Understand your financing

by Tim Herriage

Understand your financing

by Tim Herriage

by Tim Herriage

#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:

  1. 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.
  2. 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.
  3. Utilities.  This is another silent expense that can “eat your lunch”.  Make sure you account for it.
  4. 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 Price
Rehab
Purchase Title Fees
Purchase Lender Fees
Interest Carry
Insurance
Utilities
Property Taxes
Seller Contributions
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.

Tim

 

Tim Herriage
DFWInvestors.com
tim@new2020rei.wpengine.com
214.607.1227

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