Author Topic: Good idea to buy this property? Quick analysis needed, not complex  (Read 3619 times)

BryanR

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Hi everyone,

I'm getting a lot more comfortable in the stock market, but I'm new to real estate investing.

Quick question - is this a good idea or a bad idea?

I'm looking at buying a property with 25% down, and given the amount it could be rented for, the monthly cash flow will only be approximately $150 positive. The property is around $100,000. Is it worth buying with only $150 / month positive?

I did factor in a maintenance reserve of $140/month, which may be high, so the actual positive cash flow may be more than $150 positive. On the other hand, it seems to me that house fixes add up fast, and could easily run $1700/year. I am not in a position to do most of the work on the house myself, as I'm too involved in other things.

Right now I have a brilliant stock market mentor who is a multi-millionaire and is regularly getting 15% return in the stock market, and he's teaching me how to do it, and it's going really well so far, but even he admits readily that the stock market can be risky, and so that's why I'm wanting to turn to real estate - to diversify.

Still, though, I just cringe at the idea of paying repairs, closing costs, and other fees involved in real estate. Also the potential vacancy factor -- all of this just have the potential to KILL the returns!

The goal, though, seems sound - I am 33 years old and with a 30 year mortgage on this rental property, it would be throwing off $150/month positive until I'm 63 at which time it would be paid off and I could sell it or just use the rental income to live off.

Ok, so, any thoughts? Thanks.





gooki

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Re: Good idea to buy this property? Quick analysis needed, not complex
« Reply #1 on: June 28, 2012, 03:07:56 AM »
Is it positive with 0% down?

Does the property appear to be a low or high aintanance type?

What's the potential for capital gain?

Have you factored in interest write off an depreciation into your figures?

Will you be the property manager?

Is there demand for rentals in that area? Is the city growing or shrinking?

What other property options exist?

Assuming best case scenario, I'd do it. But I live in a city where it's impossible to be cash flow positive on rental property, and one has to purely rely on capital gain to make any real money.

grantmeaname

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Re: Good idea to buy this property? Quick analysis needed, not complex
« Reply #2 on: June 28, 2012, 06:07:24 AM »
The rent has to cover the mortgage, vacancies, nonpayment by occupants, property insurance, your time to manage the property, maintenance, major upgrades, and property tax. It seems like when you figure in all of that, you're looking at a really, really skinny margin or maybe a negative one. Maybe it would help to put up all of those numbers and compare them to the rent you think you could charge.

kolorado

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Re: Good idea to buy this property? Quick analysis needed, not complex
« Reply #3 on: June 28, 2012, 07:30:23 AM »
With that kind of margin I'd base my decision more on how fast your area is growing. If the area is growing moderately fast, housing costs will go up too. And that means your profit margin will go up. I *believe* rent goes up with inflation but most of your expense as a landlord will not.

Another Reader

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Re: Good idea to buy this property? Quick analysis needed, not complex
« Reply #4 on: June 28, 2012, 07:34:20 AM »
If you are not willing to do the "complex analysis," you should not buy a rental and become a landlord.  Use the 50 percent rule of thumb for your "quick analysis" - assume all of your expenses, including vacancy and collection loss, taxes, insurance, maintenance and capital improvements will consume 50 percent of the rent.  What is the return on investment under that assumption?  Also, how will you manage the property?  Property management typically costs 8 to 10 percent of the collected rent.

Most beginners don't do the necessary math and end up with an alligator property, one they have to feed every month.  Why not team up with a successful real estate investor before you write any checks?

arebelspy

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Re: Good idea to buy this property? Quick analysis needed, not complex
« Reply #5 on: June 28, 2012, 07:36:17 AM »
You didn't give nearly enough information for a proper analysis.

If all your calculations are correct and you didn't miss any assumptions, sure, 150/mo is enough cash flow.  Many professionals shoot for 100/door.

But as the above posters mentioned, there's a lot of things to factor into a calculation like that.

Main key info needed: what will it rent for? any hoa or other unusual expenses? what are the taxes?
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BryanR

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Re: Good idea to buy this property? Quick analysis needed, not complex
« Reply #6 on: June 28, 2012, 10:59:20 AM »
I wasn't clear in my original question. I CAN do the complex analysis, and I have done it. I have a degree in finance, am a licensed real estate agent in my area (although that's not what I do for a living - I own a publishing company). My family has been involved in real estate investment for years (my dad), but he has only done so-so with it, which is why I'm bringing this to the Mustachian community.

I was indicating this as a simple analysis to save YOU GUYS time, I didn't want to draw you into the whole thing. OK then, I guess I can't avoid that, so see attached spread sheet :-)

I would be managing it myself and paying a professional $500 to get a tenant in there.

The area is a 45 minute drive from where I live - where I live, prices are way too high (Lake Tahoe) and there's no way to break even unless you put 50-70% down.

The area where I'd be buying is growing moderately well but like most areas recently, has been hit by the recession.

See attached spreadsheet.