r/NJHomebuyers

One of the biggest reasons people decide to keep their current house as a rental is because they think they'll make money every month. That's not necessarily wrong, but monthly cash flow is only one piece of the puzzle. If you're trying to decide whether to sell or rent, you need to look at the complete ROI stack (return on investment - I guess I shouldn't assume everyone knows the acronyms).

Let's use a realistic New Jersey example. Your house is worth $800,000 and your mortgage balance is $425,000 (thank you Covid rate of 3.5%). That gives you $375,000 in equity, but you wouldn't actually keep all of that if you sold. After paying a 6% Realtor commission ($48,000), the New Jersey Realty Transfer Fee ($7,305), and about $5,000 to get the house ready for sale, you'd walk away with roughly $314,695.

That's the amount of money you're choosing to leave invested in the property if you decide to become a landlord. Now let's say the house rents for $3,750 a month and your mortgage payment is $3,140. Your monthly cash flow is about $610, or $7,320 per year. Based on the $314,695 you have invested, that's a 2.3% cash-on-cash return.

If that was the entire calculation, renting probably wouldn't look all that attractive. However. the complete ROI stack has three pieces.

Cash flow gives you $7,320 per year, or a 2.3% return. Principal paydown adds another $11,760 in equity over the course of the year, assuming about $980 of each monthly payment goes toward principal. Now your total annual return is $19,080, or about 6.1%.

Then there's appreciation. If your $800,000 home increases in value by 3% over the next year, that's another $24,000 in equity.

Add all three together and your complete ROI stack looks like this:

Cash flow: $7,320 (2.3%)

Principal paydown: $11,760 (3.7%)

Appreciation: $24,000 (7.6%)

Total annual return: $43,080 (13.7%)

Looking at only the monthly cash flow tells one story. Looking at the complete ROI stack tells a very different one.

Of course, these numbers assume everything goes according to plan. In my next post I'll go through the expenses and risks that can change this calculation in a hurry, because that's the part people usually underestimate.

I mean, no one does. It does nothing for you. But that being said, you don't need 20% down to buy a home and that myth refuses to die.

PMI is insurance for the lender, not the homeowner (in case they need to take your home and sell it they can't lose money. Also, just keep paying your mortgage so they don't take your home. Follow me for more great financial advice). The good news is it usually isn't permanent. Once you build enough equity, it can often be removed from a conventional loan.

The next question I usually get is, "How much is PMI going to cost me?" Unfortunately, there's no one-size-fits-all answer. PMI is based on several things, including your credit score, your down payment, the size of the loan, and the type of property you're buying. Two buyers purchasing the same house can end up paying very different PMI premiums. Speaking of two borrowers, having two buying together also lowers your PMI.

The nice thing is you have more control over it than most people realize. Better credit generally means lower PMI. Putting a little more money down can lower it too. Even moving from 5% down to 10% down can make a noticeable difference in some cases. There are also loan programs where the lender pays the PMI in exchange for a slightly higher interest rate. Sometimes that's a good strategy. Sometimes it isn't. It all comes down to the numbers.

Here's why I bring this up. I've had buyers tell me they're going to wait until they have 20% saved because they don't want PMI. That's not automatically the wrong decision, but it isn't automatically the right one either. In New Jersey, where home prices have a bad habit of continuing to climb while you're trying to save, waiting another year or two can cost more than the PMI would have.

That's why I don't like blanket advice like, "Never pay PMI." Sometimes avoiding it makes perfect sense. Other times, paying PMI for a few years gets you into a house sooner, starts building equity sooner, and ends up being the better financial move. If someone tells you that you should never pay PMI, they're giving you a one-size-fits-all answer to a question that doesn't have one. Sometimes avoiding PMI is the right move. Sometimes buying sooner is.

We’re looking at our closing disclosure and noticed a $662 cost for an owner’s title insurance that’s optional? Is that really needed or can I opt out? Do most people opt in?