Practice Real Estate Analysis

At $58K income with $520 in monthly debts, Sarah's back-end DTI should stay under 43%. Running the Affordability Calculator with these inputs shows a Moderate max price around $190K. The Conservative scenario is lower (~$160K), giving her more breathing room.

With a 680 credit score and only $12K saved, FHA is the best fit. It accepts 580+ credit scores, requires only 3.5% down ($6,650 on a $190K home), and has more flexible DTI limits. Conventional typically wants 680+ and 5-20% down, which would stretch her savings.

On a $190K home with FHA (3.5% down = $6,650), closing costs add another $4,000–$6,500 (origination, title, escrow, prepaid). Total cash needed: roughly $11K–$13K. Her $12K in savings barely covers it — she should negotiate seller concessions or save another $2-3K for a cushion.

Mortgage (P&I on $86,250): ~$603. Taxes: $115. Insurance: $100. Management (10%): $110. Maintenance reserve (8%): $88. Vacancy (8%): $88. Total expenses: ~$1,104. Net cash flow: roughly $0–$100/month. The $8K in deferred maintenance adds to your all-in cost. This is a thin-margin deal.

NOI = $1,100 × 12 × (1 - 8% vacancy) - $1,380 - $1,200 - ($1,100 × 12 × 10%) - ($1,100 × 12 × 8%) = roughly $6,500. Cap Rate = $6,500 / $115,000 = 5.65%. This is below the 7%+ that experienced Memphis investors target.

At $115K the margins are too thin. But at $95-100K (factoring in the $8K maintenance), the cap rate improves to 7%+ and monthly cash flow hits $150-200. The right move is to negotiate down, not walk away — it's a viable rental in a proven market at the right price.

At 7.25% on $285K remaining over 25 years, the new P&I is approximately $2,050/month — a $676/month increase. That's an extra $8,112/year.

New housing cost (P&I + tax + ins): ~$2,050 + $325 + $160 = $2,535. Total with debts: $2,535 + $700 = $3,235. DTI = $3,235 / ($92,000/12) = 42.2%. If we use the full PITI, they're borderline.

Refinancing $285K at 6.5% fixed gives a P&I of ~$1,800 — still higher than the 3.5% payment but $250 less than the adjusted ARM. Importantly, it locks in certainty. They have $95K in equity (25% LTV), so they qualify for good terms. Selling seems premature with strong equity. Doing nothing at 7.25% is risky if rates rise further.

Refinance at 75% of $140K ARV = $105K new loan. You invested $95K (purchase + rehab). Subtract closing costs (~$3-4K), and you get back roughly $101K — meaning only $0–$5K of your original cash stays in the deal. Near-perfect BRRRR!

Mortgage on $105K at 7.75%/30yr: ~$752. Taxes: $150. Insurance: $117. Vacancy (8%): $128. Maintenance (10%): $160. Total expenses: ~$1,307. Income: $1,600. Cash flow: ~$293/month. Solid for a property where you got nearly all your cash back.

DSCR = Rental Income / Total Debt Service (PITIA). PITIA = $752 + $150 + $117 = $1,019. DSCR = $1,600 / $1,019 = 1.57 (using gross rent). With adjustments for vacancy: ($1,600 × 0.92) / $1,019 = 1.44. Either way, this comfortably exceeds the 1.2x minimum most DSCR lenders require.

Offering $215K at 5.5% interest, 30-year amortization with a 7-year balloon. This gives the sellers a better return than CDs (5.5% vs 4.5%), provides predictable monthly income ($1,221/mo), and defers their capital gains. You get below-market financing — bank rates for investment properties are 7.5%+.

P&I at 5.5% on $215K: ~$1,221. Taxes: $175. Insurance: $108. Vacancy (5%): $83. Maintenance (8%): $132. Total: ~$1,719. Income: $1,650. At face value, you're slightly negative. BUT if you negotiate the price to $205K, P&I drops to $1,164, making you cash-flow positive at ~$80/month. The real win is the below-market rate saving you $200/month vs bank financing.

The #1 benefit for the seller is the installment sale tax treatment. On a $140K capital gain, selling outright could trigger $25K-$35K in federal + state taxes. By carrying a note, they spread the gain recognition over years, paying much less in total taxes. Plus they earn 5.5% interest — better than any CD or savings account — secured by a property they know well.

Offer A: $392K - 5.5% commission ($21,560) - 2% closing costs ($7,840) - $8,000 concessions - $550 warranty - $245K mortgage = $109,050 net. Actually, closing costs at 2% of the sale price vary. Using the Seller Net Sheet: approximately $118K net.

Offer B: $378K - (5.5% - 1% credit = 4.5%) commission ($17,010) - 2% closing ($7,560) - $245K mortgage = $108,430 net. Wait — the 1% credit comes OFF the commission, so: $378K - $17,010 - $7,560 - $245K = $108,430. Offer A nets more despite the concessions because the higher price more than compensates.

Offer A nets roughly $5-10K more despite the concessions. The $14K higher price ($392K vs $378K) more than covers the $8,550 in concessions. However, present BOTH net sheets to the seller — some sellers value speed and certainty (Offer B closes in 14 days with no financing contingency). Your job as an agent is to present the numbers and let the seller decide.

