The rules — no pros allowed. Unfair advantage. Robert? That means you, OK? 
OK, here’s tonight’s pop quiz.
Yer buyin’ an income property. 20% down. The lender offers you many choices but recommends the two they think best of the batch. The price is $250,000 The NOI (net operating income) is $19,175. Project a five year holding period. All loans fully amortized. Your primary goal is capital growth.
Wonder why I’m havin’ to analyze a buncha new loans this week?
BawldGuy Axiom: ‘Cuz lenders lend. That’s why. Even now. They have no choice. If they don’t figure out a way to lend? Then they’re not lenders. They don’t like that. So they lend. ‘Cuz that’s what they do.
You have everything you need to make your decision. Which loan is better?
Option #1 — 7.75% interest 30 years 1 point.
Option #2 — 6.75% interest 30 years 2 points.
1. Which loan do you prefer?
2. Why did you pick that loan?
What if, at the last minute, there was a third alternative? 7% interest 20 years 2 points.
Do whatever analysis you think appropriate. Pick a loan and tell us why/how you chose that one.
Meanwhile, back at BawldGuyRanch, we’re analyzin’ some new stuff — loans that is. Separating the talk from the walk is always a challenge when it comes to lenders. Speakin’ of talk, why don’t you contact me and we can do just that. (Pretty smooth, huh?) We already know the loans best suited for each transaction. Have a good one.
Related posts:
- Why Shouldn’t The Real Estate Investor Go With The Interest Only Loan? ‘Cuz
- Why Savvy Real Estate Investors Are Still Closing New Loans
- Subprime Resets AND The Real Estate Investor’s Dream Of A Perfect Storm Is Reality
- The Costs Of Real Estate Investing Are High These Days — Get Over It
- The First Time Real Estate Investor: A Chronology — Part III
About BawldGuy
I must protest. I am not a professional. An attentive amateur perhaps but I know when to defer to real professionals. Oh wait. That last might make some think me a professional. Nevermind, I know when I can’t win. Damn that in itself might be another sign of professionalism.
I give up. After the real answers I have yet another pithy one liner analysis.
OK, I’ll play! I take the 30 year/2 point 6.75% loan. Even though this loan costs $2K more up front, you have added cash flow of $136/month. First, the more cash flow, the more safety. Total cost after five years assuming interest paid, points, principal paid off and balance left favors this loan ($69,583 to $77,685 in total cost)Second, assuming you get 8% on your money you would have $2,980 in an account if you put the $2,000 you wouldn’t have paid in points versus $9,993 in an account if you invested the $136/month at the same 8%.
By the way the third option, has almost an identical total cost after 5 years, but loses big time with the cash flow analysis with a difference of an extra $253/month!
Rule #1, always take the sure bet today. There is no telling what will happen 2-3 or more years from now, so save yourself today’s cash, and go with option #1. Another variable not assumed in this equation is the projected real estate value appreciation.
I always hated the story problems in high school.
Pros can’t play?! No fair Bawld Guy.
)
Maureen — Glad to see ya here. It coulda been worse. What if I’d said, ‘There’s a train goin’ south on track #2 at 55 mph….’
Don’t be a stranger, OK?
Robert — ‘Ban’ on pros now lifted. Let me hear your thoughts, whoever you are.
Also, wanna hear your pithy comment. They’re usually among my favorites of the day.
Who is paying the points?
The buyer/borrower.
I choose option two. Even assuming no interest on the cash flow received from the rental (and no taxes), Loan #2 provides the investor with a slight margin over option #3.
Plus the added safety of cash flow to cover expenses over the life of the rental.
The only reason to even consider the 7.75% loan is if you think interest rates will fall considerably justifying refinancing in less than a year.
1 pt loan $1433.99/mo
2 pt loan $1303.68/mo delta $130.31
At the end of 5 years the 2 pt loan has $2,087.33 extra equity in addition to the extra $4,691.16 in monthly cash flow.
So my answer is take the second loan with two points offered except I’d negotiate hard for one point lower besides.
I think my calculator is broken!? Every time I hit the = button it says, “You amateur, go ask Jeff.”
You crack me up. Thanks