i’m looking to buy a duplex. i live in the suburbs but the taxes are SKY high. If i go into the city, taxes are much cheaper. after looking at a bunch of properties it seems that if i want to cash flow i have to go into the city.
The area makes a huge difference. Obviously, there are no guarantees, but as a general rule, low income rental properties bring a lot more headaches than high income rental properties. You might calculate that:
Income= rental income
Expenses= mortgage payment, taxes, insurance, maintenance, vacancies, repairs, and advertising.
What if one of your low income tenants decides bypass the electrical meter, then cook methamphetamines in the garage, and goes to jail? (don’t laugh, I’ve seen this happen)
One of the best things that you can do as a new landlord is to shorten the vacancy turnover to just a couple of days. As soon as an existing tenant sends you a 30 day notice to vacate, advertise the property. Extended vacancies and evictions will obliterate your cash flow.
Depending upon the source, rental income should be 1-2% of the outstanding mortgage balance. As a new investor, you should be looking at cash flow, appreciation, depreciation, and leverage. This means that you don’t want to buy in a war zone or a ghetto. It means that single family homes are more desirable that multifamily homes (from an appreciation standpoint). It means you need to examine the tax consequences of everything that you do. It also means that a vast majority of the deals that make sense never make it to the MLS.
- Use the search feature on this website and other real estate investment forums to figure out how to find a desperate seller of a single family home or a duplex.
- Keep all financing options on the table including seller financing (low interest rates, high possibility for leverage) and get to know the decision makers at small, local banks.
- Start small. Leverage works both ways and your first deals will not be as intelligent as your subsequent deals. There is no sense in getting greedy in the beginning only to wipe yourself out before you learn anything.
- Take property management classes. There is a lot of controversy regarding this one. One side says that you wouldn’t take brain surgery classes before you had a brain surgery, the other side says how would you know a good property manager from a bad one if you never managed properties yourself?
- Have multiple exit strategies. Can you live in it? Owner occupied properties can get 125% loan to value notes at lower interest rates. Can you sell it? If it’s such a dump in such a bad area, that it’s an albatross around your neck, you will lose a lot of flexibility. Can you rent it? Flippers get into trouble thinking that they can turn around and sell, and when they can’t rent it, they go into foreclosure.
It seems like you are evaluating a lot of opportunities. I hope some of this helps. I’d like to recommend Building Wealth One House at a Time by Schaub and The Weekend Millionaire’s Secrets to Investing in Real Estate by Summey and Dawson; I have no financial stake in either publication, but I like their strategies.
Have fun with this stuff…
When it comes to neighborhoods, ask yourself if you’d want to live there. You may have to go there often anyway. Some bad parts of the “inner city” can be great cashflow properties…IF you can collect the money… I think the market may start to yield some decent deals even in the nice areas. Keep your eyes open.
most of these properties i’m looking at i wouldn’t have my family live there. but i personally could live there. one thing i don’t want to do is make a big mistake where i’ll be out of the game from the get go.
If you want cash flow, you have to buy at the right price - whether in the city or in the suburbs. period.
i think what you’re saying is that you can buy cheaper in the city relative to rents. if that’s the case, that’s where you buy.
you’re buying a cashflowing asset, not a primary residence or status symbol.
there are a bunch of real crappy apartments near my house… i’d prefer to own those apartments over my house, because with the money i’d make from those apartments, i’d be very wealthy.
You certainly don’t want to make THIS mistake. Guy gets killed trying to collect rent.
http://blog.cleveland.com/metro/2008/04/man_who_came_to_collect_rent_s.html
You can look at it another way. If the cash flow is good enough in the inner city, why not hire a property manager to take care of the day to day issues. Cash flow is your most important reason for investing. I think in higher end properties, you tend to attract “better tenants” but these people can usually find a home. Especially now. I get the feeling you’re a little leary of investing in the “inner city” and you should be. But I also feel that it can be profitable if you can deal with the headaches or afford to hire someone to take care of the headaches for you.
I don’t collect rents. Rent (plus fees) shows up or the constable shows up with an eviction notice. “Collecting rent” is not in the lease agreement.
I just read an investing book that recommends making money when you buy the property. That way you have a cash cushion for repairs, property taxes, etc.
In other words, bdub is right. The purchase price is critical. The deal is more important than the property itself.