does it really make sense for me to invest now?

Question

I have been looking at homes that are at just 25 percent of their 2004-2006 sale prices and are now 100k and under.  I only have 20k in ready cash and am looking at 20 percent down.  
                        
                        If I put my cash into a house and the value drops another 20 percent (which I have heard is likely) then I would have just lost all my cash.  My plan is to buy when homes begin to increase to avoid not hitting the bottom because no one is sure where that bottom is.  
                        
                        I have heard repeatedly that anytime is a good time to invest.  I see  homes that are still overpriced to me, junk for 100k and it makes me challenge that philosophy.  
                        
                        My wife likes a house we saw for 75k and i"m trying to convince her we need to exercise restraint and just gather information.  We are looking to buy our first rental property, and we plan to add on over the years and hold for cash flow.  
                        
                        Can someone convince me why anyone should be buying now?

Account Closed · Answer

The Consumer Price Index website Wheatie posted is not working for me.  I found another  CPI calculator at 
http://minneapolisfed.org/index.cfm
ofgift

Will Barnard · Answer

Brian,
Mike uses the 50% rule in his calculations and his business model. What he is saying is that he includes all expenses, both fixed monthly, and future capital expenses. I do not do my cash flow calculations that way. This is not to say that I pretend that they do not exist, simply to state that the funds used for those capital expenses come from a reserve account and not the cash flow.
From a tax keeping standpoint, it is easier and more straightforward (for me & others) to do it that way.
You may not ever have to put on a new roof or ac unit, and on another property you may have to. You may not have a vacancy on a property for as long as you own it, and on another, you may have 6 months worth.
The important thing is to either, save for them via the cash flow as in Mike's example, or have a set account for them as I do.
Bottom line is that you will find that some types of properties will have lower average expenses than others, and some higher than others.

Getting back to CA, next year may in fact be an even better time to purchase, however, as many have pointed out, getting cash flow from these proerties will remain difficult as rents are much lower than values, even when purchased at 60% of market value. The same 500k home that rents for 2k a month and you can buy that home at 50% or at 250k still will not cash flow. That is why CA is more of a spec investment rather than a long term buy and hold for cash flow. If you want to enter the landlording business, you will need cash flow, so go out of state. If you can afford negative or no cash flow, but want large chunks of ":flip" profit (which still will require a longer term hold at this point), then pick markets that have proven to have high appreciation rates such as CA, Vegas, FL, etc.

Brian Campbell · Answer

I agree with you Wheatie.  Which is why I don't even plan to buy anything until at least next June.  But there are a lot of 90k homes in neighborhoods that command 1250 in rent minus water and trash.  So it seems like there already profitable opportunities, and a lot of them.

I think I am missing something when it comes to expected profits.  I thought 3 or 4 hundred was alot to make every month, however the vibe I get in here is that it should be higher.  So I have to be underestimating expenses.

I think I set my sights too low.  I must be underestimating expenses.  do you base cash flow on the amount of rent.

Michael above, said 650 for 1300 in rent goes to operating expenses, or 50%.  Where does that go, This is kept aside for expected future expenses I suppose, but what kinds of things are you saving it for.  I know the standard things (depending on the house), that depreciate.  Is this number kind of high for most cases?

Then only 100 for cash flow.  Is this your profit?    
 
I need to find the answers to these questions in order to find the price I need to buy at.  I was looking at 75-100k.  Perhaps those same ones will be 55-75k in 9 months anyway.

Matthew Quinlan · Answer

-

Jon Holdman · Answer

I don't doubt there are good locations to invest in in CA.  But rentals are all about rent, expenses, and debt service.  I've heard tales of $500,000 houses in CA that rent for $2000.  The landlord is losing his or her shirt on a deal like that.  A few years ago, when appreciation was outrageous, you could take the hit a few years, then sell for a nice profit.  With prices falling, there's nowhere to make any profit on a deal like that.  Either rents have to rise a bunch, or prices have to fall a bunch.  Just because the price has fallen doesn't necessarily make it a good deal.  Prices went up so much in CA that they have a long, long way to fall.

Brian Campbell · Answer

I had no idea that NOI needed to be so much.  I always assumed making 400 per month was sufficient and you were lucky to do so.  This wasn't based on much research.  The info is great, I am reading all I can on the landlord forum and will come with more educated questions later.

I want to note that I am not trying to time the market at all.  In fact I want to wait till the maket is on the rise (verified proof, not guessing).  I feel these are incredibly unstable times and as a gambler I believe its not worth gambling until evidence suggests the market is improving  when my odds are the best.  
            
            Also, homes I am seeing listed as "as is" seem very inconsistent.  Some prices are down right insulting (94k for a trash heap).  This could all be because I don't know what I'm looking for but could it be that the banks aren't that bright and don't know how ridiculous some of them are.  I really want to know if its me or not, because I lose confidence when I see these homes.  
            
            Why isn't California a good place to invest?  It seems logical that with the most short sells and foreclosures there should be a lot of deals going forward.  Eventually the prices will be there right?  They seem to be discounting many homes already and as they sit for another 6 months they are bound to discount again right?  Tell me the other side if I'm missing something.

Michael Rossi · Answer

I don't think trying to time the market is wise, unless you are purely a speculator.  If you want to be in the rental business for the long term, then trying to time the market is pointless.  If you are truly in the rental business for the long term, then you will go through  many business cycles over you career - both ups and downs.  In addition, can you buy an entire rental portfolio at the exact bottom of the market?  How will you know what day the bottom occurs? 
            
            The key to succeeding in the rental business is to buy at a HUGE discount (to market value).  If you know the gross rent, determining the maximum purchase price is easy.  
            
            In your case, with gross rents of $1,300 per month, the NOI would be $650 per month (using 50% of the gross rents for operating expenses).  Subtracting $100 cash flow from this $650 NOI, gives you $550, which is the maximum mortgage payment you can make.
            
            So, if we assume a 30 yr mortgage, at 7% interest and a $550 per month payment, the maximum purchase price would be about $82,000 (including initial rehab costs).
            
            So, the hard work becomes finding a property that you can buy for $82,000 including the rehab costs.  If the $75,000 property that your wife likes will rent for $1,300 per month and has rehab costs of less than $7,000, then that would be a potential deal.
            
            You say that homes like this that are ready to rent are $130K +.  Therefore, with an acquisition cost (purchase + rehab) of $82,000, you would be buying at 63% of market value.  If you buy at 63% of market value and prices decline another 20% - who cares?  You still have positive equity AND positive cash flow.  If the prices continue to decline, you'll be buying future rentals with even better cash flows (assuming the rents stay the same).  
            
            Good Luck,
            
            MIke

Jon Holdman · Answer

I may have been too tricky in my posting.  There's a link behind the "adjust those for inflation" works:

http://data.bls.gov/cgi-bin/cpicalc.pl

According to that site, $96,000 in 2000 is equal to $122,138 today.  That's just MY take on the true baseline.  There could be local factors that put values lower or higher than that baseline.  However, I think we do have to work off the bubble prices until we get more down toward that baseline.

Will Barnard · Answer

Brian,
Let me save you tens of, if not hundreds of hours of time by telling you that CA is not currently a "cash flow" state. (Not unless you put down 50%)
Therefore, you have two options for your long term strategy:
1. Buy and hold out of state in a market that is stable with future upside potential (I like TX)
2. Buy at an extreme discount off the true dollar in a market proven to be able to rebound/appreciate rapidly. (CA, Las Vegas are two choices) Keep in mind that this is a speculative investment that will most likely not produce positive cash flow, but in 5-7 years, will produce a large equity position (assuming you bought correctly).