1st Rental Property Search

[Michael Ruvido]

Hi All -

I've been actively searching for my first rental property for the past 2 or 3 months. I'm targeting the Huntsville and Montgomery areas of AL. I have $35k to $40k to use as a down payment. Houses in Huntsville cost a lot more and it seems they pop up one day and are gone the next. And there are plenty of houses available in Montgomery, but the better ones are scooped up relatively quickly (maybe not as quick as in Huntsville). A couple of questions as I try to make a decision on what to buy. I hope this doesn't turn into an ugly debate; I just like hearing other people's opinions.

1. If you want to buy cheaper houses, which are riskier of course, it seems you can pick up two in Montgomery for the price of one in Huntsville. Depending on how good of a deal you can get in Montgomery, the net cash flow between two houses can be more than the cash flow of one house in the Huntsville area. Since this will be my first rental property should I give up a little cash flow to get more stability in a better market? I'm in this for the long haul with a buy and hold strategy if that matters at all.
   

1. There is a chance I could pick up a townhouse in Madison, just outside of Huntsville, for $150k before it goes on the market (therefore avoiding a crazy bidding war!). It's a 2bed/2bath and the interior of the townhouse is beautiful and needs nothing maintenance wise. It's close to downtown Madison and my realtor thinks I could get more than $1,300 in rent. I've spoken to 4 different property management companies and three said between $1,300 - $1,400, with one going as far as $1,500. Obviously $1,300 - $1,400 wouldn't meet the 1% rule and I'm a little leery about paying HOA fees (in this case $147pm). By my calculations getting $1,500 would put the cap rate at 6.76% and the CoC return at 10.3%. If I get either $1,300 or $1,400 then the cap rate drops below 6% and the CoC return drops below 10%. Have any of you bought a townhouse as a rental and if so, how do you like it so far? Given the numbers I provided would you think this is a good deal?
   

The only other thing of concern is whether we're seeing a peak in the housing market. Why buy when prices across the country are at all-time highs? Doesn't that go against the 'buy low, sell high' motto we all know? Or if the numbers are good with a particular house it shouldn't matter if the market is high, you should still generate a positive cash flow?

Thanks guys!

Mike