Question from Newbie

I currently have no mortgage (paid off the house I live) and have some cash sitting around (despite reinvesting in the stock market, maxing out the amt I can put in my retirement funds etc). I started a business (unrelated to real estate) several yrs ago and things continue to go well, despite the recession.

I decided it would be a good idea to invest in a rental property and picked the city of San Francisco. After all, prices have dropped and interest rates are low. I picked San Francisco because I live in a suburb near by. It takes a lot of time to look at real estate and as a landlord, I will need to visit occasionally and want to keep my eye on the place – so that’s why I picked San Francisco. 60% of the city rents and it seems like prices in San Francisco will always go up. (Note: I am doing this for the long haul, planning on holding for at least 15 yrs and longer. Looking for rental income later in life and also a place I could sell in my old age for profit).

I have ~ $300k to put down as the deposit. However, the property taxes here are high (e.g. $9k on a place that costs $750k). I have been trying to find something below $700k but my max is $750k (want to stay under the jumbo loan which is over $417k). When I do my calculations, I find that I come out short ~$1000 per month when considering what I can get for rent and my expenses (mortgage, HOA, Property tax, extra insurance). I am only looking at new places (don’t like to fix houses) and have only looked at 2 bed, 2 bath, 1 parking (I figure parking is very valuable to a renter as most of the rentals I see listed don’t have parking; 2 bed , 2 bath should be easier to rent).

I will have a 15 yr mortgage so presumably after 15 (or less) years, I will generate rental income. Could be sooner as right now rents are on the low side (part of the problem). Right now the property tax, insurance, and HOA costs alone are equivalent to 5 months of the rent I would receive and I expect this to stay constant over time. So my rental profit (in 15 yrs or when I pay off the mortgage) will be for 7 mths rent/yr.

My question: Is this a good investment given that I will be losing $1000/month until I pay off the mortgage? I think that prices in San Francisco are down some so I feel confident the sale value of a place will go up a lot over 15 - 20 yrs, but being down $1000/month until I pay off the mortgage doesn’t feel right.

Would appreciate thoughts on if this is a good investment or not, and any calculations / guides used for rental investments.

If it doesn’t cash flow, you’re betting on price appreciation for the property later. Do you really want to be out $180K (using your estimate of being down 1k/mo for the life of the loan)? Your argument about wanting something new really won’t hold up for long. Get the wrong people in there and you’ll be fixing things anyway. Don’t throw cash at the deal to try to get it to cash flow. If it isn’t a good deal when you consider the total purchase price, you can only negotiate down the purchase price or raise the rent to make it better.

Tying up $300K on one rental property is fiscally foolish. I realize you want to remain in close proximity to where you reside, but in your case you might be better off considering another locale to invest in outside of your area. Buying bread and butter houses in the midwest for $75K to $100K makes a lot more sense and is a lot less risky.

You intend to Invest $300K on one property and expect rent for 15yrs and payoff your mortgages is not risky but the return/growth is slow and somewhat unnecessary. In addition there might be so many hidden cost and you should take those into consideration. Better invest in some small and less expensive property which is also less risky.

Real bad deal. You’re going to pay $300k to suffer a NEGATIVE $1000 per month? Its not even a good deal if you made $1000 per month.

Look at this way… you could take that house and buy 10 houses in Metro Detroit. Rehab them and have a few dollars left over. Your income from those 10 houses would be roughly $5,000 to $6,000 per month… conservatively.

Hey Agustin,

Most investors are more comfortable close to home. You are doing the right thing by getting advice in forums.

I live in San Diego and likewise property values have dropped a ton but the LTVs, cash flow and numbers on deals suck. I am not a speculator at all, you can add value thru upgrades but the market is out of our control. You have to control your success. A good deal must not be above 70% LTV, must have really good cash flow, must not require a ton of money into the deal and must have multiple exit strategies. You can find these deals all day long in many areas of the country, I find the overhyped bigger cities especially in CA, AZ, Vegas, Florida, etc have way too much competition and terrible investment opportunities. It is all speculation.