Should I Buy a House Rich Dad/Poor Dad Style?

[lifejoy]

Tempted to buy a home. Well actually, tempted to acquire a mortgage.

However, I'm 10k in student debt. The house is gorgeous and in a prime location, and I feel like $250,000 is a steal. I could buy it, rent it out, and sell it one day! Judging by similar houses in the same location, I could rent it out for $1500-1700/month. Easy peasy, right? Ha. I know it's not that simple.

I'm not completely crazy - I am almost certainly NOT going to buy this house. But I think back to when I read Rich Dad, Poor Dad... and I think, why am I not buying this house?

I know I'm being nuts here. But I'd be interested to hear some thoughts :)

[Another Reader]

You would not be following a fundamental tenet of the RDPD philosophy.  The return on this property is very poor.  Using the 50 percent rule, even at $1,700 per month rent, yout net income would be $850.  Free and clear, the cap rate would only be 4.1 percent.  You would not benefit much from leverage even if you could buy the property with owner-occupant financing.  Unless I was buying a $400,000 house for $250,000 and I could sell it for $400,000 the day after I bought it, I would pass on this investment "opportunity."

Before you buy any investment, especially investment property, you should understand what you are buying.  Reading RDPD will not educate you on buying and operating rentals.  Arebelspy has a list of good books on real estate investing in another thread.  Read those, join an investors' association, and learn about real estate before you reach for your checkbook.

[lifejoy]

Hey, great advice! Thanks :)

I think I let my emotions take over when I see a gorgeous house... and suddenly I can hear it saying "buy me! buy me!"

Haha thanks for letting the voice of reason break through.

[arebelspy]

I probably would not do anything "rich dad" style.

But I agree with everything AR wrote.

Getting into real estate is a good move, IMO (but I'm quite biased on the topic), even if you have 10k in student loan debt (which is not that much).  Getting into that property, unless you're planning on flipping it using conservative numbers (aka market value better be about 360k with little to no repairs needed) is not a good idea unless you have a crystal ball on appreciation in a given area.  The numbers are bad for a rental in terms of ROI.

Start your learning process now, so when the opportunity arises you'll have the knowedge to take advantage of it, instead of going out there and stepping into a big mistake.

Best of luck!

[MountainMan]

In the meantime, you might consider putting your money into a REIT mutual fund while you learn about investing directly in real estate.

[arebelspy]

In the meantime, you might consider putting your money into a REIT mutual fund while you learn about investing directly in real estate.

I probably wouldn't do that.  REITs are very different than individual real estate holdings, and are much more similar to a weird stock/bond that is much more aligned with the way the market moves, and is often quite sensitive to interest rates.

Figure out a portfolio Asset Allocation aside from your real estate holdings (often with a REIT taking up anywhere from 0-10% of that, typically 5%) and go with that asset allocation.... Don't overweight REITs because you can't afford a rental at the moment, IMO.

Of course YMMV, and everyone's investing preferences are different.  Do your homework, yadda yadda.

[mpbaker22]

Can someone explain what is considered a good cap rate (maybe that's dependent on the local market)?
Being mathematically inclined, I've been developing my own analysis, but maybe it's better to use ratios already known.

[Another Reader]

Cap rates vary with the market and property type.  The overall capitalization rate is a snapshot.  It's the ratio of the anticipated first year net operating income divided by the anticipated purchase price.  You can also do a full scale DCF analysis over some period of time, using a yield rate.