Does This Sound Possible?

[Mike Kruser]

Hey Forum. I was wondering what you think.

I'm looking at houses in the 100k-150k range(I know the neighborhood well). Then I would rent it out to come closeto breaking even on the mortgage. Then in about 4-5 years I would have the house paid off (or close to it) and hopefully by then the housing market will come back, and maybe that 100k-150k house will be worth 120k-170k, and all the money i saved up with my Main job I'll have more money for an apartment complex or there about.

Thanks, Mike

[Jon Holdman]

What do you mean by "come close to breaking even on the mortgage"? That sounds like the rent is just a little less than the PITI. If so, that's a big loser. Read in the rental property forum about the reality of rental expenses. "Break even" means the rent is about double the P&I part of your payment. If the rent is lower than that, you're in a net loss situation.

If you put a down payment, you want some return on your money. That is, if rent is 2X the P&I payment only with a 25% down payment, then you're actually at a loss because your money is working for free.

How do you pay the house off in four to five years? P&I on a $100K loan at 6% for 30 years is right at $600. P&I on a five year loan for $100K at 6% is $1933 a month.

Keep in mind transaction costs on real estate are killers. If you buy at $100K house, your transaction costs are about $3000 (not counting pre-paids). If its worth $120K in five years, you'll pay, at the very least, about $10,000 to sell it. Maybe more if the market is still slow like it is now. That makes your net profit on this deal $7000.

Even that meager profit only comes if you see some appreciation. Could happen. Continued declines could happen, too. You're counting on 20% appreciation in five years, which I think is at the very high end of possible scenarios. I actually think its more likely the price will be the same or lower than it rising 20% in five years. I think its most likely you will see slight appreciation, maybe 5-10% over those five years. A 10% increase means you lose $3000 on the deal while a 5% increase makes for an $8000 loss.

Ben Bernanke himself says the economic outlook is "unusually uncertain".

Buy a house that makes sense right now. That is, one where the rent is at least 2X the PITI so you're at least break even. Calculate that PITI with 100% financing, even if you do end up putting in a down payment. Have enough case reserves to carry you through a long vacancy. Six months PITI, ideally