I've been on and off the forums for 6 months now. And i've gotten back in recently. My questions is how in the world can you justify the 2% rule in a metro area? Im looking at a SFH, split into 3 units, 3 blocks from a major university in downtown. Would estimate 90%+ homes are rentals. So here are the facts:
And if you pay cash, you're earning $1100/month, or $13,200 which gives a 3.8% return. You can do better with CD's and have not risk or hassles.
People buy these based on speculation. They're assuming the price will continue to increase, and they'll be able to sell it for even more in a few years. Seems certain this speculation is one of the drivers for the increases we've seen over the last 7-8 years. Lots of cash out of the stock market after the dot-com crash, low interest rates, and plenty of easily available mortgages started the ball rolling. Once started, it turned into genuine bubble behavior. Now you've got landlords subsidizing their tenants and unable to sell without bring a (or another) pile of cash to the table.
I'd like to turn your question around and ask you "how in the world would you make money with this rental?" If you don't make money, why in the world would you buy it?
Mike,
The calculations we are taking are as follows:
$2200 GMR
- 200 est. taxes
=$2000 rent.
==> we have $2000 to put towards the debt service.
So this would make a basis of $320,000, Now we would deduct any repairs the property would require. Such as a new roof, some sheet rock repair, etc... So we would make an offer of $299,000, pending inspection.
If inspection brings up more issues, then we would in turn deduct the repair/replacement costs.
So we would be have a monthly interest only payment of $1868.75 at 7.5%.
Leaving a reserve of $131.25 to save for repairs and what not. And the next lease will be at a higher rent, after some major clean up and some renovations are done. Property is in pretty dirty condition. Now on the upside, we are going to try to use driveway to charge for parking, due to lack of parking in most of the other rentals.
==> we have $2000 to put towards the debt service.
The only problem is that you omitted nearly ALL of the operating expenses. You should know that throughout the United States, operating expenses run 45% to 50% of the gross rents. Operating expenses include taxes, insurance, management (even if you do it), maintenance, advertising, utilities (at least during vacancies), capital expenses (although not technically an operating expense), entity maintenance, legal fees, evictions, court costs, evictions, damage done by tenants in excess of the security deposit, I could go on and on.
At any rate, you left out all of these expenses, which means your negative cash flow (even with your interest only loan) would be a monthly LOSS of about $768 per month (over time).
I would suggest the book "What Every Real Estate Investor Needs to Know about Cash Flow" (link below) it will give you a excellent understanding of cashflow. BTW, I believe MikeOH rehabs and buys in low income areas to get the 2% that is touted on this board.
Hi All
I've purchased one home and owned it for 3 months and am about to close on #2 -- I'm working my way DOWN the price ladder -- I have NOT stuck to the 50% rule, but pretty close! My question is for "checking reality" at the end of the year in quickbooks -- I want to check my REAL cash flow vs. "predicted" but I'm wondering what to omit to make this as "real" as possible -- should I omit all closing costs and just add the usual, or include closing and capital expenses ??
To find the real cash flow, subtract all the operating expenses, capital expenses, and debt payments from the gross rent. I would not include closing costs as they are a cost of acquisition, not an operating expense or debt.