Question by a new investor

Hello everyone,

I’m doing a lot of reading on REI, especially now on the forum, and was wondering if anyone was willing to give me some help understanding the basics. I do plan on getting some cash flow books and continuing to learn of course, but I like having back and forth conversation to help my understanding. For instance, take this listing:

http://philadelphia.craigslist.org/reb/3156011651.html

If I were to negotiate the price to an even 40k, where would I begin to analyze whether this was a good or bad deal. Assume 10k down payment, 30 year fixed. Again this is just an example so any variable numbers I obviously wouldn’t know from a random listing could be made up from anyone willing to help. Thanks for any responses!

PS: sorry if posting that listing is considered a no-no (could be advertising or something I guess). I’ll remove immediately if it’s a problem!

Ok, so you need to keep reading everything but generally people on here like to

  1. Get the home at 70% ARV of what its worth
  2. Rent it for 2%/mo of the buying price (if you got it for $40k, $800 would be 2%)
  3. Check taxes, fees, etc to make sure it cash flows
  4. Profit

You can get comps from relators and use free sites to get ARV.

Just the basic answer I was looking for with a basic and general question like I posed. Just wanted I couple general evaluation benchmarks I could check out when browsing online like you gave me! thanks!

The formula that was offered earlier is a good one for those who focus on property with strong income (independent of the debt service). What you will find is the formula works best in marginal or bad areas. Or areas that are in a very long term decline scenario; falling population normally.

If you want to invest in an area that is seeing growth in value and growth in the population you struggle to make the formula work.

Cash flow is king. If the formula does not work, consider tying up more equity. You can create equity from profits on short term deals and then buy a property to hold with more cash into the deal.

rookie,

You have already received some good tips, but let’s not put the cart before the horse.

What is your investment intent? Do you want to buy and hold for rental income, or, do you want to buy and flip for profit.

Each strategy has a different set of metrics that help you determine a purchase price that creates a positive cash flow or an acceptable profit. Telling us your proposed strategy will help us give you better answers.

Making a larger downpayment on a rental property does not make a bad investment better.

Agreed. A smaller down payment does not make a bad investment better.

Total returns, cash flow to keep things ticking over and effective use of capital all are important.

A long term investor in San Francisco has properties with 40% debt. When we spoke about why he did not sell and invest in the Central Valley CA, he said the total returns would have been lower over the 20+ years he owned the property. In other words, more equity made the properties cash flow and the total returns were superior even with the lower level of debt.

Thanks for the responses -

To answer the posed question, I think right now my aim would be long term rentals. My inspiration comes from my current situation. An expensive private school that has an off campus culture bringing in 600-700 per person with houses holding anywhere from 6-12 people. My school is in a low income area, so the house prices aren’t through the roof, but the area where students want to live is very selective making certain houses say $200,000 and a similar house 2 streets over as low as $50,000.

My school current has a guy with an LLC, and basically a monopoly, over most of these houses. He got in early, had a plan, and he really carries it out great. He owns and operates about 80% of these houses, which probably total at or more than 100 houses/3 floor apartments.

Because of my exposure to this college type atmosphere, I would love to do the same in a similar situation close to home. The pro’s to this are that the rent income is sky high for the quality of property, and the money is presumably more guaranteed when it’s coming from the parents and not those who struggle to make ends meet.

So in a nut shell, that’s where I am coming from. I would love to make this a career if I could save up enough cash to get started, and surround myself with the proper knowledge and people to be able to do so.

Just started reading “What Every Real Estate Investor Needs to Know About Cash Flow…and 26 Other Key Financial Measures” today, which should give me a good foundation on cash flow!

Rookie,

I have read the book. If you want to discuss after you have completed reading it, let me know.

Thanks…appreciate it.

Any thoughts on the situation I described? I know there are many things to overlook in this business, and I’m just taking baby steps.

As a general idea, I am fine with what you suggested.

It takes a bit of time and talent to build up a portfolio in an area. If the cash flow is strong it would be a bit odd for the properties to be low priced. You would not be the first investors thinking they can rent to students so the prices should be bid up already.

Having a focus and a clear model/process for managing the business means you should be able to operate more profitably that someone who is only doing it as a sideline or hobby.