BiggerPockets

I have read through several posts on real estate investing. This site has a lot of helpful information. I am currently a stock market investor and want to evaluate investing in real estate. I am based in California, and there is some suggestion that it is best to start investing in an area close to where I live. I don't mind managing my first investment to gain the valuable experience.

I would first like to evaluate a 3 bedroom purchase, in a middle-class neighborhood, in the $150k range. But from what I read about the 2% and 50% rule, rentals in California (at least my area) do not seem to support cash flow. So do investors in California's middle-class neighborhoods really just rely on speculation?

I would first like to evaluate a 3 bedroom purchase, in a middle-class neighborhood, in the $150k range. But from what I read about the 2% and 50% rule, rentals in California (at least my area) do not seem to support cash flow. So do investors in California's middle-class neighborhoods really just rely on speculation?

Base your price on the 2/50% rules. You'll need to buy below market (probably 30% or more below) in order to get adequate cash flow. Then you'll have to find a distressed seller willing to go that low.

Keep reading the posts here on how to find those. You'll find you'll have to try pretty hard, many lowball offers and the like. Just make sure the cash flows are there. Read a lot of Mike Rossi posts.

To add a stock slant to it, if they aren't growth or income, are they even speculation? Who would invest if the asset doesn't appreciate and consumes money over time? Then throw in the illiquid nature of real estate. You're only option is to buy well below retail/market in order to create income/cashflow.

Good Luck.

Can you find deals if you look hard enough? Yes. They won't near the coast. They will be in poor nieighborhoods.. I don't mean "middle class neighborhoods" either.

That aside, if you're willing to eat a monthy negative cash flow (when taking all expenses into accout per 2/50%), and you are confident in a long position (very long). Then it's feasible.

I hear GM stock's pretty cheap.. you should buy that too (little stock humor..cough)

Think Vegas (maybe) or pretty much anywhere you can buy a house for under $100K, such as the midwest.

As an investor and a business owner, one of the things you may also have to look at is the state's own economical situation including the tax situation and cost of doing business in CA. I hear CA may be increasing taxes in the future due to their own deficit situation. It is a nice place to live, though. Hope that helps!

I prefer to start with an investment in a middle-class neighborhood to ease the amount of work that may be needed and hopefully attain a very reliable renter.

If I just do a simple calculation (and a simple investment scenerio):
Price: $150,000
20% down: 30,000
Loan: $120,000
Interest Rate: 6% (if it is really available)
Rent = $1,300
Loan Payment = $719 (based on online calculation)

I believe this comes to a break-even using 44% rather than a 50%. I assume the 50% takes into consideration the tax benefits (depreciation, interest, expenses, etc which is dependant on the tax bracket).

So even if the home is less than 10 years, a 44% ratio would still be a bad investment, for a middle-income home less than 10 years old?

I buy/hold/flip in SoCal. The Inland Empire is basically a no risk area right now. My self and several other clients are buying and holding. Meeting the 50% rule is not a problem. If you want details PM me.

Great comments. Thanks.

Lee V, I am curious what the retail price of your property was, and how much repairs are you estimating. I saw that 70% is what some investors look for. The $1,200 rent sounds like a middle-class neighborhood.

Ralph Scott, its interesting that the tax advantages are not used to access the benefit of the specific investment. But I now understand that even though a property may show positive cash flow after taxes, it is not related to that specific property. It is best to get a property with a better cash flow and the tax advantage is an added benefit.