Roofstock Property Purchase Day 14: Getting Loan Disclosures
After about two weeks into contract, I took a look at the numbers again and realized that the they were not looking good after plugging in the actual quotes that I was receiving. I contacted Roofstock with my new findings in order to let them know that this didn't seem like it would be a good fit anymore. I wanted to give them early notice so that we could save everyone time and money. They arranged a call to discuss and figure out exactly what was going on before taking any action. During that call, I was happy to find that I made a dumb accounting error in my calculation (was double counting an expense). Now all of the sudden the numbers were looking good again! But wait!...the next day I received my first loan disclosure. After reading through it I was a bit surprised. My rate was 5.75% and my closing costs totaled up to be around $9k! This was a huge surprise to me and totally threw off my numbers for this property. The property was now once again looking mediocre. Talk about a roller coaster.
Why was this happening? With such a low purchase price and down payment, anything that effects the initial investment has a huge impact on Cash on Cash returns. Reducing closing costs or expenses has a much bigger impact on Cash on Cash return than proportionally reducing the actual price of the property (due to leverage). You need to be careful there, though, because many closing costs can be tax deductible (see this article), so sometimes it is not worth trading closing cost for total cost.
Next, I contacted my loan officer to get clarification. During this call, I learned a lot:
The bank conservatively takes into account all possible closing expenses
They add in much of costs that I had already taken into account (for example first 6 months of insurance, taxes for 6 months, etc). In other words, these were being double counted in my calculations
There was a sales tax that was several thousand dollars, but I found out that the seller was actually covering that cost (as is traditional, or at least most of it)
The rate of 5.75% is higher than I expected because the property is a duplex and not a SFH. This is a national rate that this bank has little flexibility on. I could have shopped around to find more aggressive banks, but the difference here did not seem worth the time for me.
After clarifying what would or would not be in the actual closing cost, I was able to see that the actual closing cost was going to be closer to $3,500. I plugged that into my spreadsheet and boom, we're back in business!
At this point, my cost structure was as follows:
I'm looking at a healthy 10% CoC with $270/month in passive income. A few more of these and I'll be on my way towards a nice chunk of change in my pocket passively.
One thing to note here is the Recovery Point. This is the time it would take me to get my initial investment out and be able to put it back to work elsewhere. That's the true way to scale and grow an investment quickly. Ideally I could have something that returns in 5 years. This does not take into account the fact that:
That money will be accruing monthly, not all at the end, and I will be leveraging that money elsewhere for growth (whether that's in stocks or another property; we can go through that math at another time)
There will be appreciation involved that will hopefully allow me to refinance and pull the additional needed cash out that way
With all of those combined I expect that I'll be able to have my total investment back within a 5-7 year time frame.