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TraineeInvestor:
Sounds like a very good strategy if you can do it.

Jim Day:
I have used a few different lenders. My first loans were with a large mortgage broker through offices in my home town. Through them the rates weren’t great but they definitely got the job done. Recently, I used a national bank who I’ve had checking and savings accounts with for several years. For future loans I will try them all again and go with the best. I would recommend that you shop around as soon as you have the first bank run a credit check. You have roughly 2 weeks from the first check to do all your shopping without an additional tick on future credit reports. Have 5-10 places run your credit and tell you what they can offer. The interest rates are higher for investment properties, but it can be done.

Also, it is important to find a market where home prices are reasonable compared to rent, which certainly isn’t everywhere. You want to make sure that if you buy a place and put down 10%-20%, your mortgage payments will be covered by the rental income. If your expected cashflow is very negative, then you should probably look elsewhere. You could also try putting more money down if possible (like TraineeInvestor), because this will lower your mortgage payments. If you would like to discuss more specific numbers, email me at landlordshmandlord AT gmail DOT com.

Christina:
I can’t tell you exactly what to do, but I can offer a few thoughts.

Pros: 1) I am typically a fan of buying and holding if you can, but it does have to make economic sense. 2) For the most part, I do believe that rents are going to go up as the real estate market continues to soften, it is a matter of how quickly. This will close your gap over time (hopefully in the next few years). 3) If property rates go up on average 3% over the next few years, you’ll make pretty good money. If they go up 5%, you’ll make very good money. What do you think is going to happen? 4) Will you ever move back? If yes, then that could be an added incentive to hold it so that you’ll have a place and won’t pay the closing costs twice (first to sell this, then to buy later). 5) How much of your mortgage payments are going toward principle? Whatever that amount (probably around $200 now) is basically money that you’re putting in the bank each month (from the $500).

Cons: 1) You are only getting 75% of your cost (not counting vacancy and maintenance), which is low. 2) Assumptions about rent increases or property value increases could be wrong. 3) You could find a better use for this money, either in real estate elsewhere or in a different investment. To figure out how much you’ll have to invest, you must remember to include closing/transfer costs (like any local transfer taxes).

I don’t know what the market is like in Honolulu, how much is the place worth today? Let me know if this helps or if you have any additional questions. I would also recommend making a spreadsheet to project where you’ll stand economically if you hold it through next 30 years. Make each row a year, and make sure to include property value at a certain appreciation (try 1%, then 3%, 5%, or whatever else), mortgage that reflects payments made each year, your current equity, estimated yearly income, estimated yearly expenses (including vacancies), and your net (equity - money spent). I have one made, email me and I’ll send it to you.

In your last tip you write about being honest on the loan applications at the bank. I’m curious, do you do all of your financing through your local lender? If so, what kind of rate are they do they generally offer?

I’m just getting my feet wet with landlording and from what I’ve read so far, it seems that it’s just too difficult to make a profit after the banks gouge you with ridiculous interest rates.

I’d really appreciate any insight.

The only difference is that I have opted for floating mortgage rates because (i) long term fixed rates are not generally available in Hong Kong and (ii) the medium term (1-5 year) fixed rates are hugely more expensive than the floating rates. So far it has been the right strategy.