I had breakfast recently with a client (thanks again for the breakfast BM!). We talked about many aspects of real estate investment. One thing that he expressed surprise over was the difference between his return calculations and what I show in my analytics calculations. Apparently, I was having a senior moment because I failed to state the differences between the basis of our calculations. He was thinking 75% LTV (loan to value) and I was thinking a cash purchase. So, in this paper I will discuss the difference between a cash purchase vs. a typical investor 75% LTV loan.
For the following I will use an example property with the following factors:
| Example Property | Cash | 75% LTV | |
| Price | $100,000 | $100,000 | |
| Loan Amount | $0 | $75,000 | |
| Interest Rate: | 6.0% | ||
| Loan Term (yrs) | 30 | ||
| Closing Costs | $2,000 | $3,750 | (Estimate) |
| Monthly Expenses (See Note Below) | |||
| Taxes | $83 | $83 | |
| Insurance | $29 | $29 | |
| Management Fee | $70 | $70 | (Based on Rent) |
| HOA | $35 | $35 | |
| Debt Service | $0 | $450 | |
| Total Expenses | $218 | $667 | |
| Monthly Income | $1,000 | $1,000 | |
Below are the analytics based on the above numbers:
| Return (Financed) | Return (Cash Purchase) | |||||
| Income: | Income: | |||||
| Rent | $12,000 | Rent | $12,000 | |||
| Cash Out Year 1: | Cash Out Year 1: | |||||
| Down | $25,000 | Price | $100,000 | |||
| Closing Costs | $3,800 | Closing Costs | $1,500 | |||
| Taxes | $1,000 | Taxes | $1,000 | |||
| Mgt Fees | $840 | Mgt Fees | $840 | |||
| Debt Service (12 Mo) | $5,400 | Debt Service (12 Mo) | $0 | |||
| Total | $36,040 | Total | $101,500 | |||
| Cash/Cash | 33% | Cash/Cash | 12% | |||
You can see the huge effect financing has on return. Another key metric is NOI (Net Operating Income). Debt service is not included in NOI so there is no difference between financed and cash.
| Net Operating Income | ||
| Income: | ||
| Rent | $12,000 | |
| Operating Expenses: | ||
| Insurance | $350 | |
| Management Fee | $840 | |
| HOA | $420 | |
| Taxes | $1,000 | |
| NOI | $11,000 | |
What is the monthly cash flow difference (before personal income taxes, etc).
| Financed 75% LTV | Cash Purchase | |||||
| Income: | Income: | |||||
| Rent | $1,000 | Rent | $1,000 | |||
| Operating Expenses: | Operating Expenses: | |||||
| Deb Service | $450 | Deb Service | $0 | |||
| Insurance | $29 | Insurance | $29 | |||
| Management Fee | $70 | Management Fee | $70 | |||
| HOA | $35 | HOA | $35 | |||
| Taxes | $83 | Taxes | $83 | |||
| Total | $667 | Total | $218 | |||
| Net Income | $333 | Net Income | $783 | |||
I hope this clears up some of the questions on the differences between cash vs. financed investments.
Note: I did not include multiple factors that must be considered in any real world calculation including:
Contact me if you are considering buying or selling Las Vegas real estate. You will be glad you did.
...Eric
Eric Fernwood
RE/MAX CENTRAL
8400 W. Sahara Ave
Las Vegas NV 89117
Email: EricFernwood@gmail.com
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