#2. So many investors go into a transaction without fully estimating the impact of the financing they are using. You have to model your transaction out for a minimum of four months. Here are several items investors forget to put in their cost analysis:
- Property Taxes. This is a daily expense. Make sure you consider it while a house sits vacant. On a $100,000 in Dallas County, this can cost you upwards of $8 per day. If you are planning to hold the property long term, I highly recommend calling Dave Aarant to protest the taxes.
- Back end points/prepayment fees. Make sure you understand how you lender is structuring your loan. There really isn't much you can do about how a lender structures their transactions, but you must understand it in order to accurately forecast your profit.
- Utilities. This is another silent expense that can “eat your lunch”. Make sure you account for it.
- Closing costs. When you get the GFE/Term sheet from your lender, really take a look at it. Many of these will project what your fees are. If you are paying points on a loan, you can almost always count on the fees totaling about 1% more than the points.
I recommend you have a spreadsheet to project your profit. Make sure the following lines are included:
Purchase Title Fees
Purchase Lender Fees
Real Estate Commissions
Use this spreadsheet to calculate profit, not LTV. The purpose of all of this is to make a profit, and a LTV isn't always the best way to decide if a house is a good deal or not.