BiggerPockets

I have been in IT profession for about 20 years. Even after these many years, there is no guarantee that I will be spared during next company-wide layoffs due to economic conditions.
I hate it and want to kick them before I get kicked.
I have much interest in RE since last few years, and have learned about it during my spare time (which almost non-existent). This interest born after I bought a property here in No. Cal as my primary residence and saw the appreciation going out of the roof. (It certainly came down in last two years but I still have some good equity in it).

I also have done few RE courses and following some online resources, including this one, during that time.
I even bought 3 properties on eBay and then ended up selling them there (with almost no profit).

I also bought an REO in Atlanta with all cash last year but still not sure what I am going to do with it.

So now here I am, wanting to get into REI so that to make living out of it.
The most ideal situation for me will be to have some (or many?) rental properties to generate a steady monthly cash flow, and also do few buy-rehab-sell per year to generate extra income.
My target would be to make at least about $5K per month from rentals and at least $15K per fix-upper, doing about 4 of these each year.

Do you think it is a reasonable goal for someone with very minimum RE experience ( but a lot of enthusiasm and energy, and of course some cash in hand) ?

I am already looking (and need help of gurus here) to identify which markets I need to explore for good rental properties.

Please help this newbie and make it a success story for BP :lol:

-MN

I agree with Josh that you certainly can do it. However, you need to spend some significant time reading the forums here and really learn the business before you jump in. Buying a property without knowing what you're going to do with it is not a recipe for success. If you're serious about making a living from rentals, you may also need to move to a better area. California isn't known for property that will cash flow and moving to a more suitable area might make your new business a lot easier to start.

Good Luck,

Mike

Absolutely an obtainable goal with some hard work and some education. Right here on BP is a great start to that education.

Secondly, as MikeOH stated, buying an REO, or any other property for that matter, without at least one exit strategy is a recipe for failure. Having the ability to pay cash for properties puts you in the driver's seat, but you must have a plan BEFORE you buy.

$5,000 a month in cash flow from rentals is no easy task and based on receiving $100 per door per month, you obviously would need 50 doors to reach that goal. Buying 50 homes can take several years or more, but a large amount of doors can be obtained in one purchase through apartments, or perhaps in other commercial purchases.
One buy, one loan, one location, multiple doors, you get the idea.

Good markets are ones where their is job growth, which will drive population growth along with somewhat limited housing supply that will help create demand. Pricing vs. rents is key. An old rule of thumb is the rent should be at least 1% of the price. Rent is really the driver, so that really means you can't pay more than 100X the monthly rent.

That will, however, cost you money every month. That might work for long term appreciation (or might not), but its not your goal.

Read about the 50% rule. That says 50% of the rent goes toward expenses, vacancies, and capital items (roof, furnaces, etc.) So, if rent is $500, $250 will go toward expenses, leaving you $250 in NOI (net operating income). From that, you need to extract a cut. $100 is a common goal. That leaves $150 as the maximum you can have for a P&I payment (taxes and insurance are in the 50%). At 7% and 30 years, that gives a max loan of about $22,500. That makes rent 2.2% of the purchase price. That's the origin of the "2% rule".

If rent is $1000, expenses are $500, leaving $500 for NOI. Subtract $100 and you get $400 as the max payment. That gives a max loan of about $60,000. That makes rent 1.66% of the purchase price.

If you're just buying outright, assume 20%-25% down. However, use the above calculation as the PRICE. This will make your cash flow a little better.

The 50% rule includes some percentage for property management. Most managers for SFRs (in my experience) take 10% of the collected rent plus half to a full month's rent when they fill a vacancy. So, on that $1000/month rental and with a tenant change every year, the manager is going to take $2200 a year or 18% of your gross rent. If you never have a vacancy, its just $1200 a year or $100 a month. That's the difference between you getting $100 a month and $200-$283 a month. That's the difference between needing 50 units and 18-25 units.

Keep in mind the tax benefits for rental income are significant. You should pay much less taxes on $5000 in rental income than you would on $5000 in W2 income from a day job.

You might consider looking inland from where you are. I've heard people say there are opportunities in Sacramento and areas around there. Research prices (easy), rents (bit harder -- papers, craigslist, driving around), vacancies (drive around and look for "for rent" signs), and jobs (read the papers.)

So, I have read books, done courses, browsed websites. I am just now too tempted to get started. Where do I go from here? What are the best markets for rentals? How do I go about finding some good deals?

Read the renal forums on BP, join the out of state group, and find out what people are saying about different areas. When you find a couple areas you are interested in do what Jon said, get the economic factors - population, unemployment # etc..

Then when you decide to dig deeper in a certain area, contact the local experts from BP, ask for references to successful investors in the area, join the local REIA, find a couple of PM companies and interview them about the rental market,time to re-rent, vacancy rates etc..

:idea: Think about all the info you get about your own town just by sitting behind your computer doing google searches, reading the paper, finding local blogs, forums etc... and do that in the area you want to invest in.

City-data will give you some local stats as will Wikipedia

Munir

Yes there are easier places to do business in other parts of the country where if you have $1.98 you can wheel and deal.

But I'm very familiar with your area as a former Mill Valley resident who sold many Novato homes to S.F. police officers in the old days.

I just finished a deal in Santa Rosa that cost me $500 out of pocket and I have not been in the state in 5 years or more.

I have a son based in San Rafael that is still doing deals with minimum money and has a full time job in the city. So it is still out there.

Wholesaling and flipping are the way for you to get going. I did 6 deals in the Bay Area in 2008 with little money. Sold 5, kept one, I could have sent my money to Michigan or somewhere with cash flow properties but made a million sitting at my desk in Salt Lake City.

Don't care to learn Detroit or Cincinnati and else where. Every thing you need to know to make money where you are is in the archives here and at a few other sites. Doing it is the problem, so start. 95% of investors fail due to lack of action, not money, not knowledge, not credit.

Originally posted by Munir N

I bought this upper fixer REO in Atlanta about a year ago for $18K. I paid cash for it. It is about 10 minutes from downtown, in a good rental area. Current market value is about $80K. Plan was to rehab it and then rent. Rentals in the area for similar properties run for about $700/mon. Renovation cost is about 20K. But then I did not get a chance to get anything done, mainly due to combination of some time constraints, long distance and not having local contacts there.

Munir -

If you need any help with local Atlanta contacts (or if you're looking to sell the property), feel free to PM me...

I have a lot of contacts down here, and am happy to help where possible...

I tried to PM you, but since I am not your colleague, BP does not allow.

Munir, get a BP Pro Account and you can send messages to anyone, along with many other advantages. It is well worth the money if you want access to all the benefits of BP Nation!

If a property gives good cash flow, do you much care about the equity on the property? For example: if property gives $200 cash flow per month and about 35% annual cash on cash ROI, but have about 10% equity on it. Is it a good deal?

I haven't seen a property that can be bought at 90% of the market value and will cash flow $100 per month, let alone $200 per month. I would strongly suggest reading the "50% Rule" threads in either the General or Landlording forums (they're sticky and right at the top of these forums).

Good Luck,

Mike

Hi Mike,
This is what I have for one of those properties. Please let me know what is wrong here, or if I am missing something.

Market Value: $40,000
Asking Price: $36,000
Down Payments: $5000
Closing Costs: $1000
Total out-of-pocket: $6000
Currently Rented for $710 (12 months lease started in April '09)
Cash-Flow (after all expenses, debt services): $171
Annual ROI: 34%

Thanks!