Question about investing???

Question

This might be a dumb question but....   I am looking at a multi-family in my area.  I was told by a mortgage broker that the certain city I am looking in a is a "depreciating market".  Is it not wise to buy here or is it ok as long as the house has a positive cash flow?  Just need someone's opinion.  Thanks!!!

Account Closed · Answer

It depends upon why it is depreciating. If prices are going down just because prices are generally going down and buyers are feeling spooked, that's one thing.

But if it is depreciating because the drug dealers are moving into the neighborhood and all the factories have closed and there is no living wage work, then that is a different situation entirely.

Also, when you are running your figures, remember that the dollar loses perchasing power over time. In 20 years, if your property is worth $10,000, that will be just about enough to take your family out for a pizza, if you don't order beer with your dinner. (but, of course, the rent amount will have gone up)

Will Barnard · Answer

Difficult, not unrealistic.
I have a duplex with $400 cash flow and 90% financed in Texas.
It is new so I will not have to worry about major maintenance/repair expenses for the first few years.

Chris Pelletier · Answer

Thanks for the great advice.  We are hunting for a cash flow property in a decent neighborhood.  We were aiming for 200 per unit, is that too unrealistic?

Will Barnard · Answer

Utilizing a buy and hold strategy is a great way to get started and in this market, should be the most used. Real estate has its cycles and they always come back. Many investors and newbies, are sitting on the fence saying that they missed the last market "run-up" and there will never again be a cycle so good. That is incorrect, as cycle repeat. In fact, the market we are in now may be even better than the run up market from 2002-2006, it will only require a differnt strategy. From 02-06, anything you bought in CA turned into large gains inside of 6 months. Flipping was easy and anyone could have done it. Today's market requires a diferent strategy (Buy & Hold). Buy low and now while RE is on sale and very few are buying, and sell later when everyone else is buying. That is how you make $ in this market.

If the market in your local area is not currently condusive to this strategy, look outside your area or even your state. No sense buying in a poor market when there are good markets abroad, regardless of what you here in the news.

Purchasing multi-family units are excellent investment choices (in my opinion , the best right now), particularly new constuction as they come with builder warranties (little or no maintenance costs for 1-2 years), they will have greater future appreciation (compared with older units), and they will be easier to sell when the market turns to an upswing.

As others have mentioned, due your homework (due diligence) and most importantly, run the numbers to make sure the deal makes sense. Shoot for $100 per door as a minimum.

Michael Rossi · Answer

I agree with what Heathen said, but I would like to add one other thing for consideration.  If an area really did depreciate significantly over a long period of time, that usually means that population is leaving the area.  When that happens, there is an increase in the number of rentals on the market and therefore increased competition.  With increased competition, RENTS GO DOWN and your $100 per month positive cash flow disappears.  So, now you've got an asset that is depreciating AND a negative cash flow.  Prices don't only go up and neither do rents.

Mike

Matt Brown · Answer

It's pure basics.  Of course we could "what if" this to death by listing every single scenario, but he's just talking the bottom line.  I like it.

However, I must add...  Not only are you making a little bit of profit which adds up over time, and your house is getting paid off, but you have to think about all the interest you're deducting from your taxes over the years.  Add that up! ;)  Now this example is a single property, but if you buy another property every 3-4 years (being conservative) you're going to be making quite a bit of bank.  Oh, and almost forgot, you're not just going to leave your profits in a safe in your basement, right?  Invest that cash!  Bonds/CDs at the least.

Chris Pelletier · Answer

I like his point too.  Ironically, that's what I was thinking...a profit is a profit regardless of where you purchase.  As far as the taxes go, that's what got us interested in this area to begin with.  It seems the potential is endless.  It's always nice to have your thoughts confirmed by others who have done it before you.  There are so many people out there who seem to try and discourage us from heading down this path.  Can't help but question our mission from time to time.  Thanks for the input!!!!!!

Chris Pelletier · Answer

We will definately do our homework, as a matter of fact, that's all we do these days.  Right now, it's time consuming but we're hoping it will pay off in the end.  Thanks for the great advice.  I'm going to that site right now!!

Bob McIntosh · Answer

Why not start a group up yourselves?  There are bound to be all kinds of investors in and around your area, you just need to provide the forum for them to come and impart their knowledge upon you!! :)

Chris Pelletier · Answer

We do not have a local REIA!  :cry:   We have looked and can't seem to locate any in our area.  We are considering traveling about an hour and a half to attend the closest meeting we could find but aren't sure if it will help us much considering we are so far away.