I am starting out as a new investor. I need to help figuring out my number. I know someone that’s looking for a place to rent quickly with $1300/month budget. I want to take advantage of this and invest in a place for her to rent with maybe a cashflow of $100-$200/month. If someone can help me figure out what formula to use to figure out the cost of the house and where to quickly buy a house.
While I applaud your willingness to take action (most “investors” don’t!) I’d also caution you a tad before jumping into the fire.
So, with that being said…you don’t necessarily want to buy a property just because you’ve found a tenant that needs someplace to rent quickly. You buy a house because it’s a DEAL! PERIOD!
I don’t know what your financial situation is, but what if she gets in, you get a mortgage on a house you’ve purchased, and let’s say REAL conservatively that your mortgage is $1000 a month and she’s paying you $1300. How many months can you cover that $1K payment if she is GONE and you don’t have a renter?
I’m not sure the area you’re in, but first, I’d recommend you start with a little less expensive house (I’ve got a bunch of them that I’ve paid around 20k for, their payments are $200ish, and they do cashflow a couple hundred or so a month or more). The point is…I’m getting the same monthly cashflow that you’re hoping for, but my risk is a LOT less.
My two cents would be to start by wholesaling properties…it’s the easiest way to get started in investing without risking, and you’ll quickly learn the ropes. The last thing you want to do is to get in waay over your head and get discouraged and become a “tired landlord” before you’ve even learned the ropes!
Again, I HIGHLY commend you on wanting to take action…it will pay off, but you’ve got to also get your education and do your due diligence!
Thanks, Jason for the advise.
I just started doing my research on real estate investment. I have a desk job that I am so ready to quit and need something to replace my income. But looking at the economy, I want to make sure I have something solid before I make my move. I’m hoping investment will get me out of my cubicle job. I do have really good credit and have around $25K in saving for investment. I really want to learn the rope to this business but don’t where to begin. I have been searching the web and listening to web seminars. There are so many ways to buy properties and so many advertisements on system and package. Where do you think is the best place to start small and build up and learn the business. Any advise would be greatly appreciated for the desperate newbie.
You’re definitely on the “right track”. First, while Real Estate is by no means a “get rich quick” system, in my opinion it’s the best thing out there…period. The last thing I’d recommend is to spend your 25K is on Real Estate because you will make mistakes, everyone makes mistakes…that’s how we learn. You don’t want the mistake to cost you your 25k in savings.
So first, I’d counsel you to invest as though you’ve got NO cash. That way you’re not going to learn it.
If you’ve got a local real estate investment group in your area…get involved with it…not necessarily for the speakers that will come in and out, but for the people that are there doing deals…the networking.
Second, I STRONGLY recommend that “newbies” start out by wholesaling…in my opinion, that’s the easiest way to get a quick education and make some cash with the least amount of risk, and then once you’ve gotten some experience under your belt, then look at your different options of how to make a cashflow. Cashflow will set you FREE. Most investors that I see in my area…from the time they “make the decision” which really means “taking massive action”…it’s about a 2 year time frame when they can punch out of their job. There are plenty of people that do it quicker, but that’s what I’d say is the “average” in my area!
Do a search on here (search button is at the top of your screen) for the 50% rule. This is discussed all the time. It’s a good way to figure real world cash flow on a rental. Jason is right about not replacing your income right away. You’re probably not going to make enough off REI next week to quit your job. You may not love your job, but it’s a stable income for you right now.
Don’t get caught up in paying a lot for REI training. There is a ton of good information in the forums here. Keep in mind your local REI meeting will probably have many other newbies. Seek out someone who has experience - not someone who’s just talking a good game to make themselves sound experienced.
You asked a straightforward question – what formula do you use to figure out the maximum price you should pay for a rental property.
Mike Rossi, whose screen name is propertymanager, is a frequent poster here and espouses a 2% rule. His premise is that the monthly market rent a property generates should not be less than 2% of the purchase price.
That is, if a property will support a monthly rent of $1000, then you should pay no more than $50K for the property. If a property passes the 2% test, Mike does a more detailed cash flow analysis to see if the property will meet his required cash flow target before he makes the purchase.
This is just a quick and dirty method for screening potential purchase candidates but starting with the 2% rule will keep you from making a serious purchase error.
Truly admirable post. To be a bird dog initially is my suggestion. You work for someone and get paid is risk free and easy learning for you. Working for a realtor, agent will create references for you.
Let me start by saying htat I am a flipper not a Buy and Hold guy however I have been lately and I use a real simple formula…
On 1-4 family units - Cash flow expenses : income 1:2 or 50%
Cash flow expenses are:
Mortgage Payment (at the interest of the available loan not wishful thinking)
15% of the collected rent. (at the value at time of purchase not wishful thinking.)
The you have to run a deferred maintenance costs to determine if the units will support the maintenance. Most of the time you’ll buy units that need repair.
In fact, I wouldn’t buy and hold a house unless the hassle of financing it (or finding a deal where you can get in light and hold it) and renting it are much less than whatever personal benefits there are to you from holding it.
I mean, I used to just hold properties because it’s what investors do. Now I wholesale almost everything because I examined my life’s goals and all I really wanted was to make money without much work, and wholesaling (as long as you get good at marketing) accomplishes that, plus it’s easy to outsource to an assistant.