Should I consider a multi-unit? How do I find one?

Question

Hello all,

This website is fascinating, and I was wondering if you could help me decide on what path to take.  I am still young (27) and have always rented.  I finally have a job that I feel stable in and I plan on living in Jacksonville, FL for awhile.  So, for the first time I am considering purchasing a home.  While I have a satisfying job as an engineer, the starting out income is lackluster.  The regular homes I can afford here are either in terrible neighborhoods or are over-priced rehab projects.

So, it was under this premise that I started considering a purchase of a multi-unit that I could live in one unit and rent out the rest.  I also like the idea of possibly having a vehicle for additional income.  In fact, if I felt that the effort was worth the income, I would like to expand my real estate portfolio in the long run.

Here's an issue - although there are a decent amount of multi-units on the market, I have found 1, only 1 that would earn 1% of its asking price in monthly rent.  From what I have read so far, 1% is measly and should be avoided.  Seeing that eliminates all options, perhaps I am searching incorrectly.  I am very turned off by the foreclosure listing websites that charge you to view properties.  Are there better ways to find them?

I apologize if I seem to be going in a lot of directions with my questions.  This is the one of the biggest decisions I will have ever made in my life, so I want to put as much research into it as possible.  Thanks!

N/A N/A · Answer

MikeOH - I understand the importance of cashflow, in part thanks to your postings. I think that some or even a lot of investors  at 1 point or another probably tell themselves 'JUST BUY SOMETHING' in part just to finally get into investing - the hope/speculation/risk they are taking on is that the appreciation of the property is going to bail them out of any -ve or break even cash flow situation...

As for me, i am in the NW burbs of Chicago (10 mins from border to WI) and have not started investing yet as i am wanting to read/learn a lot first and come up with a plan. I am having trouble coming up with the plan, since before i even start i read that i am going to have a very hard time finding something to +ve cash flow...I wonder if i should look at WI or IN or just concentrate on flipping in the short term and then look for rentals....

Thoughts?
thx.

Eric Medemar · Answer

Depending on your market conditions and how long you plan on owning the home 1% or less could be fine.  Almost as important as cashflow is buying the home at a very good price 80%FMV or less is a good number to shoot for, that way if you dont like ownership then you can sell and get out, plus you can sell in 2 years and take tax free gains on the portion of the home that you lived in.  There are so many variables that go into picking out rentals that it is hard to take care of in a single post. Cashflow can often be made up for in owner occupant situations, with strong equity potential but it all varys depending on your market.

N/A N/A · Answer

Yeh, i have heard from a couple of folks on this site that IN might be a good spot.
As to your question MikeOH - i haven't been doing a lot to find a good deal!:( I have only got serious in the last 1 month and have been doing as much learning/reading _before_ i start looking for deals....I expect that in another 1 to 2 months i will be ready to start seriously looking for deals....At that point, i am not quite sure _how_ i will look though...

Joshua Dorkin · Answer

Indiana has TONS of good deals . . . if you can't find them in your market, look at other markets!

Michael Rossi · Answer

bs73,

You hit the nail on the head!  That is exactly what happens and their mistake forces them out of business.  One bad deal is often all it takes.

I don't think flipping is necessarily the answer.  It won't be a lot easier finding a good property to flip.  You'll still have to buy at a big discount if you are going to be successful.  Finding good deals is hard in every market.

What have you been doing to find a deal?

Mike

Michael Rossi · Answer

I'd like to see the numbers on that!  I've never seen a property with gross rents of only 1% of the cost that will cash flow (unless you put a bunch down).

Unfortunately, most of the books on the market don't discuss how to calculate cash flow and those that do don't discuss all of the real world expenses.

Mike

Joshua Dorkin · Answer

You two are welcome to debate your opinions, but the personal attacks need to stop NOW!  ENOUGH ALREADY!

As for finding rental properties, I'm with Mike on this one . . . I'm a little less stringent on the 2% . . 1.5% has worked for me, but that's it.  As for finding how people make money in expensive markets like NY, LA, etc, most investors I know buy on a gamble.  I don't know one person who has invested in these markets that did so on a pure cash-flow basis over the past 5 years.  Every decision I witnessed was based on a pure appreciation basis.

I've spent the past 6 years in Los Angeles and refused to invest in any cash-flow property, primarily because I was unable to find one that met my criteria.  In fact, I think I know of one deal that would approach 1.5% return, and the person dumping it had to leave the country immediately, so he sold it to his friend for nothing.

