Andy over at Thoughtful Consideration emailed me the following question and, with his permission, I thought it would be better to answer it here.
“My wife and I are interested in getting into investment real
estate, but we’re having trouble identifying properties with which we
could generate a positive monthly cash flow. We have some (but not a lot) of
money that we could put down; unfortunately it’s not enough to bring even
the most basic expenses (mortgage, taxes, etc.) to a monthly dollar amount
below what we could rent the units for.
Did you run into that problem, or is that just our market (Boston suburbs)? Do you have any ideas on how that might be overcome?”
I guess I am lucky because the city I live in is heavily populated by students, and enjoys relatively low real estate prices. The average home in my city costs approximately $250,000 CDN, but you can find town-homes and a lot of smaller homes in the $150,000 range. My first home is a war-era home converted from 3 bedrooms to 5 bdrm, 2 bath. My second income property is a 3-bedroom townhouse converted to 5 bedrooms. Furthermore, I charge per bedroom since I am renting to students. This works out to $2000/month rent. Expenses are kept low ($1200-ish) including mortgage payments due to the low cost of the homes, so the mortgage payments are reasonable.
I’m not really sure what the Boston market is like. You may
wish to consider leasing out a property, or flipping a house or two to generate capital. However, flipping is a risky business and one must very carefully plan out every eventuality prior to purchasing a house to flip. I think flipping will become even more dangerous in the coming years as some of the air gets let out of the housing bubble. For a light-hearted view of the Flipper Nation, check out this online video series. (It is worth a watch!) There is also the question of flipping in a market which has a good potential for downturn. I, for one, think it is still possible to flip a house as long as you do it right… What does that mean? You need to get in and out quickly, get the house on the market ASAP, know your market so that you can guarantee the house will sell fast, and keep in mind all of your expenses including depreciation of the market value.
Another idea would be to attempt to buy up some foreclosures. There are several ways of doing this, and it does require a fair bit of legwork, however, you can often get the house for much less than market value. I have not attempted this, so I really don’t know how to go about it. I have some ideas… but untested ones, I’m sure a trip to your local Chapters would dig up some good information here.
Either way, the more down payment you can scrounge up, the more cash-flow you’ll have. Ideally your yearly cash flow will be able to pay for all of your repairs, and other miscellaneous expenses. Otherwise, these will be out-of-pocket expenses, and I wouldn’t recommend getting into a situation like that.
Here are some questions for you, maybe you could chat them up in the comments:
- What is the average cost of a house in Boston?
- How much do you think you could rent it for?
- How much is property near the colleges?
- College students pay exorbitant amounts of rent (because they are much shorter term usually).
- Have you set up a spreadsheet to compare properties (more on this later)?
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