BiggerPockets

l live in Montgomery County Maryland where the property prices and rents are on a higher side. This would be my first investment property if the offer gets accepted.
I am looking at 2 properties:
1. I just went and looked at this townhome which is listed for 120k. It is a foreclosure townhome and the property is in very good condition. My realtor told me that I could get about $1400 - $1500 mo. The neighborhood seemed really shady. I was really hesitant when I looked at the people in that community.
2. Another property that is listed as short sale for $170k. It is a newer townhome in the suburbs and rent would be about 1400 - 1500 also.

It is a huge difference in price and I am not sure if any of above seem like a good option.

Thanks for your help.

Thats the lowest I can find and in not a very good area. I still figured that with interest rate being so low I will be paying about 450 in mortgage, 50 in HOA, 250 in taxes and insurance, 50 in maintainance.
I will still be making about $700.
This property was last sold in 2005 for $272000.

I really don't think you'll get a mortgage of $450. As an investor loan you won't get the rates advertised. It may be a few percentages higher, possibly 4.75%. Plus your rate will depend on your credit score. Have you talked to anyone about financing? Also if it's a foreclosure are any repairs needed?

Keep in mind the goal is to make money with your investments. If you can't find something that makes money, don't buy it. If "the best deal I can find" is a crummy deal, don't buy anything.

Now, long term appreciation can, in the long term, make money even with negative cash flow. And the DC market is currently one of the strongest in the US. That may or may not persist. But the fact it last sold for $272K in 2005 and you can now buy it for $120K doesn't really bode well, does it?

And even a break even property can be valuable long term once the tenants pay it off.

Are you going to manage it yourself or hire a PM? If you're hiring a PM, then the "50% rule" almost certainly applies. That says that over the long term and for a number of properties, expenses (you've listed some of those), vacancy (not included in your calculations) and capital (also not included) will eat up 50% of the scheduled rents. So, out of that $1400 in rent, you're left with $700 in "net operation income" or NOI. From that you have to pay the mortgage. With 25% down on a $120K purchase I get a payment of $483.14 a month for 30 years at an investor rate of 5%. So, that leaves you with true cash flow of about $217 a month or $2602 a year. On a $30K investment (actually higher with your closing costs), you're looking at about 8.7% cash on cash return.

Now, if you manage it yourself and handle minor maintenance you can earn a pretty good chunk of that "50%" for yourself. Perhaps a third or so. So, that's roughly another $233 or so a month or a total of a bit over $5000 a year. Generally property management is not too big a deal, but once in a while you have to deal with something. Filling a vacancy is probably the single biggest task.

Now realize that a lot of these expense can be very lumpy. The ones you've listed at the routine ones that come month in and month out. The cash flow you listed is what you will get in your good months. Once in a while, though, you will have some vacancy. Or, you'll need a new furnace. Or the HOA will give you a special assessment. Or your tenant will stop paying and force you to evict.

I'd say no based on price and estimated rent.

Also, your estimated rent might be wrong. You are getting a rent estimate from a realtor. The realtor's motivation is to sell you property.

I'd get a better handle on the potential rent because it might actually be lower. Ask a couple of property managers and look in the paper and on Craig's List to compare rents. Call the numbers on "for rent" signs in the area, etc.

My realtors are usually high on rent and low on rehab costs. I wonder why that is...

One last thought, have you bought a townhome yet? Read up on some issues with townhomes versus single family rentals.

Good luck. mck

I think the 2% rule is overly pessimistic when rents are higher. I walked you through the math in my post. So, just repeat those same calculations on the deals you can find.

On the east coast? Don't know. Somewhere within an hour's drive? Probably.

Higher rents is no guarantee off better tenants.

Thanks Jon an mck. How feasible is it doing investments in far away cities and using management companies for maintainance?

Given a 5% fixed interest rate for 30 years and 25% down... you can straight line extrapolate what the rents need to be to return a given cash on cash return. For a 15% return, I believe the ratio comes out at just over 1.45% of purchase price. Given how cheap money is nowadays, 2% if found provides VERY nice returns.

Please note this assumes $0 repair cost after closing and excludes closing costs involved in the actual purchase.

I think I understand that most people here are looking for or getting closer to 2% rule.
For me I have cash sitting in the bank with no returns. With money so cheap I thought that I could buy a few properties with 25% downpayment and even with minimal cash flow I would have equity on those properties which are essentially being paid by tenants.

If long term wealth is your goal then getting a property with 10% cash return may be fine when you add in equity gain and appreciation, that's a personal call.

How much risk can you deal with, how much work do you want to put into it (in terms of rehab and management), and what type of returns do you want to get will be the key things that should guide where and how you invest your money.