Anything but financial suicide?

Question

I am so glad to have found this forum. There are obviously some well-experienced and informed people on it.

I will try to make this short. I am no expert in investment properties. Although I have sold several private homes for a nice profit and have basic real estate saavy, I have never owned income properties.

I am writing as I see a friend who I think is about ready to make a HUGE mistake. Normally, I keep well out of other's peoples business, but when I see someone going over a cliff, I consider stepping in. I may be totally wrong on my math, but I have done research on cap rates and such and can't see this working. My friend tends to run more an emotional level and I am afraid he isn't doing the math.

Here's the story:
My friend did well on one rental property that he held for about 15 years. It wasn't giant on cash flow, but it appreciated real well here in CA. He just moved his own home to another area and has sold the rental and looking to buy 3 rentals in his new area. Here are some parameters on these 3 prospective rentals.

The price of each prospective rental will be about $200,000 (market value for this area). They were built in the 70's and 80's and have no or one car garage also no central heat or air. They all need SERIOUS updating. He anticipates replacing windows, walls, fixtures, flooring cabinets, roofs, siding and more. He anticipates at least $30,000 to fix up each rental.

The area he is buying in is a somewhat of remote area in far northern California (almost in Oregon). There is no local job base (mostly retired residents), no shopping, schools etc. The population outlook is flat for the next few years and there are a lot of vacant lots available to build on.

Looking at the rental market here, newer homes with more amenities are asking $1,100/month and sit on the market for that price.

This friend is almost 60 and needs more retirement income. He says, "I just want to go out and play now". If this were your friend, would you say something?

Thanks,

Robert12

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Update:

I think the better question on my original post should have been, "Is there any way someone can see these numbers making any possiblity of a cash flow?" (1,100 rent on appx. $230,000 home)

Subsequently, I have crunched the numbers for my friend and he is anxious to see them. I will be telling him that I might be totally messed up and that this advice is only worth what he paid for it (zero). Who knows maybe the area will appreciate DRAMATICALLY in a way not forecasted.

$1,110/month on a $230,000 property. I just realized!! My Money Market Fund (after deducting only property tax and HOA's) does better than this!!!!

I would still appreciate any input on anything I may be missing. Don't have a clue if there is some tax write-off or anything else that may help him.

Thanks, Robert12

PS Mike I like the No-nonsense look of your book!

Michael Rossi · Answer

Robert12,

You are absolutely right. He's gonna lose his butt on those rentals. I would estimate that over the long term, he will lose about $750 per month on each of them. OUCH!

As to whether to tell your friend or not, I don't know. The majority of people who start a rental property business fail in a short period of time. They fail because they are not willing to do the work and learn the business before they buy. Can he afford to lose a couple of thousand dollars a month?

Good Luck,

Mike

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I appreciate the reply Mike. I think my friend is seeing the profit of his previous rental and envisioning bigger returns doing the same thing. He seems to have forgotton how long it took to make that kind of appreciation the first time. His update today is that he is going to put all of the proceeds from the previous rental (about $300,000) in to the new ones and try to finance the rest with Home Equity Loans and/or Lines of Credit. Like I say, I am no expert, but that seems like a terrible momentum to go against.

I don't want to see my friend end up like Casey Serin. You may have caught his story on Suze Orman or the ABC piece. He is a young admittedly want-to-be real estate mogul. His story is a hard lesson. You can see it at IAMFACINGFORECLOSURE.COM. My friend won't have time in his life to recover.

THANKS,

Robert 12

I don't want to see my friend end up like Casey Serin. You may have caught his story on Suze Orman or the ABC piece. He is a young admittedly want-to-be real estate mogul. His story is a hard lesson. You can see it at IAMFACINGFORECLOSURE.COM. My friend won't have time in his life to recover.

THANKS,

Robert 12

Anything but financial suicide?

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