Investing in rentals / short & long term

4 Replies

Here is what I am thinking of as my first step in increasing my portfolio:

Purchase at least 2 suited properties (or duplexes) for $800,000 (or less) (cost $600,000 after 25% DP)
Rents in my area will be between $4,000-$6,000 ($48,000-$72,000 per year)
Interest cost $2,000 ($24,000 per year) at current rate (assuming interest only LOC)

So I have potential net of $24,000-$48,000 per year (less taxes and insurance)

Originally posted by Robert Griffin:
So I have potential net of $24,000-$48,000 per year (less taxes and insurance)

Actually, it's less taxes, insurance, maintenance, vacancy, capital costs, utilities, turnover costs, concessions, rent loss, legal costs, accounting costs, etc...

In the end, you'll likely see negative cash-flow on these deals. Check out threads here on "The 50% Rule" for more details as to why...

Correct me if I'm wrong. I'll try to interpret your numbers to make it easier to evaluate.

Total for 2 duplexs
Purchase price 800,000
Down Payment 200,000
Amount to finance 600,000

Gross Annual Rent 48,000 to 72,000 (1,000 to 1500/mo/unit)

Your vacancy, property taxes, insurance, property management, capital expenditures, repairs, maintenance and other rental costs will like eat about half of this rent on average.

Your intention is to finance with an interest only LOC. Approx 24,000 annual cost

If your rents are 1000 per month you will just be breaking even and paying nothing on your principal. This seems like a very risky investment.

If your rents are 1500/mo you might average 6K annually for cash flow, but again your principal is not getting paid down.

A 6K return on a 200,000 investment is only 3%. That net income comes with a LOC that will not always be interest only.

I am considering a similar deal as Robert...

It's a duplex that I'd offer at most $400k for (really like to buy it for $350k, but I'll use 400k for my example). It would produce between $5k - $5500 per month. The PITI will be $2800-$2900 a month. So basically one side pays the PITI, the other goes into my reserves. I know this is just shy of the 50% rule. But I've found it next to impossible to find property that qualifies in my area (Northern NJ).

In comparison to many properties this deal is the best...

I currently own a duplex where I live in one half and rent the other... This is me trying to build my portfolio :)

I guess my question is, I'm looking at this opportunity like this... Because I have the 20% to put down, I'm investing $80k, then my tenants will be paying the PITI, so either one of 2 things will happen.

1. I hold onto the place, pay off the mortgage, and then the rent each month is income.

2. I end up selling at some point, the difference between the price the property sold for and what I still owe on the mortgage, minus my initial investment is profit.

Is this not a sound strategy for someone who has a good job in their late 20's?

Please all thoughts are welcome.... Criticize away!

If you have a good job that early in your career, congratulations! Unfortunately, the property, if you get $5,000 a month gross, probably gets you $2,500 a month net, which is $30,000 a year. From there, that's an 8-cap, rounded up.

It's not the best cap rate you can find, I'd look more towards 11- and 12-cap properties, but there's also appreciation to be figured in. Now, you probably won't hold the place for the rest of your life, so selling it is a definite exit strategy. Using the cash-flow to pay the mortgage while letting it appreciate is definitely a strategy, but you are banking on appreciation.

If the area is good, and it's not already overpriced, it might be a good investment, especially if you can get it for $350k or less. Remember, you have to both beat inflation and cover the seller's costs, like commissions and closing costs. So, even if you bought it for $400,000 today and sold it for $408,000 next year, you'd still be losing money, since inflation is 2% (8k) and you are paying a good amount in closing.

Also, I find it a little more difficult to hedge my bets on appreciation, but that considers the areas I work in. Just my input, I'm sure lots of other people around have completely valid viewpoints different from my own.

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

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here