Is now a good time?

[Brett Vandervort]

Real estate investing has been my dream for years, and I'm eager to start! I thought it would be an good idea to get my feet wet by buying a house and renting out the extra rooms to roommates. But is now the right time? First of all, I'd be getting my down payment as a loan from my parents and the max they'll lend me is $20k for 5 years at 4% ($370 per month), so the most house I can guy is for $100k, but even then the debt burden would be pretty high ($80k for 30 years at 4.75 is $420 a month, for a combined monthly payment of approx. $800), so I probably wouldn't be able to break even when expenses are factored in. If I got roommates (which isn't a sure thing) that would bring the cost of living down considerably, but there is still the second issue: according to several realtors, it's a "seller's" market right now, so it's almost impossible to get a house at a discount (my target is 20%). So I'll have to either buy at market, or at a premium, or a serious fixer upper (I don't have the skills to do it myself, nor the money to pay someone else). So between the debt burden and the demand exceeding the supply, is now a good time to jump into my first property? Or would it be better just to rent an apartment, save money for a down payment, and wait until the market become more favorable to buyers?

[Eric Fernwood]

Hello @Brett Vandervort ,

You should listen to @Hattie Dizmond on getting a loan. As long as it is a 1 to 4 unit property you should be able to get financing (or your parents can get the loan). As to whether it is a good time to buy? I see two aspects of this question:

• Is this a good time for you and your parents? This is a financial & emotional decision and I have no ability to comment on this.

• It is a good time to buy? Here I can offer some advice.

In my opinion, there is never a good time or bad time to buy. There are only good deals and unacceptable deals. Even during a sellers market there may still be good deals available but they will take more effort to find. And, if you cannot find a good deal, do nothing. You can never afford a bad deal. What constitutes a good deal? Properties which generate sustained positive cash flow and are likely to appreciate. These two goals sound simple but they are not; especially in multiunit properties. First, sustained profitability. Generating a sustained positive cash-flow includes:

• Buying the property at the right price vs. rent. Simplistically, Rent > Recurring Expenses + Profit. Recurring Expenses include: Debt Service, Insurance, Taxes, Periodic Fees, etc. I will tell you how to make a quick investigate/forget decision later.

• Keeping good tenants in the property. I define a good tenant as one who: pays all of the rent on schedule, takes care of the property, does not cause problems with neighbors, does not engage in illegal activities on the property and stays for multiple years. Never rent to friends and family.

• Buying a property in acceptable condition. Many of the multiunit properties I see (I am a Realtor in Las Vegas and my practice is almost exclusively remote investors so I am always looking for properties that meet the dual goals of profitability and appreciation.) in Las Vegas are not in good condition and require significant upfront capital investment. I do not think this is a possibility in your consideration.

• Stable or growing job market - Rental property profitability is totally dependent on employed tenants. The property must be in a job market area that is at least very stable but preferably growing.

• Control maintenance cost. Do you have the skills to fix the things that will fail? If not, do you know a cost effective handyman?

There are other factors but the above is a good start. On the second goal of potential appreciation, this is quite different from single family properties. If you buy a single family property and later decide to sell it, there are two categories of potential buyers: individual owners and investors. If property prices are rising in the area, the value of a single family property will rise with it and the highest offer is likely to come from an individual wanting the property as a residence. With multifamily properties, the primary buyers are other investors and investors focus on return more than area values (although area values are a component). So, for investors, the key valuation component is rising rents. Rents rise (ignoring inflation and such economic factors) on increased demand. The key components of demand include a combination of the following:

• Low crime. High crime and appreciation do not go together.

• Sustained population growth of people who can and will rent your type of property.

• A stable area in which people desire to live and have good schools.

• Sustained job growth.

In my practice I have to quickly evaluate a lot of properties so I developed a tool for doing what I call a quick investigate/forget decision. You ( and anyone else) are welcome to use the tool. Here is the link and below is a screen shot. Watch the getting started video for details but simplistically all you have to do is enter the estimated rent and some other known factors and click Estimate. The resulting amount is the purchase price where rent = recurring expenses + profit.

Remember that the only value of this tool is to decide whether to take the time to investigate the property or to forget it. As an example, suppose you are considering a multiunit property matching the following:

• Rent: A 4-plex and the rents are 2 @ $500 and 2 @ $600/mo. So, your total gross rent is $2,200. Based on your research a 9% vacancy rate is a reasonable estimate so I would use ($2,200 x (1 - 9%) = $2,000 as the rent.

• Monthly Fees: Suppose you end up paying water and sewage and that averages out to be $200/Mo.

• Your goal is a 10% profit (a very good return these days).

• Financing: The terms of your loan is 20% down, 30 year, 5%.

• Real Estate Tax: 1%/Yr

• Insurance: $600/Yr

• Management: You manage the property yourself (A very bad idea but that is another issue.)

Enter these numbers into the estimator, click Estimate and you will see that the break-even price is about $300,000. So, if you think you would have to pay $310,000 for the property, forget it and look for another. If you think you could get the property for $260,000 then it is time to get the spread sheet out and really investigate the property taking into account rehab costs, existing leases, etc.

So:

• Under ideal conditions, a project like this is going to take a lot of time and effort, if everything goes well. Do you have the time?

• There will always be unplanned expenses so in addition to the down payment and initial rehab you need a cash reserve. Are your parent's up for this?

• Managing a property is not an easy task. I wrote an article once about the most popular ways to fail. Managing your own properties is on that list.

Brett, I hope the above helps.