First Investment - Good Idea?

4 Replies

Hello Everyone!

This is my first post to the BiggerPockets community.  I look forward to talking with you all!

I have an idea for a real estate investing deal that seems a bit too good to be true.  I noticed that in my city, there is an area of town known colloquially as the "ghetto".  Houses here range from $30,000-$60,000.  I am considering buying one of these houses and then renting it out.  The mortgage payment is around $184/month, yet some are being rented for $700/month.  

Example: http://www.zillow.com/homedetails/9318-N-Elmer-St-Tampa-FL-33612/45077624_zpid/

Could I really make $516/month passive income and $184/month (-interest) towards equity in the home?  This seems too good to be true.  Surely there will be expenses (cleaning the house, making repairs, changing lightbulbs, etc.), but how large exactly are these expenses?

Before I go ahead and buy a cheap, ghetto house with the goal of renting it out, is there anything I should be aware of?

Also, on a side note, would you recommend using Section 8 tenants if you can't find a regular tenant? For a 2 bedroom house, the HUD website says they will pay almost $1,000/month! This certainly seems too good to be true.

So...what am I missing about this business model? Is it really that easy?

Thank you all so much for your time.

Regards,

Justin

I've followed a deal that seemed too good to be true in the "ghetto" before, too. I had a property manager that was my employee at the time go to the property during the day. He was held up at gunpoint. So, naturally, we stopped going to the property as often. That let it deteriorate, and eventually the tenants ruined the building and we boarded it up. One night a crew broke in and completely stripped the property before I could sell it. 

Another story: I helped a friend of mine buy a property in another bad area of St. Louis. He was held up and shot (he's OK now) outside of the property. He moved to California because he was uncomfortable living here after.

So, those are horror stories. I don't mean to fear monger, but if you're not comfortable being at the property during the day and night, or you wouldn't walk around the neighborhood, don't buy there.

If you're chasing a great deal, you're doing just that... chasing. I'd advise everyone to find good deals in good areas rather than "incredible" deals in bad areas. The cost of management -- again, unless you're comfortable there -- trying to track down late rent, finding good renters (since most good tenants want to live in better areas), along with the higher maintenance costs associated with bad areas all tend to wreck any profits the theoretical numbers show.

There are a lot of things you're missing. For example most people estimate expenses to be about 50%. That would be $350 in your deal. You didn't think about management, takes, capital expenditures like a new roof, tree roots cracking the foundation, replacing HVAC, vacancy, or evictions. With that said, the business model is very simple, rent for more than you pay (mortgage and ALL expenses) and you'll make a profit.

How expensive of a house would you guys recommend for a first-time real estate deal?

Starting out I would buy the nicest 4 family that I could afford in an area that I wanted to live in. I would do some dinging and browsing on this site and attend your local real-estate clubs and do some networking on local # for maintenance vacancy management fees etc. To make sure it will cash flow. 

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you

Get the Ultimate Beginner's Guide

Sign up today to receive the popular eBook for free!