. This means your NET passive income for the entire year is divided by your total cash outlay (purchase price, closing costs, repairs, etc.). Our minimum Cash Purchase CAP RATE will be greater than 7%.
Another percentage to keep in mind is the relationship of the total investment (purchase price plus repairs) compared to the After Repair Value (ARV). Worst case scenario, if you had to liquidate the property and sell it on the MLS with an agent, I want to make sure we are not losing money. To sell a property with an agent typically costs approximately 7.5% of the sale price. That means, we need to stay at or below 92.5% of the ARV. Also, if you purchase a price for more than the ARV, you might as well go find one that does not need any work!
Financed Purchase (or Refinanced)
Time to leverage! The purpose of leveraging the mortgage is to decrease the amount of capital you have invested in the property and in turn increasing your rate of return. On a financed purchase OR a cash out refinance, your Rate of Return ROI will increase by a minimum of 1.7 times and really it is more likely to double. This is why the Financed Purchase Return on Investment should be greater than 12%.
Not a binding condition but the Total Stacked Return is a number that give the investor a more “rounded” perspective of the return. There is more than just straight cash flow on these investments. When you have leveraged a mortgage, the tenant’s rent is used to service the note paying principal and interest. Thank you tenant. The principal paid is a direct paydown of the Loan Amount as well as a direct addition to the asset column on your personal financial statement, increasing your net worth. It is also noteworthy to consider the Principal and Interest relationship throughout the life of the loan repayment (see illustration below). In the beginning of the repayment process, the interest is very high and the principal paydown is very low. Look what happens as the repayment progresses. The principal begins to get larger and larger and the interest gets lower and lower. So as the repayment progresses, your Total Staked Return increases dramatically. The straight line depreciation of the property is also included in the Total Stacked Return. We like to see the Total Stacked Return greater than or equal to 30% in year 1.
Don’t forget about Equity! This is an additional return that is not accounted for in our projections and it is real money on your balance sheet. In value-add single family residential properties, it is very common to average $10,000 to $20,000 in equity on EVERY deal. This is real money that can be realized if you needed to sell the property or 1031 Exchange into another property.
Cash Flow! This is what we call the Monthly Net Income. Remember this NET income number is above ALL expenses and contingencies: the principal, interest, insurance, taxes, property manager, and utilities/HOA (if necessary) have all been paid. We even figure for 5% vacancy and 5% maintenance holdback in this number as well. At the end of the day, this is the conservative amount of monthly cash that you will see on your owner statement and automatically deposited into your bank account. The Monthly Net Income on a Financed Purchase should be greater than $200.
The Total Loan Amount plays a major role in determining how fast the loan will be paid off. We want to see the Total Loan Amount less than or equal to $130,000. It also must be less than or equal to 80% of ARV to make sure we stay below the allowable limits of the lenders’ Loan To Value LTV. Some lenders allow you to go up to 90% LTV but that percentage often challenges other conditions such as the Loan Amount, Actual Cash Invested, ROI, and Monthly Net Income. If Total Loan Amount is greater than $130,000 and all other conditions are met, we will consider the proportionate increase of Monthly Net Income to determine if the deal makes sense.
There is a very interesting situation that occurs when you refinance value-add real estate opportunities. It’s called “air equity”. This is the difference in Appraised Value or ARV and the total amount of capital invested. For example, you purchased a property for $100,000 and you invested $25,000 in the renovation. Now this property has been appraised for $150,000. “Poof” you just make money out of thin air; $25,000 in air equity. The interesting part is that the air equity, “money on paper”, offsets the down payment required reducing your Actual Cash Invested. In this example, you would be required to have a $30,000 down payment, 80% LTV, for the house that appraised for $150,000. Now you can decrease that amount by the equity you “forced” into the property by completing the repairs and it leaves you with $5,000 Actual Cash Invested. We will target Actual Cash Invested less than or equal to $25,000 but will consider the proportionate increase of Monthly Net Income when all other conditions are met.
Our purpose is to acquire properties that the insurance companies want to write policies on and the lenders want to utilize as collateral to loan money. One way an investment property is attractive to a lender is how well the income covers or “services” the principal and interest payment of the loan. This is called the Debt Service Coverage Ratio DSCR. A standard DSCR value to keep is greater than 1.20.
Goals
Ultimately we want to keep the ROI and Monthly Net Income HIGH AS POSSIBLE; the Loan Amount and Actual Cash Invested LOW AS POSSIBLE. Something called Infinite Return occurs when you can borrow (pull more money out) more money than what you have invested in the property – THIS IS GOOD!
CAP RATE: greater than 7%
Percent of ARV: less than or equal to 92.5%
Return on Investment ROI: greater than or equal to 12%
Total Stacked Return on Investment: greater than or equal to 30%
Monthly Net (Financed Purchase): greater than or equal to $200.00
Loan Amount: less than or equal to $130,000.00; less than or equal to 80% of ARV; if greater than $130,000 and all other conditions are met, consider the proportionate increase of Monthly Net Income to determine if the deal makes sense.
Loan to Value LTV: less than or equal to 80% of ARV
Actual Cash Invested: less than or equal to $25,000; need an option to see the solution if a larger Actual Cash Invested amount is required (i.e. Cash Invested=$33,000 and all other conditions are met)