OfflineExcellent advice from Dean on that video.
I'm confused on one bit though.
I'll illustrate with Dean's numbers:
Say I buy a property with hard money: $75k loan. I pay $50k purchase and $25k rehab. FMV is $100k. All fixed up the property can rent for $1400/month. Here is my confusion:
If I get an 80% LTV, 5/1 ARM commercial loan from a 1-month season bank at 5% interest like Dean says then the principle and interest on that loan comes to $1,509/month. That is negative cashflow rent of -$109/month. And that is before taxes and insurance.
This particular property would be purchased at 50% FMV. I don't see how money can be made with this strategy. I must be missing something. Can someone please explain?
Kind regards.
Caz
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Let me explain how an arm works. It looks like in your calculations you are figuring that you are paying off the loan in 5 years, which is not the case with an arm. In a 5/1 arm your payments are still amortized over a 30 year period. The first 5 years your are locked in at a set interest rate, (for Dean that is 5%). After the 5 years is up the interest rate becomes an ajustable rate mortgage which means the interest rate can change on a regular basis for the next 25 years the mortgage is out.
So my calculations in this example comes up with the payment for the first 5 years at right around $430 + taxes and insurance.
Hope this helps.
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Eroberts - Thank you!
Your explanation makes perfect sense. Dean was also gracious enough to explain how the ARM term works in the comments section of the #211 weekly blog on bottom of page 4. What a generous guy. You both made my week with your clarifications. I now see the profitablility of $301, which is a wonderful 27% ROI on a 20-year term 5/1 ARM; a no-brainer pursuit. The hunt is on again!
Eroberts you are right: I misunderstood the 5/1 ARM to mean 5 years * 12 Months = 60 months payback term. Thanks to Dean and the coaches here much for your priceless advice and generous guidance. I watched Dean's weekly wisdom video #211 at least 5 times (from the mid-section) because it was so rich with powerful, useful, and empowering information!
Take care!
Thanks a bunch!
One thing to add though on the hard money loan (HML): you mentioned $50k purchase, $25k rehab = $75k HML.
Keep in mind the lender is still going to require some kind of downpayment and usually 6 months reserves cash in the bank to make the payments. In addition, they want to make sure if you go over budget on the rehab, you have funds to finish it.
- Tom
I found a commercial lender offering 5 year or 10 year ARM with 10 or 20 year amortization. Just out of curiosity, does Dean use the 30 year amortization with 5/1 ARM, or a shorter period of amortization?
Thanks!
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