Reader Question #1

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:

  1. What is the average cost of a house in Boston? 
  2. How much do you think you could rent it for? 
  3. How much is property near the colleges? 
  4. College students pay exorbitant amounts of rent (because they are much shorter term usually).
  5. Have you set up a spreadsheet to compare properties (more on this later)?

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4 thoughts on “Reader Question #1

  1. Thanks for your response (and sorry it took me a couple of days to comment). I’m not sure what the prices are like in Boston itself, but we’re quite a ways out of the city in a non-college town. While there are more colleges in New England than in most other parts of the country, those closer to us are fairly small and probably don’t have a big impact on the surrounding rental market. I suppose we could look further away, but since this would be our first time at it, having the property nearby sounded like a good idea, especially since we expect to manage it ourselves (as I believe you do).

    A couple of years ago we looked at buying a unit in our condo complex. We knew that was below market (as proven by the fact that it sold a month later for $15,000 more), but we didn’t know what we were doing and were justifiably nervous about carrying the mortgage on an empty property given how quickly it would have eaten up our emergency savings. There’s a guy who rents his unit (of the same size) for $850/month upstairs, and monthly rents in the newspaper for larger, nicer-sounding units in our town were only in the $1000-$1100 range. Just mortgage, tax, and condo fee were somewhere around $1200-$1300, so we backed out. The guy was selling because he had already found a new place and just wanted a smooth transaction, hence the discount.

    We’ve also considered moving to a multi-family as an owner/occupier. Often the MLS listing will include rents, but you have to guess that they’re a little optimistic. Unfortunately, even with the rents they provide, we can’t make the numbers work.

    That experience led me to ask if there wasn’t something that I was doing wrong because unless we put down a significant amount, we can’t cover our costs. Perhaps our market just requires that, or maybe you take a short-term hit with negative monthly cash flow until the rents rise relative to the original purchase price of the rental. None of those scenarios were attractive to me, especially since we’ve never done this before, and there will likely be quite a few unexpected repairs and costs.

  2. First, yes I do manage my own properties at this time. We’ve considered having someone else show the properties, but for the foreseeable future we will do the maintenance ourselves. Our houses are only about 5kms from our house, which makes things much easier.

    I guess there are a few problems that can make it difficult to earn a positive cash-flow.
    1) Property values are at an all-time high right now.
    2) Interest rates are on the rise.
    3) Renting to single families is much less lucrative than renting multi-unit residences, or even renting multiple bedrooms in a single house (as I do).
    4) Geography

    I find the best thing is to have a spreadsheet to analyze properties side-by-side. I’m hoping to post my spreadsheet on the blog in the near future. I just need to clean it up first and add some new calculations.

    Have you considered flipping houses at all? It is a good way to generate capital more quickly but there is a significant risk associated with it.

    You could also look into buying foreclosures. The procedure is not ‘cut-and-dried’ though, it requires a lot of hard work, research and tenacity. I haven’t tried this, and probably won’t.

    You can check my past posts for more information on my properties and why they make money. Generally, I rent 5-bedrooms in a relatively cheap ($150k) house. The house therefore rents for $2000.

    My advice, if you really want to get into this is:
    1) Be careful (housing prices are volatile right now, and could drop substantially depending on your area).
    2) Keep looking, run numbers, analyze the hell out of the properties.
    3) Hire an agent. A good real estate agent will save you time by showing you only the properties that meet your strict criteria (location, price, rental potential, etc., etc.).

    Good luck!

  3. That bit you posted on Casey’s blog about renting his houses is the worst piece of advice I’ve seen on that site. And in written such a smug and condescending tone. Truly its the asshats leading the blind.

  4. Hmm… I didn’t think the advice was that bad at all. Do you care to elaborate on your claim? Here’s the ‘bit’ for reference purposes. Also, the full post.

    I don’t get it…
    I agree with ‘Adult Supervision’ those are all a bunch of excuses. I have friends that are good at making excuses and when it comes down to it, the only reason to do that is to avoid doing any actual work. Its called … wait for it… Learned Helplessness.
    1) Yes, the house would be slightly harder to show… however, how many people are viewing the house per month? 2?? Not many I would imagine, so this point is moot.
    2) Yes, the house would be slightly messier, but … see (1).
    3) When you are a landlord… you have to deal with bad tenants some times, but they are the minority. Do you want the money? Or do you want to shoot yourself in the foot and sit there in foreclosure? Also, that’s why you have insurance (just make sure your insurance company knows tenants are living there), if the house gets trashed, the insurance will cover it.
    As far as the banks go, there’s no law stating that you can’t rent your property (unless you said they would be owner occupied, in which case you’ve committed fraud). So, rent them out, get the money, make sure the bank knows they are occupied by tenants, and then it’ll be their problem to evict them.
    I’m not sure how the laws are written in the US, but in Ontario, if the new owner of a property intends to live in it (for real), they are allowed to force the tenants out within a reasonable time-frame with written notice. The only time you run into a problem is when you are kicking out bad tenants (for damage, or missed payments) because then the courts get involved.

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