Money Matters:: A different approach

Money Matters with Barb Van Stensel

Buying a home is the best option out there right now for anybody who is renting or thinking about having an investment property. Right now, one of my investors got a rate from his preferred lender that he really believes that there is a much better deal out there. He was looking at a 30 year mortgage.

This got me to thinking because I prepared an Operating Statement as I do for all my 2-4 unit Chicago homebuyers and investors, that just maybe this buyer/investor is missing something totally.

First, the Operating Statement shows the gross rent minus the vacancy percentage and that gives you the "Effective Gross Income".

Then I added the projected expenses for the next 12 months to this report, that includes casual labor as most of you don't think about it! Casual labor is like interior decorating, general maintenance and reports and supplies needed for the building.

The biggest part that most buyers or new investors do not consider is "The Replacement Reserve Schedule". (I will discuss that in another post this week, so stay tuned.)

So, bottom is, after we looked at the great monthly cash flow, the monies going into the Replacement Reserve Account, that got me wondering all because of a rate that this investor/buyer didn't like.

So, I was talking to Gene Mundt, here in Chicago who is with ChicagoBankcorp and ran the idea by him to see if it was to my client's advantage to do a 30 year fixed rate on this building.

See, the numbers that kept coming up i paid interest in the first two years on the 30 year rate was roughly $9,720 and the interest paid on a 15 year fixed rate mortgage was only $5,220. So, my client's cash flow would roughly be $150 less each month on the 15 year loan but the interest paid would be significantly less.

Here's the point that most are missing:: It isn't about paying less in the interest as it is more about "could you use that extra $4,500 in interest savings to do some work on your building? Better yet, the question that came out from my conversatino with Gene today was:: "What do you need that cash flow money for from a 2-3 unit building here in Chicago?

That's the question for today: What do you need that cash flow for from a 2-3 Unit Building in Chicago?

See, if you were buying the building and wanting to deconvert it down the road to a Single Family Residence, wouldn't it be to your advantage to pay off that mortgage faster then have the cash now because interest on savings isn't that great yet. Shoot, you'd only be loosing $1,800 or so from your cash flow each year and still have money coming in. So, let's say in 5 years, you want to deconvert that Chicago Two Flat into your permanent residence? According to the amortization schedules I pulled form the MLS, you'd be 1/3 your mortgage and with your down payment, you would have that loan probably paid off in half of the purchase price. We will have adjusted here in Chicago re market as it is a "cycle" and you'd have roughly "x" amount in savings from your cash flow which you could put towards your renovation/rehabbing costs, plus take out a loan to make that two flat your new single family residence..... it really makes "cents".

See, when buying a property, it isn't always about "i like, I like, I like" but more about the money because it does Matter!