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All those numbers are sub-optimal. Read other replies to other comments and biggerpockets.com
RE is not unlike any other investment class. Look at the cash you’re paying into the investment and then look at the cash flow as a return. Back of the envelope this is looking like a 9-10% return best case scenario with the 30 year.
Seller will take $260K. I’m putting 30% down. Rental comps $2,100 - $2,400/mo. This home was being rented for $2,350/mo before recently listed.
Considering two options:
15 YR loan @ 3.4% APR
30 YR loan @ 3.75% APR
No buy down on either loan. With rental comps, I should be able to do the 15 yr and breakeven year over year (~$2,000 payments for me), but maintenance will cost something. Obvious advantage is getting the home in 15 years instead of 30. With 30 year loan, payments are $1,600 all in and will generate $600-$800 cash flow per month, but of course the interest over the lifetime of the loan is much more.
I realize there is an opportunity cost here (I could reinvest the $600-$800 in cash flow per month at a higher return). But with that logic, why buy real estate at all? Diversified portfolio? Anyways, I’m torn. If it makes a difference, I have a good amount of liquidity and could fund repairs without the rental cash flow from the 30 year loan. It’s also possible that I might sell the house 5-10 years down the line.
Thank you fishbowl for any and all advice / criticism!
Multiply your rental income by 70% to get a better representation. Taking 30% off covers insurance, property tax, and forecasted maintenance. Based on these numbers you’d be CF negative on the 15 year - income positive, though. I’d go with 30 year. It’s an ok deal for the Texas area
Purely on the loan aspect, take the 30 year fixed. Locking in this all time low interest rate for as long as you can is a win.
Overall, are you sure you're factoring in all costs?
Thanks! Honestly, I’m not expecting to make anything in the first few years except the equity in the house and the hopeful increase in home value as time moves along. I’m too new to expect great returns at this point. Anything in terms of positive cash flow is a bonus. This doesn’t make my return look very desirable, but I’m more interested in maintaining a diversified portfolio than investing more in the market at the all-time-high prices. Time to get this thing leased!
Congrats Op. You have a good perspective on measuring returns.
I generally compare it against the market and savings accounts - somewhere in between - for managing expectations