Having trouble finding deals that 'pencil out'.

[X X]

As you can tell, I'm a newbie - so if this is the wrong section or anything let me know.

My situation: I just sold a business, and have a decent amount of cash to invest. I'm fed up with the stock market, and don't want to own another retail business [ever :)]. So, here I am - getting into REI.

That being said, I'm having trouble finding properties that I can buy and rent with positive cash flow in my area. The average entry-level house here is about $225,000+ for 3br, 2ba - nothing special, average neighborhood. However, the average rents are around $1,100-$1,300/mo. Not enough unless I put a large amount down. I want to leverage the bank's money as much as possible, and I'm getting pretty good rates with 10-20% down. Should I not be looking at MLS to find properties? I've looked at the foreclosure auctions, and they don't seem to be that great, either.

I have spoken to 2 other landlords; they both told me that when they started they had negative cash flow and raised the rents over time until they flowed. They both said they contiuned to make money from the tax benefits, and even more when they sell properties, as this area has been enjoying some great appreciation. However, when I read most opinions here, it seems that the negative cash flow [or even breakeven] deals are losers, and should never be touched. Can anyone offer any advice on this?

Thanks in advance.

[Jon Holdman]

Originally posted by "BlackCobra":

If I leverage the banks money, I don't need a whole lot of appreciation to make 25-50% on my investment every year.

Hmmm. Transaction costs on real estate are so huge you need 10% appreciation just to break even. Add in carrying costs, which can easily be 3-4%, and you need even more to break even. If you invest 10% for a down payment, and want to get 25% ROI after 1 year, you need appreciation of something like 14%, if you ignore carrying costs. Less that 11% or so and you're in the hole. Its better with a longer horizon. For five years, you'll break even if it appreciates 2.5% annually, and you'll get your 25% if it appreciates 6% per year. But, you better have a tenant paying those carrying costs. If there coming out of pocket, you need that much more appreciation to stay above water.

Be sure to look at this page if you really think real estate is going to continue to have significant appreciation going into the future Irrational Exuberance, the Real Estate Bubble and the Weakening of the US Economy
That sure looks a lot like the NASDAQ in March 2000.

John Talbott in "Sell Now" gives an even scarier picture and a comparison to Japan's housing situation. House prices there are falling, not rising. Don't recall if its this book on another, but one author is predicting very large price drops in the coming years. Like 50% on houses currently worth $500,000.