One of the biggest issues for foreigners buying in the US is the difficulty in obtaining good lending on properties. Even a small amount of gearing can improve returns dramatically, and reduce the amount of money needed for the purchase. Sadly though, in USA right now, often the only options are buying cash, or taking ‘hard money’ lending which can have high interest rates (10-15% at time of writing) and short amortization times (3-5 years typically).
However, I’m happy to say that now we have a lender who offers excellent terms on our properties – Up to 75% loan to value with 10 year terms, 30 year amortization, and competitive interest rates (circa 6-8%). The lending is based on the asset, rather than the individual borrower.
The difference in ROI here is amazing – lets look at a typical example property from our list, 481 17th Street.
The worked example on the link has a net income of $710.40 per month, and a price of $48,000. Lets say there are $1,500 in closing costs, and the house has a ($710.40×12)/$49,500 = 17.22% net ROI per annum. Not bad, bearing in mind there’s the added bonus of capital growth too.
However, lets look at the same house with a 75% LTV mortgage. If we assume a higher rate of 8% interest, and 2% costs added into the loan too, then we’d have a loan of 0.75x$48,000 = $36,000 + $720 fees = $36,720.
You’d invest $49,500 – $36,000 = $13,500
Over 10 years, with a 30-year amortization schedule, you’ll be paying a monthly mortgage of $269.44.
After 10 years, you’ll have amortized the loan down to $32,212.51 – i.e. paid down the fees plus $4,787.49 in capital or $39.90 a month. At this point you could either roll over the finance or sell the house, or even just pay down the remaining mortgage.
So from your investment of $13,500 – you’ll have a monthly income of $710.40 per month, minus the mortgage payment of $269.44 per month, plus the amortization of average $39.90 per month = $480.86 per month income.
In other words $480.86 x 12 months / $13,500 = 42.74% net ROI.
So a typical house jumps from 17.22% ROI to 42.74% ROI with this financing.
However, while this seems amazing on paper, we all know as investors that one variable that we didn’t take into account with this calculation – The inevitable costs of repairs, maintenance, and general wear and tear, which eat into the income from time to time. Lets say for example, conservatively that 20% of net rent should be deducted for repairs, wear and tear, voids etc.
This gives the following, more realistic results:
$710.40 per month – $142.08 per month = $568.32 per month
$568.32 x 12 months / $49,500 = 13.77% net ROI, which in my experience is more typical for a double unit like this.
$568.32 – 269.44 mortgage payments + $39.90 amortization = $338.78 per month
$338.78 x 12 months / $13,500 investment = 30.1% net ROI.
That’s 30.1% return per annum over 10 years, plus the inevitable bonus of capital growth, (the prospects which are good in Buffalo/Niagara Falls, according to Zillow – look under neighborhood/market guide)
Are you an overseas or domestic investor looking to increase the cash flow of your portfolio? Pick any property from our list and go through the 75% LTV example to compare the two scenarios. Questions and inquires are welcome at email@example.com
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