House hunting

OK. First for most, I am a novice in the RE investment. As part of my 2010 resolutions, I start look into buying investment properties.

I know some members on this forum are flipping house or are in the RE business. I have some novice questions for those.

When I look for house, what important thing should I pay attention to?

Nearby school, easy to rent, location or anything?

Is the following book "The Millionaire Real Estate Investor" a good one for novice?

My goal is to generate the cash flow with the properties. I am not ready to flip house, so I am looking for house that I can rent out right away.

Any hit or suggestion will be very much appreciated!

Thanks!

This was my first full year of being a landlord. Learned some very valuable mistakes.

If your looking for income property, then you need to evaluate the number very closely. When folks say 25-45% of the rent payment goes towards expenses. They are not kidding.

Picture a house that rents for 1000/mo. Many folks would assume the mortgage needs to be $800 or less. $800 is way to high. I would say the mortgage needs to be $500 or less $600 with taxes and insurance. That means you need to have mortgage of 65k or less.

I always assume in my calculations 1 month vacancy, 1500-2500/yr maintenance, 8% for property manager. That gives a positive cashflow of $150/mo.

On top of that I would have 6 months reserve payments for each of the first 3 properties and at least 3 months reserves for every property after that.


In my first two rentals this year, I lost 4k. Almost entirely due to my mistakes in learning how to own property, but also due to issues every landlord faces. Be very very picky is all I suggest. Above everything else, be picky about tenants. I would rather take 3 months vacancy, then have a bad tenant. They can cost a hell of a lot more then that vacancy.

To answer your original question. It depends. Depends on the area you wish to invest, the size of the homes, what tenants are looking for in your area, and will the properties cashflow.

All this rambling sounds like I'm trying to push you away from rental homes. I'm not. I had a great learning experience this year that I would not trade. Its value is in the untold thousands I will save in the future.

No. It is actually very encouraging to me. It is still better than leaving money in the bank to earn 0.3% of interest.

I am not sure if I fully understand Rich Dad's cashflow concept. Should I calculate the earning based on the total cost of owning a house? It means the total of down payment + rental cost + mortgage + Insurance + Tax.

It seems to me the cashflow is calculated without including down payment? Is that right?

In that case, would that make more sense to pay off the house entirely? From what I understood, 65K mortgage will have higher interested rate than 100K+ mortgage.

So if I have to pay 6% interest on 65K mortgage, should I just pay off the 100K house all at once and start generate cashflow with rental? However, in that case, I think that paying off the house is actually creating debt. The asset is not paying itself, I do.

Also, should I create a holding company to start with or buy the house as personal investment?

Do I miss-understood the whole cashflow concept?


Thanks!

Keep your CASH....don't pay cash. This is only your first purchase...things will change...you will change over time and your goals will be different. If you really only want the income....find a property already rented. Go to an investors meeting..hook up with someone.

RE is not my cup of tea. But I say look for REO (bank owned properties) that's where the deals are to be found.

YES...they are, but not necessarily for a newbie.

Depending on your area, most areas of the US have houses that can be purchased well under market value and rented out without a large down payment.

I purchased both my rentals with hard money and refi'd into a traditional mortgage. It cost me about 5% of the purchase price to do so. There is a large risk doing this, but I had seller agreement to take back the property if I could not get financing.

I would not use the RK model for buying houses. I would do like suggested and network with local landlords and property flippers. You may be able to pick up some good tips from them on your market.

I'm not a big fan of analysis paralysis, but It sounds to me like you do need to do some more research first. Just an observation. Unfortunately I have yet to read a landlording book I could recommend, but there are a few books that touch on investing in real estate and how to look at the numbers.

Terence,
Paying cash for a property with price/rent numbers similar to Bilge's example above will most likely get you a 10-12% cash-on-cash return. Certainly not bad, but not nearly what you can get by using leverage (financing a portion of the purchase price). If you have lots of cash sitting in a CD, probably not a bad move. Tying up a large percentage of your free cash can lead to trouble though if things go south with the property, personal health etc.

To calculate your cash-on-cash return, you simply divide your NET year 1 cash flow by the total amount of CASH you personally have in the deal. To calculate the "total" return, add NET cashflow and principal reduction during 1st year then divide by cash in the deal.

Using rules of thumb, make sure that your mortgage payment is LESS THAN 50% of monthly rent. House rents for $1,000/mo? Mortgage payment should be less than $500. This should keep you in a positive cashflow situation.

Stay tuned for B&P, I'll be going over this in more detail and explaining how I often get an ∞ return on similar properties...it's just math!

Saw an article and hope this help..
Here are things to consider before renting out real estate investment:

1. Is renting out your real estate investment a financially feasible option? Can you get enough in rent to cover your mortgage, property taxes, insurance and repairs? Carefully calculate how much money will be needed on a monthly basis to cover your expenses and make a profit.
2. Is there a demand for rental homes in the area? Some areas are filled with rental homes, while others hardly ever have them. Every neighborhood is different. Do your research and find out which other homes in the area are being rented out.
3. Remember that you will be responsible for all repairs on the house. This goes beyond sprucing it up for the next renters. Renters will call all hours of the day and night with various problems they want you to fix. If you aren't handy around the house, it will cost you more to hire someone to handle these kinds of repairs.
4. Are you willing to be a landlord and handle issues with tenants? Are you firm enough so they won't walk all over you? Do you have what it takes to kick out tenants who aren't paying? Being a landlord takes patience and people skills.
5. Make sure you have your real estate investment thoroughly inspected before you rent it out. Also have your tenants sign a checklist before they move in so you have documentation of what minor things were wrong and what things the tenants caused.
6. Take the time to familiarize yourself with tenant's rights. Know your responsibility as a landlord and what rights you have as far as enforcing the rules, evictions and more.
7. Be prepared that there may be times when there are no tenants in your property. Ideally when one tenant moves out, another one moves in, but there is the possibility that you have several months in between when the property is vacant and not bringing in any rent.

Not to blog spam, but it's easier to just post links than to rewrite all this...

Here are a couple basic articles I've written on analyzing rentals (Montexan addressed these things above as well):

Cash Flow Analysis for Single Family Houses

The 50% Rule

I live in a pretty expensive area so its tricky to find good rentals.

But I would look for something where you can get a 10%-12% cash on cash return. If you need to put a note on it thats fine, you will just have to accept a lower return. Just to mortgage it to the hilt, its easy to get into trouble doing that. Most people that did that during the last boom are bankrupt now, or nearly so.

I'd also stay away from bad areas, ghetto property's are just going to give you problems. This is an investment, buy quality.

As a noobie one of the easiest ways to get in and use leverage to your advantage is to find four plex or less. You live in one unit and rent out the others. This was my first experience with rentals.

unfortunately that was the ONLY right thing I did. You can find that in " What NOT to do as a real estate investor" thread here on the fastlane. That is my claim of glory here on the fast lane. It made the sticky as the worst example of what to do as a real estate investor. Maybe you can avoid some of the mistakes I did by reading that thread.

FHA loans can be issued for anything under a 4plex. I saw a while back a four plex that had one 4/2 , two 2/2's and one studio on a quarter acre for 150k in Houston. Had I had the funds and the abililty to inspect I would have jumped on the chance at that one. It was off the market in three days.

Get a good real estate agent and tell her exactly what you are looking for. they can get you the deals before they hit the general market. That is how I got my current house. Locked it up the day it went on the market. gotta move fast on the bargains.