Now, i am about to ask a question that i know will get some weird answers like “it depends on your market”; “what your goals are”, etc, etc… But, realistically, what kind of houses are you guys buying?
In the end it all comes down to dollars and cents financing… Are you doing low income homes? Are you doing middle income homes? Bc i cant find any way to make an investment work unless the price is 150K or less… Which angle do you guys go after/ play? Middle income family homes are tough to come by for around 150K in decent neighborhoods…
A 150K mortgage at 7% is around 1000 dollars a month PI… Now you add taxes, and Insurance and your looking at another 200 dollars… So there is 1200 dollars with a potential for 1300 in rent for a 3 bedroom average home…
Granted i can go after ghetto and buy props for 70-80K… I heard some people on here say they buy for around 30K per door… Now, i dont know what market or what your rents are… But, i would say that its pretty safe to say that average rent for a 3 bedroom in the US as a whole is around 1K…
Hi, I’m a newbie around here but have been reading alot, and looking into purchasing my first property as well. I think this is an interesting topic and I’d also like to see what the more seasoned investors have to say.
However, I’m looking away from single family homes right now at least from a buy and hold strategy. As you’ve mentioned, there seems to be a price cap that people will pay for rent. Once someone can afford $1,500 per month in rent, it’s likely they can afford to buy a home in most areas. Because of this, I’ve been looking more at duplexes.
In my area fairly decent duplexes can be found listing around $150,000. Rents range from $750-$950. I’m personally going owner occupied, but I think you can see that the potential might be better even when renting both units. I think in general this type of potential scales with the number of units in a building.
Anyway, most the guys I see around here that buy single family’s are buying distressed, and probably with non-traditional lending sources. That’s why they are able to generate income off them.
I’m currently investing in one midwest market and will be expanding to another midwest market in the next few months. Property values there are very low compared to most other areas of the country. My wife and I are currently looking at some multi-units in the new market, but are also considering cheaper SFH. There are plenty of homes on the MLS for between $12-25K that could rent for $500-600/mo with some rehab. These are basic and smaller homes where about $5K of rehab could go far. Right now we’re open to looking at smaller multi’s (duplexes up to about 4-6 units) as well as mixing in some SFHs as well. I’ll only go for houses where it looks like I can do almost all the rehab myself.
You are right about there being a limit to what you can get for market rent in an area. The last area where I lived had prices so high that the market rent wouldn’t even begin to cover the mortgage. In that area, you could rent a house for $1500 that would market for $275-300K. Obviously there’s no way those numbers would work.
I will pay whatever will allow a positive cash flow of $100 per month ($100 per unit per month in multis).
Finding deals that will cash flow is difficult in EVERY MARKET. It is very hard to pay retail for a property and have positive cash flow. Therefore, you must buy at a discount. The size of the discount depends on the market, but generally you will need to buy at a MINIMUM 30% discount to market value (even in good rental markets). In some markets, you may need to buy at a discount of more than 50% of market value.
It is not easy anywhere and will require serious work on your part, especially in the early years of your business.
So that is 250. If I want to make 150-200 a month, then I need a payment no more than 350/month, right?
So based on rates I can get, what should I pay for this property?
There ya have it. Now that is only because my style has always been to push for positive cashflow properties, after all, that is the only way to true legacy wealth creation.
So, its kind of like i figured… That is how i do it as well… I work backwards, but as i stated few houses now are available at those rental price points… Aside of course from very low income areas… So, what areas of towns are you guys buying? I usually try to get a great run down house in a good area and fix it up and rent it… But, again those are few and far between… I have been thinking of going to low income cities and buying houses for 40K or so and renting section 8…
In your guys experience is that a decent strategy or do most of you guys stick with middle income folks in middle income neighborhoods?
I spent the weekend with our college-aged son looking for rental housing within 1 mile of our state university.
Students were lined up at every house with a “For Rent” sign on it. We hadn’t realized we needed to start earlier, as school doesn’t begin until late August.
We finally found a great 3 bedroom, 2 bath house 4 blocks from campus for $1500/month. Unfurnished, students pay their own utilities.
The point of this is --What a market for those of you who are landlords in a university town! Many of the small, older 2-bedroom houses had the garages converted to the third bedroom. What demand when 30,000 students descend inside 1 month and need housing that the dorms can’t even begin to fill.
The lowest price SFR I spotted was $157,000 in that area. I bet they go for less in Dec.-Jan.-Feb. when the parents aren’t buying. Wish there were a university here.
So that is 250. If I want to make 150-200 a month, then I need a payment no more than 350/month, right?
WRONG! You left out a BUNCH of the expenses. IF you had a mortgage payment of $350 per month with $800 rents, your cash flow would be about $50 per month, not $150 - $200.
