Im pretty sure this is a horrible deal, just help me to understand why

Investor · San Diego, CA · Member since 2014 · 101 posts · 23 votes

@Brandon Heath it may look terrible numbers wise and I am sure many people on here will tell you it is. Unfortunately not everyone can live in an area where you can buy a $60k duplex and have your tenant cover your whole mortgage. This certainly wouldn't be one of those cases without a hefty down payment. However, keep in mind that Poway is very expensive and decent SFRs sell for $500k+ and if you have to live somewhere you might as well have somebody help with the mortgage. Also, Poway has very few 2-4 unit properties so when compared to these properties this might be a decent deal if they have similar rents but are selling for more than $525k. If you did go with a 5% conventional you could get in for relatively cheap (for the area) and still have you tenant pay for roughly have your mortgage. Either way it beats renting. The downside is that if you ever move out you will have negative cash flow every month.

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Bill Jacobsen

Salem, OR · Member since 2013 · 701 posts · 159 votes

12y

As a pure investment, you are right, it doesn't look good. I estimated about a 4.4% cap. At a 30 year loan at 4.25% you have a loan constant of about 5.9%. This means you have to put about 25% down to not have negative cash flow. Your return must come from appreciation.

1 Reply

Larry Turowski

Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes

12y

@Brandon Heath Any investment is about your return. Show us your return and I think you'll see that it is not a good investment.

The one exception is if you are going to live there because you need to compare this to what you are paying for rent and then there are certain intangibles, like you would just be so happy in this house.

1 Reply

Aristotle Kumpis

Specialist · Long Beach, CA · Member since 2011 · 888 posts · 401 votes

12y

It doesn't seem like a good deal. You could purchase something in another market, say Houston, and get about $1400/month in rent. And the purchase price in Houston would be around $140K. A good rule of thumb is the rent to value ratio. As long as you are around 1%, you will have some cash flow. When the deals don't make sense in your market, you need to look elsewhere.

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Sonny Ngo

Involved In Real Estate · Houston, TX · Member since 2014 · 78 posts · 22 votes

12y

@Aristotle Kumpis

I concur with you.

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Account Closed

Investor · Sunnyside, NY · Member since 2014 · 356 posts · 114 votes

12y

@Brandon Heath

1. With rent at $1500pm, you're talking about a return on your investment of roughly 0.28% per month or 3.4% per year. Now if you factor in about 50% expenses (i.e. 50% of your rental income will go to upkeep and maintenance of the house, taxes, etc), you're talking more like 1.7% per year on your money. This does not factor in your mortgage payment. Putting your mortgage payment aside, the real question is "what other ways/forms of investment, will give you a 1.7% return per year or more? Probably, putting your money in bonds or a money market account would get you there. Even low risk mutual funds will probably outperform that. The term to use here is "what is your opportunity cost"? Owning a house, renting out part of it and having to deal with tenants (even very nice ones) and having to deal with ongoing maintenance and upkeep of the house is work. Think of the work involved and ask yourself if putting money in a safe/low risk mutual fund (hardly any work other than opening up the statement once a month) that earns you even 5% per year is a better bet than this investment.

2. Of course, there is potential appreciation. You'll know your market better and it may be a hot area but for reasons discussed ad nauseum on BP, I tend to never factor this into my calculations or my decision making process. The investment must make sense in, and of, itself.

3. Being an owner occupant has other considerations, as @Matt C.

pointed out, it will beat renting. I think the only way I would consider this is if you are going to live there at least 5-10 years. Even then, put down enough of a deposit so that when you do move one day that the rent will at least cover all expenses. And I do mean ALL expenses, including the cost of property management in the case where you move out of town and can't be there to hands-on manage the property yourself.

1 Reply

Brandon Heath

OP

San Diego, CA · Member since 2014 · 78 posts · 10 votes

12y

@Matt C. Thanks for the response. Its something we would have to decide on. The draw of the area for us is the school district. If one of the units were a 3/1 I could see us staying 5 years or so. You mentioned a 5% convetional loan, Im usder the impression that anything under 20% require an FHA loan along with PMI. Could you clear this up for me (as i Mentioned, extremly new)

@Larry T. Living in the property is the only way it makes since. I currently rent from a close family friend who has a duplex and our rent is well below market ($700 including water and electric). So in that since also not jumping up 4x/5x in monthly payments is also one of the draws. Its a great family area that we would love to live in but after everyones input Im begining to see that I may need to go to a chaeper area for a few years and maybe try a little down the line. Thanks for your help

@Aristotle Kumpis & @Sonny Ngo Fur sure I know my local market is horrible as far as a pure investment goes but I do plan on liveing here. Im going to buy a house in the near future anyway, might as well let it pay me a little now and hopefully a lot later. My wife and I had our first child a little over a year ago and where we currently live we are busting at the seems! There is no possible way we can find rent as low as we pay. Even if we didnt mind some ofthe scarier areas of the county, there is just no way. If I rent again I will be putting out at least $1300-$1700, I was just hoping I could envest that money rther then throw it away. Maybe a year or two after i figure this out I would love to try a deal in a different state or area. Thanks for your input, Ill keep my eyes on that Houston market for the future!

