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#459707 - 11/08/17 12:52 PM How invest with 15% interest rate
waka Offline
Junior Member

Registered: 11/08/17
Posts: 9
Loc: Sri Lanka
interest rate in my country for a mortgage loan is 15%. I found a great deal for a buy and hold property. But with a down payment of 20% and a 30 year mortgage loan it will take 2-3 years to obtain a positive cache flow. What should I do? I only have a capital to pay the 20%

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#459709 - 11/08/17 01:30 PM Re: How invest with 15% interest rate [Re: waka]
Long Walk Online   content
Member

Registered: 06/27/08
Posts: 118
Loc: New Hampshire
Originally Posted By: waka
interest rate in my country for a mortgage loan is 15%. I found a great deal for a buy and hold property. But with a down payment of 20% and a 30 year mortgage loan it will take 2-3 years to obtain a positive cache flow. What should I do? I only have a capital to pay the 20%

Do you mean that you don't have cash saved to make up the monthly shortfall while the property operation is stabilizing?

Are you saying that you can't get that money on a monthly basis to make up the shortfall?

What makes this investment so good as a 'buy and hold' if it can't pay for itself?

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#459711 - 11/08/17 02:17 PM Re: How invest with 15% interest rate [Re: Long Walk]
waka Offline
Junior Member

Registered: 11/08/17
Posts: 9
Loc: Sri Lanka
I have cash saved up for the monthly shortfalls. But to get a significant cash flow i will have to wait for at least 2 years. Are you suggesting that in this interest rate it is preferable to do a buy and sell deal? Or should i wait for 2 years for the cash flow to improve?

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#459712 - 11/08/17 02:21 PM Re: How invest with 15% interest rate [Re: waka]
Long Walk Online   content
Member

Registered: 06/27/08
Posts: 118
Loc: New Hampshire
Nobody could answer that question without knowing why you think this property is a great 'buy and hold' property.

If the property is so good, why would it be available in 2 years at the same terms being offered today? Wouldn't someone else buy it in the meantime?

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#459713 - 11/08/17 02:51 PM Re: How invest with 15% interest rate [Re: Long Walk]
waka Offline
Junior Member

Registered: 11/08/17
Posts: 9
Loc: Sri Lanka
It wont be available in 2 years. What i meant was the two options whether to keep renting this house for 2 years with a very little cash flow or to buy and try to sell it. What I am really worried is that with a 15% mortgage loan interest rate how I will ever be able to have success in real estate investing.. The only option I see now is to save for another couple of years and build a big capital.

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#459714 - 11/08/17 02:55 PM Re: How invest with 15% interest rate [Re: waka]
Long Walk Online   content
Member

Registered: 06/27/08
Posts: 118
Loc: New Hampshire
I think I am beginning to understand.

In 2 years, either you will get a new tenant paying a much higher rent or you will significantly cut some major expense. Is that right?

Is the mortgage interest rate fixed or variable?

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#459715 - 11/08/17 03:18 PM Re: How invest with 15% interest rate [Re: Long Walk]
waka Offline
Junior Member

Registered: 11/08/17
Posts: 9
Loc: Sri Lanka
Fixed. I recently read a book by Gerry Keller. It had a model for building a real estate portfolio. But it was based on a 4% mortgage loan interest rate. I have no idea how to do that with 15%. Should I abandon real estate investing?

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#459716 - 11/08/17 05:08 PM Re: How invest with 15% interest rate [Re: waka]
Long Walk Online   content
Member

Registered: 06/27/08
Posts: 118
Loc: New Hampshire
Real estate investing is the same everywhere. Either: 1) you like a property because of it's cash flow. Or, 2) you see a way to improve value through repairs or additions, subdividing, or increasing cash flow. Or, 3) you like a property because it is under-priced for the current market or you anticipate that its value will go up later. That is it.

How you evaluate a proposed investment is based on those 3 options. Interest rates are not relevant so long as you like the story of the investment and can afford it.

So, would you please tell us what makes this such a good 'buy and hold' investment? Also, tell us what it is about how interest rates factor into your analysis.

Otherwise, we can't be much help.

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#459719 - 11/08/17 10:49 PM Re: How invest with 15% interest rate [Re: Long Walk]
waka Offline
Junior Member

Registered: 11/08/17
Posts: 9
Loc: Sri Lanka
There is a university being built in the area. So after a year or two there will be a huge value addition for the house. I cant pay fully for the house. so a down payment and a loan is the only alternative. These are the numbers I got..
for the first year
purchase price 5200000
down payment 20%
interest rate 15%
loan term 30-years
purchase cost 1%
gross rent 40000
vacancy 1%


internal rate of return (-33.50%)
return on investment (-33.50%)
cash on cash (-14.30%)
cash flow (-156010)
cap rate 8.90%


Edited by waka (11/08/17 11:08 PM)

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#459724 - 11/09/17 04:46 AM Re: How invest with 15% interest rate [Re: waka]
Long Walk Online   content
Member

Registered: 06/27/08
Posts: 118
Loc: New Hampshire
Thank you for sending this information.

1) Cash flow: we need your Net Operating Income (this is before your mortgage payments).

2) What reversion are you estimating in calculating your Internal Rate of Return?

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#459725 - 11/09/17 09:53 AM Re: How invest with 15% interest rate [Re: Long Walk]
waka Offline
Junior Member

Registered: 11/08/17
Posts: 9
Loc: Sri Lanka
net operating income = 475200
loan payment = -156010
IRR=(1+ROI)^(1/Number of years-1)

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#459733 - 11/09/17 08:06 PM Re: How invest with 15% interest rate [Re: waka]
Long Walk Online   content
Member

Registered: 06/27/08
Posts: 118
Loc: New Hampshire
Assuming your NOI is correct, your actual cap rate is 9.13%. Do single-family homes generally sell by cap rate or by some income multiple in Sri Lanka? In the US, the income multiples are usually treated as more reliable for single-family.

You gave this information:

Gross Rent = 40,000 (I think you are giving a monthly rent. Annually, the potential gross rent would be 480,000)

NOI = 475,000 (this amount does not include any expense except the 1% vacancy factor -- is this right?)

ADS = 156,010 (I think you gave your Before Tax Cash Flow (cash-on-cash) in place of Annual Debt Service) (your stated terms: 15% interest, 30 year amortization, 80% LTV on 5,200,000 purchase price) The problem is that the monthly payment at these terms is 52,600.87 (annual debt service would be 631,210.46)

Assuming my debt service is correct, your cash-on-cash return would be:
EDR = BTCF/Down Payment = (475,000 - 631,210)/1,040,000 = -15.02%

Your projections only show one year of operation and do not include a reversion value, which is the cash you receive when you sell the property. So, I can't make sense of your IRR rate. That rate is the discount rate that makes the NPV of the investment = 0. Without knowing the cash flows for the years in your discounted cash flow (including the reversion), I can't reconstruct your IRR calculations.

From what I can see, this property is going to eat cash. What do you expect to sell the property for in the future that will make that loss worth it to you? How many years in the future will that sale happen?


Edited by Long Walk (11/09/17 08:08 PM)

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