First Time Rental Buyer

I’ve heard it many times that rentals are great way to become successful in RE investing. Can you help me decide if this a property that I should be looking at (I’m not sure how to figure out what interest, I’ll be paying, but have a good idea of everything else. Here’s the Scoop:

Property listed at $52,000 - FMV should be around $70,000
Needs $5,000 - $7,000 in repairs

Could rent out at $650 per month - (Normal rent is around $700 /mo, but I want to make sure it’ll rent).

Taxes will be around $2,200 per year.

How would you assess this situation? (this is my first year at investing - have done a few rehabs)

To be conservative we’ll say that you’ll need a loan of $58,000

A loan of $58K (30years, 8.0% interest) is a monthly payment of around $425

You say it will rent at $650, real world operating expenses say that 45%-50% of your rent go towards expenses and the rest of the rent is used for mortgage/your pocket. This give you your cash flow.

$650 / 2 = $325

$325 - $425 = -100 NEGATIVE CASH FLOW

Doesn’t seem like a good deal to me.

What is the vacancy rate in your area?  What is the unemployment rate?  What kind of repairs does the property need?  Can you do the repairs yourself?  Is the property a nice place in a bad neighborhood or a fixer in a good neighborhood?  What is the histroic appreciation in your area?  Are there government subsidized housing programs that will increase your rental income?  Are there developers in your area and are they flooding the market with low cost homes and/or rentals?  I believe that you should develop a strategy that uses leverage, appreciation, depreciation or cash flow or any combination of those things, and make sure that your strategy is appropriate for your area and situation.  A good rule of thumb is to have 6 months of principal, interest, taxes and insurance in reserve capital.  Consult a real estate professional who specializes in helping investors in your area, they should know the important points to examine.  Always have multiple exit strategies (ie sell, rent, refi)
                                                          Good Luck

Serio is right. This is a terrible deal for a rental. Cash flow is king for rental properties. If your plan is to have one or two rentals as a hobby and you can afford to lose money, then so be it. However, if your goal is to actually run a rental property business, then buying properties that lose money is a very bad idea.

In almost every area of the country, it is almost impossible to buy properties at or near retail and then rent them at a profit. That is the problem here. You would be buying this property at 84% of retail, which is too much.

I also agree with Funder that it is critical that you KNOW your market.

If your goal is to be successful in the rental property business, you MUST find properties that cash flow. This one won’t do it!

Good Luck,


So if I can analyze this situation a little more. I need to buy a rental that’s FMV at $63,000 for $44,000. This will allow me to have a break-even cashflow, if I rent it out at $650 (this is still not a good deal because I only breakeven). If I can have the rent at $700 - is it a good deal then?

I know the appreciation value for last year was 13%, but now with the economic downfall I’m not sure what to expect…maybe a surplus of homes that I can buy cheap in the near future.

Currently in this area, I typically can’t find a home on the MLS under $75,000. This home would be a breeze to sell at $80,000. So would it be better to flip this home or try to do an assignment.

I’m trying to figure out these exit strategies, but would love find a home to hold for the cashflow.

THanks for your input. In the last two weeks, I’ve learned so much from all of you. Mike, thank you for your pure honesty!!!

You actually need to buy it for $40,000 because you say you need about $4000 or $6000 in rehabs.

If bought 70% below market the bank will actually loan you 100% of the price plus the rehabs.

Therefore we take a loan of $44,000 (30 years at 8.0% interest)

The monthly payment would be $323
The rent would be a $700

$700 / 2 = $350
$350 - $323 = $22 positive cash flow

Personally I like to have a minimum of $100 of positive cash flow per house/unit.

Serio - How often do you find these deals that give you $100+ per month. I just wonder how many of these deals I am passing up or if it really does take alot of time. Is there any way of making these deals seem more recognizable or finding more possibilities?

Actually I’m 18 years old and haven’t bought a property yet, I just know how to calculate cash flow and have read a lot. I got my criteria for buying properties from propertymanager and I read his book.

You can also negotiate with your local bank to get a lower interest rate.

No, you aren’t just accidentally passing these deals up they take work to find but they ARE there. You just have to know your market and have a good team to work with.


Thanks Adam for your input. I’m glad to see that you are starting at a young age. You have so much potential!


Yes, these deals are out there. It is a lot of work to find them, but that’s what you’re getting paid for.


That kind of tax rate is going to make getting a rental to cash flow pretty tough in that area. Roughly 30% of your rent would be going to pay the tax man…