@Wendy Noble In reference to where you mentioned "With rent at $1500pm, you're talking about a return on your investment of roughly 0.28% per month or 3.4% per year". Now is that $1500 considering me living in the propperty as well and paying rent? In either case is the only way you can raise this number (0.28%month or 3.4%yr) is by lowering your intitial purchase price? (either by the down payment or a cheaper house)

I see your point about being able to earn equal or better on a bond or money market type investment. Can you explain or point me in the direction of a good BP Blog that could me better understand how you came up with those numbers? This way I could run it myself to see whats worth really taking a deeper look into. Thanks for your time!

Just from these few responses I feel im already understanding more then when I first posted. I really appreciate all of you taking time to respond and help me out.

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Account Closed

Investor · Sunnyside, NY · Member since 2014 · 356 posts · 114 votes

12y

@Brandon Heath

The "1% rule" and/or the "2% rule" are often referred to on this website. They are really "rules of thumb", not absolute rules. To calculate: rental income / purchase price. To achieve 1%, I should get rental income of $2000pm on a property that I pay $200,000 for. Its a very simple calculation and is neutral as far as financing (mortgage) and expenses are concerned. In the above example, my investment of $200,000 will net me a return of 1% per month or 12% per year.

Then you get to the "50% rule" which again is a "rule of thumb" that states that on average, about half of your rental income (excluding mortgage) will be eaten up in expenses (examples, maintenance, taxes, any HOA fees, vacancy in the rental unit, etc, etc).

Therefore, in reality, my investment of $200,000 is really only going to net me about 6% a year after expenses. Then, to my above point, you have to figure out if the opportunity cost (and the work involved) of having your money invested in a property is better or worse than another comparable investment.

I'm not saying everyone will see it the same way as me, but that is (in a nutshell) how I look at it when looking to buy an investment property. Your considerations are different when buying a home that you will live in yourself. Note: a home is not an investment. A home may become an investment when you move out of it one day and decide to rent it out but whether it will be a good investment or not will be for you to calculate.

Have a look at the "Ultimate Beginners Guide" (look at the top of the screen at the "Learn" tab, click on "Free How-To Guides" and the UBG is at the top of the list). I think in Chp 2 of the book there is information on how to analyse a property and a link to a great blog post on deal analysis that explains all the above in more detail.

You may also want to look up "cap rate" which is a calculation that people do for multi-family houses.

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Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

12y

I can see why you can't get this one off your mind. I would investigate the comps see where its at. This could be a longterm winner in a big way. That newer house next door is what is going on longterm.

Thanks,

Matt

1 Reply

Leon Y.

Real Estate Investor · Las Vegas, NV · Member since 2011 · 117 posts · 28 votes

12y

@Brandon Heath I think you need to find other areas with potential higher cash flow. You don't need to invest in where you live. I'm sure there are areas close by San Diego that don't requirement such a high price. I know a friend who's cashflowing on a 4plex in Ramona. So just explore other areas starting close by to see if there better options. You can always rent where you want to live and invest where there are higher returns.

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Account Closed

Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes

12y

Originally posted by @Brandon Heath:

Hello BP!

First of all I am an EXTREME newb to any type of investing, so I apologize in advance for all the needless questions. I live in San Diego county and would like to try and purchase a small multi family in the next 12 months. I've been looking around and trying to get a grasp at maybe what I could be getting myself into. This property is just down the street from me and I cant get it off of my mind (dangerous emotion). So I thought it would be great to run numbers with all of you. I find myself trying to act like this would work and your job it to crush my dreams and save me from myself.

The property is in Poway California, here is a link to the actual listing Click here.

Ranch Style Duplex
Side by side 2/1
Asking price $525,000
Current Rent $1,500 and $1,600
Rent Comps in the nearby area are $1400-$1600
Metered separately for water and electric
Taxes last year $3200
I would plan to live owner occupant for a few years.

Now I'm almost positive that from this I see why everyone complains about investing in California. With these numbers I would have to put like 30% down just for it to make sense. I of course would looking for an FHA loan but with these numbers that's basically suicide!

Highly unlikely I would be ready for this deal anyways but i thought it would be great to learn what type of numbers I should be looking for.

Cash flow is not profit. Look at appreciation and rent growth. That is your profit. Also compare expenses per sf. Even tho you could buy ten times the sf in the midwest you are dealing with much higher expenses

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Im pretty sure this is a horrible deal, just help me to understand why

Im pretty sure this is a horrible deal, just help me to understand why

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