A new $235K loan at 7.5% for 30 years: $1,643/month. At 25 years: $1,743/month. The subject-to payment of $1,147 saves approximately $596/month — that's $7,152/year in savings just from the rate difference.

Subject-to mortgage: $1,147. Taxes: $233. Insurance: $133. Vacancy (6%): $117. Maintenance (8%): $156. Management (8%): $156. Total: $1,942. Rent: $1,950. Cash flow: ~$8/month with management, or ~$164 self-managed. The real profit is in the equity capture and rate arbitrage.

The due-on-sale clause in most mortgages allows the lender to demand full repayment when ownership transfers. While lenders rarely enforce this on performing loans (they're getting paid), it's a real legal risk. Mitigation strategies include using a land trust, keeping payments current, and having a refinance exit plan ready.

FHA mortgage on $275K (after 3.5% down): ~$1,784 P&I. Plus FHA MIP: ~$160/month. Taxes: $267. Insurance: $200. Total PITI: ~$2,411. Rental income from 3 units: $2,475. Your effective housing cost: roughly -$64/month (you actually get PAID to live there). Even with 5% vacancy, you're under $200/month.

FHA loans allow 1-4 unit properties as long as you live in one unit. This is one of the most powerful wealth-building strategies for beginners: you get the low down payment (3.5%) AND the rental income from the other units. The rent often covers your entire mortgage.

Once you move out and rent your unit too, you'll have $3,300/month in income against ~$2,411 in PITI. That's roughly $500-700/month cash flow (after vacancy/maintenance reserves) on a property where you only put $10K down. Your cash-on-cash return at that point would be exceptional.

Annual savings: $350 × 12 × 90% = $3,780 in year 1. Net cost: $19,600. Simple payback: $19,600 / $3,780 = 5.2 years. With 3% annual rate increases, the effective payback is even shorter — roughly 4.5-5 years. After payback, it's essentially free electricity for 20+ years.

Studies show solar adds approximately $4,000 per kW of installed capacity. For a 10kW system: ~$40,000 in added home value. Even at a conservative estimate of $2,500/kW, that's $25,000. You invest $19,600 net and gain $25-40K in home value — an immediate positive ROI on top of the monthly savings.

With a 5-year payback, 25-year warranty, and $25K+ home value increase, buying outright is the clear winner IF you have the cash. Leasing/PPA provides savings but you don't own the system or get the value increase. Waiting is unlikely to beat the current 30% tax credit (which steps down after 2032). The math strongly favors buying now.

Capital gains tax: $180,000 × 23.8% = $42,840. Depreciation recapture: $98,182 × 25% = $24,546. Total tax: approximately $67,386. That's money that could be working for you in the replacement property instead.

To defer ALL gains, the replacement property must be equal to or greater than the sale price ($450K). Since the $680K apartment exceeds this, you can defer 100% of the taxes. You must also reinvest all net proceeds (not just the equity) into the new property.

After selling, you have 45 calendar days to identify up to 3 replacement properties (or more under certain rules) in writing to your Qualified Intermediary. You then have 180 calendar days from the sale to close on a replacement property. Miss either deadline and the exchange fails — you'll owe the full ~$67K in taxes.

70% Rule: Max Offer = ARV × 0.70 - Rehab Cost. At $225K ARV with $45K rehab (midpoint): $225K × 0.70 - $45K = $112,500. Add in a 15% unknown reserve on a $110K purchase ($16,500) and your all-in would be $171,500 — still well within BRRRR refinance range.

Purchase: ~$110K. Known rehab: $45K. Unknown reserve (15% of purchase): $16,500. Holding costs (4 months): $6,000. Closing/financing: $5,000. Total: approximately $182,500. This exceeds your $120K capital — you'll need a hard money lender or partner for the difference.

The spread between all-in cost (~$160K) and ARV ($225K) provides a healthy 29% margin. Even with a worst-case rehab ($60K), your all-in is $185K against a $225K value. The risk is real (no inspection), but the 70% rule provides adequate cushion. Stay disciplined at $110K max — above that, the margins get too thin for the risk level.

With property #5, new PITI is ~$1,610 (P&I on $180K at 7.25% = $1,228, tax $200, ins $150, + 25% of rents don't count as qualifying income). Adding to $2,800 existing debts = $4,410+. DTI = $4,410 / $10,417 = 42.3%. This is just under the 45% max for investment properties, but borderline. Strong credit (745) and reserves ($85K = 6+ months PITI) are the compensating factors.

DSCR = Gross Rent / PITIA. PITIA at 7.75%: P&I on $180K = $1,290 + Tax $200 + Ins $150 = $1,640. DSCR = $2,100 / $1,640 = 1.28. This exceeds the typical 1.2x minimum. The property qualifies for DSCR lending independently of the borrower's personal DTI.

While conventional offers a lower rate, the borrower is at their DTI limit with 4 existing mortgages. Adding property #5 conventionally would require perfect documentation and compensating factors. The DSCR loan at 7.75% qualifies based solely on property income (1.28 DSCR), keeping the borrower's personal DTI clean for future conventional purchases. The 0.5% rate premium is worth the flexibility.