Where you buy makes a difference
A property’s market is a major factor in determining risk.
To illustrate, look at an example of rental duplexes that are currently for sale in two completely different markets. Assume we are attempting to buy each with 20% down using a standard 30 year amortizing loan at an interest rate of 5.00%. Expenses include repair reserves, property insurance, property taxes and property management fees.
| Amarillo | Los Angeles | |
|---|---|---|
| Purchase Price: | $115,000 | $379,000 |
| Cash down: | $23,000 | $75,800 |
| Loan Amount: | $92,000 | $303,200 |
| Annual Rent: | $15,000 | $33,000 |
| Expenses: | $5,500 | $13,000 |
| Net Operating Income: | $9,500 | $20,000 |
| Loan Payments: | $5,900 | $19,530 |
| Excess cash flow: | $3,600 | $470 |
Assuming the banks would agree to make these loans, it’s easy to see why the Los Angeles property would be significantly riskier than the one purchased in Amarillo, Texas. The Texas property has a very comfortable amount of cash remaining after its mortgage payment, while the Los Angeles property is projected to have almost no cash remaining (no cash flow). In fact the Los Angeles property’s lower cash flow would prevent it from qualifying for a standard loan without the investor putting substantially more down on the purchase—banks don’t want this level of risk either! An investor would have to come up with another $75,800—a total of $151,600 down—to make this property cash flow well enough to quality for a conventional investment property loan.
Invest Amarillo chose the Amarillo market not only because of the stable demand for quality rental units, but because these properties offer exceptionally strong cash flow. This both reduces the risk and increases the current return rate for our investors. All of Invest Amarillo’s current inventory generates excess cash flow after debt service. See all our properties >>