I suppose it could be worse....

[Kevin C.]

OK, here are the numbers for a SFR I purchased prior to knowing about BP. Numbers are bad, really really bad, but I'm wiser now, a lot wiser thanks to BP, and my next deal will be much better than this one was.

Purchased SFR for 168.5K back in 10/2008 with intent to rent to one of my son's and a couple of his friends (not something I would recommend).

Put down 35% to get the payments to where I wanted them to be so I could rent the place to my son at a specific price and break even (or so I thought).

Here's how the purchase breaks down:

Price Paid $168,500.
Down Payment $58,975.
Amount Financed $109,525.
Financed @ 6.0% over 30 years = $656.66

I rented this to my son for just enough to cover PITI + HOA dues. Another bad deal (bad for me, good for him and his friends).

Fast Forward 1.5 years later, son and friends have moved out and I've just finished getting the place ready to rent again, to the tune of $3.4K and a LOT of elbow grease.

With a sign in the yard, and adds on Craigslist I was able to get the place leased in a couple weeks for $1375 a month (considerably more than I was charging my son).

Using the 50% rule I see just how bad this is, even at market rates.

Rent $1375
50% for Expenses = $687.50
NOI $687.50

168.5K for 30 years @ 6.0% would be around $1010 a month, making this a loss of 322.50 a month (687.50 - 1010.00)!

The 35% I put down got my payment down to $656.66 (P&I only), so after taking into account 35% down, my cash flow will be all of 687.50 - 656.66 = 30.84 a month.

For almost 60K cash invested, I'll see a total of about $360 a year in cash flow (I should see a bit more than this since I'll be managing the place myself).

Bad deal, you bet.
Do I know better now? Absolutely!

I have another home with similar numbers I bought in 2007 that I rent to another son. I not only did a bad deal once, I did it twice!

Both homes are in solid, desirable areas, one was bought new (the one bought in 2007), this one was built in 2001 and was perfect when I bought it. Both homes were bought a little under market and both are worth more today than what I paid for them - comps put them each at $10K or so above their purchase price.

I have no intention to sell either, so hopefully one day rents will get up to a level that these places can provide decent cash flow.

The deals were not good investor deals, but they got me in the game. That in itself was worth it to me. Prior to the purchase in 2007 I had talked about investing in RE for years, but never did anything about it.

Thought I'd share my poor choices - maybe it will help someone else to avoid making the same mistakes.

Next property I pick up will be a far better deal than my first two.

On a good note, I'm in the game, and I'm much wiser now thanks to BP.