There are many different ways you can go, but if you're looking to be an income property investor, the bast advice I can give is to go where you can actually generate a substantial amount of income from the property.

N/A N/A · Answer

I've tried the 2% thing with the houses I'm looking at.. that's nearly twice the rent, and there is no way the properties would be able to rent that much. The 1.5% is a little closer. But at 1%, we're making money. I've been reading some good books about investing and they haven't mentioned the percentage. I'd recommend you go to Barnes and Noble or another book store and check out some retail estate investing books. Lots of great information out there.

Eric Medemar · Answer

Your are very silly, oh great rental one, you still love to follow me around, now with your goofy book that should be titled "Mikes way of renting" I am not saying that your book is a waste, but...

Anyway to respond to your question, I am not saying that a new investor has to grab the first home in there area but, if every investor tried to hold to "your truth" then nobody could invest in the more expensive markets of  the U.S.  I find it interesting that you refer to the  expensive markets of the U.S as terrible markets.

Prior to the decline in the larger U.S markets rental homes in those areas have not meet your criteria for the past 10-20 years, perhaps your giving away a time machine with each book so that people in Larger markets could buy rental housing.

I have never said your way is wrong, in fact I invest that way as well, but you would have a better chance of seeing a unicorn than you would finding a home that meets "Mikes way of renting" in LA or Vegas, or Chicago.  So essentially you are saying that you know more than the people who have invested in rental properties in those areas.

By the way you never actually answered the question, about how would you invest.

Anyway onto your great moment in time, I am glad you remember it so well, it must have meant alot to you.  To set things straight for you once again I was referring to Gross cash flow, Not Net, we have a small differnce in the way we do things, but if it makes you feel good to be right, and I can see that it does, OK your right.  You should mark your calender with the day that it happend, so that you can celebrate it every year like christmas or something.  You can call it "The day I corrected Eric with my way of thinking"

Everyone, please dont take this guy to seriously, unless you live in the markets of the U.S. that can support his 2% rule, then you have to take what he says with a grain of salt.  You will have a verrry hard time finding properties that meet this criteria, I live in Michigan one of the most depressed markets of the U.S and its still fairly difficult to buy properties as he mentions.

Ok, im done, stay around for the next round of "Mikes great response", here ill save you the trouble YOUR RIGHT.

Michael Rossi · Answer

Eric,

Have you read my book (I doubt it) or is this just another personal attack?  If so and you have a specific critique, let's have it.  I've had nothing but good comments about the book from those that have purchased it so far and a couple of the readers have actually already bought rentals that cash flow!

I guess that when you don't have the facts on your side, personal attacks are your only choice.  At least we've discovered what you are good at (personal attacks).

Let's be clear here.  There is no MY truth, there is only THE TRUTH.  As much as I would like to claim credit for discovering math, I simply did not.  The expense numbers that I use are well documented with hundreds of thousands of rentals throughout the United States.  The math is very simple.

IT DOES NOT MATTER whether it is difficult or impossible to buy rentals that will cash flow in any particular market.  While your advice seems to simply be BUY SOMETHING even if the numbers don't make sense, that simply does not work.

For the purposes of being clear, let's simply state our opinions:

My opinion is that you should only buy a property if it will cash flow and you should NOT buy a property that loses money every month in hopes of appreciation IN A DECLINING MARKET.  That is financial suicide.

Your stated opinion is that if you can't get cash flow, buy anyway and hope for appreciation, while you're losing hundreds or thousands of dollars each month.

There is no mistake here.  You got hammered by a bunch of successful investors (certainly not just me) on that other forum for spewing info that was absolutely wrong.  Good try with the "gross cash flow" nonsense, but that simply is not true.  No-one would have said anything to you except that you were hyping your mentoring when you clearly didn't even understand the basics yourself.  Personally, I think that it is unethical to sell mentoring to newbies when you don't even have the basics down.

You can call me names; wage more personal attacks; and keep changing your story, but the facts are on my side.  Again, I suggest doing some studying, understanding the business, and understanding the math before you try to teach things to others.

I did clearly answer this question, but I'll repeat it.  If you live in an area where you can't buy a rental property that will have positive cash flow, then don't buy one.  Investing is NOT the goal.  Making money is the goal.  If an "investment" causes you to lose hundreds or thousands of dollars per month, that's not a good investment.

If your life's dream is to start a rental property business and you live in a bubble area, then I would move to a more favorable area.

Mike