Posted in Cash Flow Properties, Investing in Real Estate, Property Management, Single Family Houses

Why Would You Do That? (Part 1)

Did anyone ever offer you a house to purchase and tell you that the rate of return will be over 30%?  Be careful!  This real estate market is lined with sharks preying on new investors.

The only way you can achieve those kind of results is when you buy low income property or use leverage.  The high rate of returns may be attainable, but it will not be sustainable.  I’m going to speak in general terms so I hope not to offend anyone.  Low income houses mean low income tenants or worse, subsidized by the Federal Government through Section 8 or by the local county through welfare.

Just think about this for a moment:

  • These tenants will never buy the house
  • If they break something, they can’t afford to fix it
  • When they move out, you will be doing a full blown rehab on the house to repair everything they ruined
  • You may get paid for a while but it won’t last
  • These houses seldom go up in value
  • These houses are hard to finance if you ever do sell it
  • You’ll have to sell to an investor
  • And finally, these houses are HIGH maintenance and management intensive

Why would anyone buy this garbage when there are so many great opportunities in today’s market?  Sure, you will pay more for a well constructed house in a good neighborhood.  In fact, the higher quality of the home, the lower your rate of return will be.  The reason your rate of return is lower is because rents do not go up in direct relationship with the cost of the home.  For example, you could buy a house for $65,000 and your rent should fall between $650-$900 per month depending on where you buy.  But, if you buy a house for double that $65,000, that would be $130,000, it doesn’t mean your rent will automatically double.  However, the quality of the home that you buy for that extra money should offer you greater safety in terms of value.  You are buying a better house in a better neighborhood and it should be more stable in terms of future value.

A good rule of thumb, not always accurate, is that rents should be approximately 1% of the purchase price.  This is not written in stone and is subject to the local market where the house is located.

With so many properties on the market today, go for quality houses in quality neighborhoods in the path of progress.  Focus on your exit plan, that is, who will you ultimately sell the house to? Buy in the price range of first time home buyers as these are the primary buyers in today’s market.  If people already have a home they are staying put until the market corrects itself.  No one needs a second home so focus on the market that is buying; first time home buyers.