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Updated over 12 years ago on . Most recent reply

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Cody Lown
  • Detroit, MI
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Will an experienced investor please explain what I am missing?

Cody Lown
  • Detroit, MI
Posted

Hi,
I have been reading the forums here, and been learning as much as possible for awhile now. I am interested in long-term cashflowing rental property investments. I am moving to Lansing, MI for graduate school, and have recently been looking at places there. I am somewhat familiar with the area already, and have been getting better acquainted. My main question is: It appears that there are hundreds of homes for sale in the Lansing area that would cashflow a lot of money (relatively speaking of course). Many of them, at market rent, would be well over 3 or 4 times PITI. I am talking about rent ready homes, not handyman specials. Resources I use: homes.com, rentometer.com, Ingham County website, craigslist.com, etc. I am factoring location, proximity to downtown and Michigan State University, population decay etc. Can someone please fill me in. I am obviously missing something. Please take into account the fact that I have yet to own real estate, am not yet an investor, rather a young person wanting to learn as much as possible before jumping in after school.

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Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
14,128
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22,059
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Jon Holdman
  • Rental Property Investor
  • Mercer Island, WA
ModeratorReplied

IMHO you need three things to have a good deal:

1) The cash flow has to be there, at least based on an estimate. Assume the 50% rule is true (50% of gross scheduled market rents will to vacancy, expenses and capital). Assume 100% financing. Do you cash flow? Now, apply the realistic financing terms and compute your cash on cash return? Is that OK?

2) There must be demand for the rental. No demand and your vacancies are going to be very high. To deduce this, you have to evaluate the market. Do rentals come on the market and quickly disappear and someone moves in? Or do houses sit vacant for weeks or months?

3) The must be equity. Ideally, you would buy at a low enough price that you could turn around and sell the property quickly and not have to take a loss. If the first two criteria are well met, though, you could be a little flexible on this one. But if you're paying the same price that every other house is selling for in the area, you have to realize you're going to take a 10% loss for all the transaction costs for buying and selling. That's 10% of the purchase/selling price, not your investment. If you by with 20% down, you're talking about a 50% loss on your investment.

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