Hey guys,
First post in this forum. I'm in my early 30s and currently own no real estate. I'm interested in taking advantage of the current low interest rates and leveraged investment that real estate offers.
Unfortunately, I live in NYC so much of the real estate here is not affordable to me. I'm single so I prefer to live in some of the more close-in desirable neighborhoods which I can't afford to buy in. I could, however, afford to buy a property in some of the less expensive (still nice, but family-oriented and further out) neighborhoods and then rent it out.
I haven't done too much research into this yet, but I figure I could buy a $200k - $300k property. My net worth is about $115k right now. It'd be months before I buy so my net worth would be up around $150k I suppose.
Does this make sense at all?
It makes fairly good sense from an investment perspective, if you can get a good rate of return on the property and do most of the work yourself. NYC is not known for cheap plumbers, electricians, or general contractors. I find my margins and cash flow are far better when I can avoid the costs associated with a property management company. This requires that I live close to my investment property, simply to keep an eye on it. Over the years, I've had partial or total ownership of a house, a condo, a duplex, and a 5-plex, all of which I managed as rentals.
Before putting in an offer, figure out what your interest rate would be on a loan. You'll get a lower rate for an owner-occupied home than you will for a rental, so it may make sense to briefly live in the property-- say for about a year-- and then go back to renting. This will give you a chance to fix the place up if you need to.
The other thing you need to do is to run a cash flow analysis. Calculate your operating costs, including property tax, and compare it with your estimated rental revenue. You'll have to guess at some of the expenses, and you'll be high on some but low on others. Do it Fermi style: list as many expenses as you can think of, and make guesses at each. If your sample size is large enough, your wrong guesses will cancel each other out, and your total estimate will be fairly close. When you're done with that, add a 10% contingency. This contingency is not your reserve, or money you save and hope to not spend. It's money you *will* spend, but you don't know on what.
Most rental real estate is cash flow negative before depreciation when there's a mortgage against it: you're putting more money into the investment than the rental revenue covers. After depreciation you can often claim a loss at tax time, but you're still feeding money into the property especially if you've got a vacancy. My former business partners and I called it "tax flow to equity" when the equity in the propert is increasing proportionately with the money you're putting into it. But you should be in a position to expect and afford this kind of spending. You'll also need cash reserves to deal with sudden "oops" factors such as a new hot water heater or emergency repairs.