YIKES!!! Have you seen the damage a bunch of college kids can do to a place??? :beer
Best to get a large security deposit! (Yes, I am generalizing and know that NOT all of them will trash your place…) Just pointing out that there is more to supply & demand then meets the eye… :biggrin
Karim, You can’t buy RETAIL when you’re investing. If you’re looking at renting out SFR, it’s true that you need to look at market rents for SFR. But you also need to see how much it would be to BUY homes that are similar to the ones you’d be renting out. If people can afford to pay $1000/month to BUY the house, you may have a hard time renting it for that amt.
You’ll need to find motivated sellers. There are many reasons sellers are motivated. It takes a lot of work to find them. Look into REO’s, Foreclosures etc… You may find properties that need work also. Just keep your eyes open and keep looking for motivated sellers. Not Retail homes on the MLS. When you actually DO make an offer, You’ll have to be sure YOUR price will provide the cashflow. Also remember that putting more down doesn’t make the deal better. A mistake I would have made if the “vets” hadn’t set me straight. If a SFH rents for $1000/mo., you’d have to offer a price that would have a mortgage of about $400/mo. You get that by subtracting 50% of the gorss rents and $100 for your minimum profit. If you’re using a financing source, you’ll need to determine the terms of that financing. Good luck.
Yeah, i am seeing that no price really above 40K for a 3bedroom SFR (fixed and all) would really provide good cashflow… I am contemplating on giving 20-30K cash offers on houses that require light cosmetic work and are bank owned… But, again, this would be the low income areas (semi ghetto, but not gang land)…
What you’re describing is exactly the angle we’ll be working unless we can find a multi that will fit our criteria. Our area is a cheaper rental market, so we’ll be trying to keep things under $30K after all necessary repairs.
I think you missed the main point. Karim, in his example, is looking at a specific property and already knows the market rent for that property. Now based upon the market rent and his NOI, he computes the maximum amount he can afford for debt service and still cash flow. Once he knows his maximum monthly debt service, he can compute the maximum loan that debt service will support at the currently prevailing interest rates.
Once he knows the maximum loan amount he can place on the property, he can determine his maximum purchase price. Using this “reverse engineering” approach, Karim will almost never pay retail in a normal market. This approach builds in a healthy discount to FMV by brute force.
Now, to get that property at or below the maximum offer price Karim just computed, the needs to be seriously motivated.
I agree that Karim left out some expense figures in his calculations. He compensates for that somewhat by reserving a $200 cash flow rather that the more typical $100 monthly cash flow that we usually advocate.
The example does present a valid approach to determining the maximum offer price for a buy and hold property. I have used this reverse engineering approach myself for years.
Yeah, ive been doing alot of reading (thanks to all of you guys Dave T, propertmanager, fdjake, etc…) and previously made some bad purchases (when i was around 18-19) that i “believe” from experience i now know what a good profit margin is; its basically like properymanager and others say… I used to only look at how much my rent and how much my mortgage was… Boy was i wrong, i had forgotten about water, taxes, insurance, maintenance, property management, etc, etc…
Needless to say i wont be making that mistake twice, as far as i am concerned, my money is better off in the bank if i cant find a good cash flow property (honestly, in my book cashflow is the only way to value property, how much revenue it brings in)… bc otherwise, you just get eaten alive, its like an alligator, it swallows you slowly…
BTW, i think in this horribly slow market we should be able to buy houses that provide more than 200/door cashflow… I havent bought any in this time frame yet, so i cant speak from experience here at this point… Anybody seeing better than the 100/door after all expenses? I am simply going about it logically… I mean there are tons of houses and very few “conventional” buyers… I was thinking of paying cash (with a steep discount via low/very low income area neighborhoods) for a property and refinancing to get my money out…
I will be testing my hypothesis soon enough… But, i believe that with tons of good areas getting hit hard and banks taking a huge loss on the nicer areas of town they would be wiling to discuss cash offers in the not so nice areas, even i they were 20% of previous “appraised” value… I mean some of these houses dont have garage doors on them… The longer they sit the quicker they are picked clean… Just my thoughts on it…
I would love some input/critiquing if you guys see any faults in my view! Im not shy
Dave T, I didn’t miss the point. I was just stating a point that if you can’t buy at a price where the property will cashflow, you shouldn’t buy it. Perhaps I should’ve just daid that… But if people can buy a home for the same monthly payment ( or close to it), why would they rent? Unless he finds a distressed property/owner where the property just needs some sweat equity, he may have to just keep working to find the deals. When Karim said he couldn’t find any deals that were less than 150K, it appears to me he saying those prices were RETAIL. Not WHOLESALE. That’s why I replied the way I did. I think there will be a lot of SFH’s that won’t go for a discount because may people leveraged the home at the peak of the market. If its a foreclosure situation, you may have to wait until the bank has it as an REO for the price to come down. One last point, if foreclosures keep spreading, that will bring the SFH’s that were above the 150K level back to earth… Maybe… :cool
You have to understand that this horribly slow market for retail sales is also a horribly slow market for landlords. Landlords are reducing rents and offering incentives to get their vacancies filled.
The rental market does not automatically get stronger when there is a soft retail market.
