Investing in Single Family home rentals...

Starting Out
19yFollow

Investing in Single Family home rentals...

N/A N/A
Member since 2008 · 7 posts · 0 votes

Hi,

First of all I'm about as new to real estate as you can get. Is investing in single family home rentals a waste of time? I've always been interested in it but just never had the motivation. I live in San Diego so purchasing a home with the intent of making it a rental doesn't seem to work so well out here as the price of real estate is still extremely high while rent isn't.
So I was thinking that maybe I could find an area out of state where I could basically purchase a house with the intent of renting it out while building equity and maybe even producing a couple hundred bucks a month in cash flow. This is probably the most basic form of a real estate investment there is but I feel like it's an easy way to get started. About 8 months ago I made a post about Biloxi MS but no one seemed to have any opinions on it. After doing more research I'm still convinced that the area will experience growth over the next few years. I'm thinking about actually taking a quick trip out there to scope out the particular area I'm interested in and maybe look for some deals. I figure if I pick something up in the 150k range I can probably rent it out for 1200-1300 which should cover mortgage, management, taxes, insurance, etc. I'm also considering some pre-construction projects in the high 100s but I have to see if the math works out on those.
The only thing I'm sort of confused about is the actual buying process. About the only thing I have in place at the moment is financing. I'd prefer not to use an agent as I'll be doing the scouting myself. I guess what I'm confused about is the actual offer. Is there some place I can get sample offers or templates or something that can be modified slightly depending on the conditions I want to set for this particular property? Sorry if this sounds ridiculous but I've just never been exposed to the process first hand. Furthermore, at what point do I start looking for an escrow/title service? Should I have that in place before creating the offer? My goal with this whole thing is to build some equity while renting out the property and maybe make a couple hundred bucks a month. Thanks in advance for any comments or opinions.

0Reply
38 views

6 Replies

Jump to latestLatest
  • Frank Adams
    Loveland, CO · Member since 2008 · 1k+ posts · 123 votes
    19y

    bmahon; Let me be the first to suggest that you spend some time on biggerpockets reading the older forums. What you are describing is a recipe for disaster, YOURS.

    You wrote;

    The road to becoming a broke RE investor is littered with people who thought that! It's called going broke on the installment plan. You'll need about twice the rent to handle a $150K property. Read the archives.

    You wrote;

    The same is true everywhere in the country! I don't know of any market in the US where you can purchase a SFH at market and make a profit on rent. It takes buying at less than market. For investment property sales price is a function of rent.

    And;

    Even the main stream media are running articles on all the "investors" (wannabes mostly) who are losing their shirts because the closed on a preconstruction deal that is now worth 20%-25% less than they paid. Of course it's been a topic on this forum for close to a year. Preconstrucion deals only work in appreciating markets, not in flat or depreciating markets which is what 99% of the country is in now.

    The average person spends 4-6 weeks researching and several "tire kicking" trips before making an offer on a new car. I'd suggest spending a few months educating yourself about REI. A lot of people get hung up on the side aspects; setting up a company, getting their "team" in place (I've never quite gotten that-I am my team), type of business cards etc. Others just know "there's money to be made in the REI 'game' and I want some of it". You seem to fall into the latter group. It is not a game, no more than the stock market is a game, it's bloody, serious business.

    There is money to be made, usually not quickly, never easily and not by naifs. The way you're going some experienced investor (possibly acting under the guise of a "mentor" will have your pants off before you know your belt has been unbuckled.

    all cash

    0Reply
  • Michael Rossi
    Real Estate Investor · OH · Member since 2008 · 4k+ posts · 1k+ votes
    19y

    bmahon,

    Investing in SFH rentals is not a waste of time. In fact, it's probably the best way to start in this business. However, there are a couple of things that you should know.

    First, the vast majority of newbies fail in a short period of time. The fail because they follow the plan that you outlined in your post. They buy at retail; have no clue about the real world operating expenses; don't understand how to calculate cash flow; don't know how to properly deal with tenants; and they lose money every month until they finally quit with a big loss.

    Operating a rental property business (and it is a business) is difficult. It is much more difficult if you do it long distance. You will have NO CHANCE of being successful if you buy a property with gross rents of $1,200 to $1,300 per month and your purchase price is $150,000. In the real world, such a "deal" will allow you to lose about $500 per month! OUCH!

    I would strongly suggest that you do a LOT of research and study the business before you even think of buying anything. Your plan as written in your post is fatally flawed and will result in certain failure.

    Good Luck,

    Mike

    0Reply
  • N/A N/A
    OP
    Member since 2008 · 7 posts · 0 votes
    19y

    Thanks for the replies. The idea seemed to easy which was why I was asking. The whole thing came up when I was talking with someone about this a few months ago who was doing something similar but from what you guys are saying he must be losing hundreds of dollars a month on this property and just doesn't realize it or doesn't like to tell people that.

    I think I'm just grossly underestimating the expenses associated with a rental property. I was only factoring in the very basics like insurance, taxes, management, and the mortgage. I guess the key to making it all work just comes down to the price you pay for the property.

    0Reply
  • MATT WARDEN
    Member since 2008 · 141 posts · 0 votes
    19y
    Originally posted by "bmahon":
    Thanks for the replies. The idea seemed to easy which was why I was asking. The whole thing came up when I was talking with someone about this a few months ago who was doing something similar but from what you guys are saying he must be losing hundreds of dollars a month on this property and just doesn't realize it or doesn't like to tell people that.

    There could be a lot going on here. The easiest explanation is that he has gotten lucky. Operating expenses are not fixed; they are highly variable and it only makes sense to discuss them as a long-term monthly average. It is possible that he has simply not had large expenses yet and has been able to get by without losing a lot of money. But, if he is following the plan you outlined, it is a ticking time bomb and he will lose a lot of money.

    Alternatively, he could just be in denial. He could be rationalizing the situation by saying he is building equity or that his property is appreciating or he's getting tax write-offs. Who knows.

    Bottom line: do your own research and talk to successful landlords who have been in business for a long time with many properties. You can find many such people here on these forums.

    0Reply
  • Jim Gordon
    Residential Real Estate Agent · OH · Member since 2008 · 553 posts · 24 votes
    19y

    One of my neighbors bought 2 preconstruction homes from a builder. He is in the building supply industry and knew he was getting a good deal. He set the rental rates and then the taxes kick in to the tune of an extra 2500.00 per home. Ha had ARMs and they adjusted up. He had a few months of vacancy and his company is slow because of new construction slowing down.
    They are in forclosure on the 2 properties.

    I already talked to him and his wife about a short sale but they bought the properties under the bussiness.

    They are in deep trouble with no end in sight.

    He had figured to cash flow at about 200.00 per home and asked me if I wanted in on the deal (deal?). He said it could not miss.

    I am still putting along with my older properties one is at 75% occupancy and still makes the debt service and a positive cash flow of 500.00.

    I wonder what his advise would be now?

    0Reply
  • Account Closed
    Real Estate Investor · London · Member since 2008 · 3k+ posts · 74 votes
    19y
    Originally posted by "Ohio Realtor":
    I already talked to him and his wife about a short sale but they bought the properties under the business.

    Can you explain to the group why the ownership (company vs. individual) matters in a short sale discussion?

    John Corey

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free