Cash is King. With all the foreclosure here in Phx we have a glut of renters and rentals. Many renters though are in financially precarious positions. Having no loan will permit you to be very selective with your tenants.
RE Rules:
1. RE should be cash flow positive from day 1
2. 100 x monthly rent = cost of the house
It’s a quick ‘rule of thumb’ for whether a purchase is reasonable, from an investor’s standpoint.
If you buy a 100k house that gives you 10k in rent a year, and you deduct 2-4% for upkeep/taxes/insurance (depending on where you are, this can be significantly higher), you’re getting a 6%+ return on your investment. If you wind up with it unrented for 1-2 month a year, you wind up still with 4%+ return on investment. Buying a house at more than about 10 times yearly rent is a losing proposition, as you could invest your money for the same return with none of the hassle in CDs.
Of course, rents generally go up unless the economy of an area collapses (which is happening in many places), so ’scraping by’ with 2-3% ROI isn’t horrible if you’re a believer in the local economy. And if you have to finance part of this ‘investment’, it’s easy to go into negative returns.
And for the last few years, people have been doing just that. They’ve been financing Interest Only loans to buy a house and STILL hemorrhaging money, because they were banking on short term appreciation for a profit, not actually renting the property in a cash-flow positive manner. So the 10x yearly rent is roughly when it makes sense to buy it for cash and have it be a cashflow investment, and not a price speculation play.
I hear Detroit has some really cheep bargains, if you’re interested.
Some of the rules posted seem strange. I am a real estate bottom feeder. I operate mobile home and Rv parks here in Florida. I typically rent a mobile for just a little less than the same # of bedroom house but my cost to purchase the unit is much less. The typically cost of a mobile with its own land is from 11K to 18K these rent for between $300 to $550 per month. I get the cost back in 36 months not 100.
Find your nitch and find a local real estate investment group to network with especially in todays market one needs to be on top of the local market. My only hit has been the lack of construction workers who would pay almost obscene weekly rental rates when that industry was cruising.
Buy low, sell high.
Collecting rent by accepting almost worthless dollars may be less than desirable.....I won't even mention extraction of likely squatters....
I’ve been a Real Estate investor for about a year
There is certainly some stability in the markets I watch, but the Administration's enmity for business in general has small business owners in a holding pattern with regard to expansion and hiring (and it is income growth that most directly affects the residential markets).
Most small business owners are pessimistic as to what Obamacare is going to require of them. All of the business owners I have spoken with believe that, despite some comments to the contrary (particularly to the Chinese), Obama will increase government spending and individual and corporate tax rates...and this will prevent a recovery.
Bottom line: Unless and until Obama has an economic epiphany, investing in real estate has too much risk.
I also did well with a group of investors buying apartment buildings at good prices a few years ago when everyone else was overpaying for McMansions. I got 100% of my initial investment back in cash in 18 months, plus an additional 20% back in cash within the next three years. I estimate the value of my remaining assets to be about 40% of my initial investment.
My advice is to be very careful in this marketplace, and be very selective. One thing I would recommend for anyone starting out is that you buy something that you wouldn't mind occupying yourself for up to five years if you couldn't find a tenant to pay the bills and give you a good, positive cash flow.
What kind of properties do you own and/or look to own?