Buying an investment property

[Juan Mendoza]

Hello everyone I'm excited to be a part of this platform and I'm looking to buy an investment property.  I live in the Salinas CA and medium homes are priced right around $450-500K.  The way the real estate market is in this area I don't believe I could make it work and feel as though I've been pushed out.  I've decided to look outside of the area and found the Central Valley to be most appealing due to job creation.  From what I've read Amazon had broken ground on a new distribution center in Fresno.   In addition, depending on where you buy the schools could be pretty well rated.  I spoke to my lender and was pre-approved, I now have the ability to purchase an investment property and have the required 20% down.

My wife and I have been searching for an investment property for while and have decided to make a move. I didn't know anything about DP before we started looking at investment properties. I did however do some research and started learning about CAP Rate and Cash on Cash rates. Since I have a little extra cash I thought I it would be a good idea to make it work for us. As I mentioned I'm new to this and want to make sure I'm making the right decision. Any feedback would be greatly appreciated. I thought about buying a duplex or multi-unit in the Fresno'Clovis area but most seemed to be located in areas that were less desirable. Given my full time job I really don't want to have to deal with those issues.

After much discussion with my wife, we decided to look at homes.  In doing so we went from one realtor to another because he seemed to drop everything just to earn our business and showed us what was on the market.  We took a look at a couple of homes in the Fresno/Clovis area some of which were better than others.  He had just finished an open house for one of his clients and asked us if we wanted to take a look at it.  We took a look at the home and it seems to meet the criteria we are looking for; its in a pretty decent location and within the Clovis Unified School District.  The home is pretty much turn key and has been updated.  You could really tell the home owner really cared for the home.  Anyway they are asking 240K which is below our pre-qualification amount.  The agent has agreed to dual representation at 4.5 points.  

After speaking with our lender the estimated loan would be about $1100 with PMI. I researched rental rates for a similar homes in the area and found them to be between 1300-1600. I figured I could rent this home for about $1550. With that said we have decided to submit an offer at asking price. As of today It looks like our offer has been countered. The seller would like to stay in the home longer and is interested in renting the home from us for $1500. In speaking with our realtor it looks like we could still close with the acceptance of the rental and not have to make a mortgage payment for two months. We would however collect rent from the seller for those two months. Our realtor further advised us that the seller may need more time and would rent from us until they find a new home.

[Jonathan G.]

@Juan Mendoza  Congrats on getting started in your real estate journey and welcome to BP!  I love this site because there is so much that you can learn from if you are willing to push through and apply yourself! 

In regards to your current deal, I would be hesitant because even though you will be able to afford the mortgage payment and it looks like you have a renter already in place, there is still a lot more that would need to be figured in.

1) Taxes ( Not sure in your area, but you could find out very easily or this may already be included in your payment)

2) Cap Expenditure (Figure at least $100/mo)

3) Repairs (Figure at least $100/mo)

4) Property management (8-10% of current rental rate roughly $150) - I know you may manage it yourself but if you ever decide not to, you want to take that into consideration so you can plan for that.

5) Vacancy Rate (5-10% of current rental rate $75-$150) - even though you have a renter you have to plan for the worst case scenario if something happened to him and you were unable to find someone to rent to.

So if you add the above that is an additional $425-$500 not including your monthly taxes.  So if your payment is $1,100 and you add the above numbers to that, your cost to properly maintain your asset you and your wife worked so hard to acquire, it will put you in a negative cashflow.

Most investors look for at least $100-$300 cash flow after figuring all the above.

I would encourage you to check out Bigger Pockets Rental Calculator and do a little more searching before you jump in to the above deal!

Don't get discouraged and keep on looking at deals!  You will get there!