First real estate investment

[Kevin Chhum]

I'm moving forward on purchasing a duplex. But I want to know some of your opinions.

Here is the break down from my agent. 

San Diego, california.

Purchase price: $328,000 (this includes my closing costs as well!)

Mortgage: $2,077/month

Rent collected: $2000/month ($950 and $1050)

Difference: $77/month which I will be paying monthly.

Tax Benefit: $440/month

Principle pay down: ~$500/month

So it will cost me $77 a month to cover the mortgage, BUT you get the tax benefit of $440 per month.

Is then a move forward deal.

From the looks of it there will be no cash flow. But will there be cash flow in a couple years?

[Lee Zap Martin]

Hello Kevin,

Congratulations on your find! I know you must be excited. 

A few pieces of advice:

(1) I think you are focusing on the income more than the expenses. @DanHeuschele made some good points about property taxes, insurance and vacancy. Make sure these costs are factored in your equation. 

(2) Have you ever property managed before? If this is your first time, a negative cash flow situation gives you no room for a personal learning curve - that is - all of the mistakes you will make (and their subsequent costs) simply because it's your first time owning/managing/financing a complex in San Diego. 

(3) Going into a negative cash flow situation in "hopes" of appreciation is generally a bad financial move. The ONLY reason I MIGHT consider doing that any way is if I had hard evidence that upward $$$ appreciation is on the way. For example: Does the area where the duplex is located have a recent history of appreciation? Is the area up and coming (new construction, new jobs, they city investing in infrastructure, etc.)? Are days on market for the area low (in other words, housing is selling fast)? 

(4) Do you have a plan to sustain the negative cash flow (extra money to pay into this complex) until it turns cash-flow positive? This plan should include dates, deadlines and an exit plan. 

Hopefully you've considered these things and you're making a very informed decision. 

Best of luck! 

Zap Martin, MBA

Real Estate Investor, Finance Coach