This is my first post on BP. I currently rent in the Philadelphia area and am looking to buy a multi-family home to occupy myself and also rent the other unit(s).
I am having trouble finding properties that even come close to generating positive cash flow after PITI and a 50% rental income maintenance factor. Also having trouble finding properties that meet the >10% rule of yearly rental income divided by purchase price. To be honest I'm flexible in not having positive cash flow because I'd plan to live there and no longer paying rent already puts me $900/month ahead while not even considering the equity being built.
I'm looking in the Philly suburb areas at homes around the 250k mark (which is where it seems you need to be for something decent) and it seems the average rents for nice 3br/1.5bath are only about 1500/month. With a 15 year loan and 10% down that's far from positive cash flow.
Am I looking at this all wrong? Should I be looking at a 30 year loan that would lower my P&I payments to increase cash flow? Should I find a cheaper house with similar or higher rental rates? I really want to do this but initially it seems like the numbers won't work out.
Notes: I can afford 10% down but wouldn't want to go much higher because that would wipe out a significant portion of my savings. My credit is very good. My idea was to look for a duplex with a smaller (1br/1bath) unit I would live in and a bigger unit to rent (I don't need much space because I'm a younger, single guy). This would be just the initial step in REI for me. Eventually I'd like to continue buying rental properties with a buy&hold strategy after getting my feet wet.
Any advice for the situation I've described above?
I'm not the voice of experience here, but as someone looking to do the same as you I would have two thoughts...
1) To make the cash flow happen, I would definitely be looking at a 30yr loan vs a 15yr. At your purchase price of 250k, that's near a $600 per month difference!!! Also, I assume from your photo that you are also fairly young (like myself) and therefore don't have the necessity for a 15yr loan to be fully invested by a "retirement" age. And the likelihood is, you will probably want to sell off this property down the road before your mortgage even reaches completion. Plus, having a lower payment make it more likely that your charged rent would cover more or all of the mortgage. And if someone else is building that equity for you, maybe it's ok if it takes a little longer?
2) I am not familiar with the prices of housing in your market, but here in Kansas...$250k for a duplex is quite a chunk! I'm looking to acquire in the $80-150k range (even if that means a little fixing up). I don't know what your goals are...but I wouldn't go for a higher dollar property your first go around. Get some experience and make bigger commitments further down the road when you know more what to expect.
Just my thoughts personally, hope they help! Best of luck in your endeavors @Joseph T.
I definitely agree with Ben, the whole goal of an investor is for the cash flow, that is unless you are trying to buy and flip a property, but that's a completely different subject.
If you want to have high cash flow, you should get a 30 year loan, if we could get more than 30 years, then I would definitely do the highest amount of years possible. I would do that to have a lower monthly payment, which equals higher cash flow.
I'm also in the same boat as you, searching for a 2-plex to a 4-plex, I haven't been able to find anything good cash flowing properties, but it seems like the 4-plexes in my area (Vancouver, WA) are cash flowing slightly better than the 2-plexes. There are rules for some states on whether you can purchase 4-plexes with less than 25% down, so make sure you look that up if that's something you're interested in.
I hope to hear your updates on purchasing! I also hope I'll be able to find a 2-plex to 4-plex soon that has decent cash flow.
Good luck @Joseph T. !
Go 30 year. You can always make extra payments. If you go 15 years and times get tough the bank isn't going to let you pay less! Also, why put down 10%, why not 5%? This leaves you cash for repairs/upgrades/vacancies or better yet, another rental!
As far as "rules" like 2% and such, they're rules of thumb made up by seasoned investors that are looking for serious cash flow on properties they're not living in. You're not likely to purchase something in an area you'd live in that will achieve the 2% rule and that's OK. You're going to live for free each month while someone else buys you a house. Sounds like a good rule of thumb to me...
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