50% rule on SFH

[Steve T.]

Hi all,

Looking into purchasing an investment property. In my home market, I can get into a little 2 BR SFH for about 60-70k that should rent for $650-700 or so per month.

Here's what I don't get. Using the 50% rule, there is $350 left over every month for P&I and cash flow. P&I at 5% and 30 years on 65k is $350. There's just nothing left over for cash flow.

So, bottom line, I guess these are bad deals? Some of them really aren't in bad shape or in bad neighborhoods. What I really don't get is this - a lot of these houses are selling for 50-60% of what they sold for 2 or three years ago. It seems crazy to me that prices could have fallen that much and still not present a real opportunity for investors, but I guess not?

A related question. When I run the numbers on properties, the ones that seem to fit from a cash flow perspective are always beaters in bad neighborhoods. Am I better off just accepting that to get some cash flow I need to be a slum lord?

As a final note - I have a pretty good day job and I will absolutely use property management if I decide to do this.

With all that, any thoughts/advice?

Thanks,
Steve

[J Scott]

Originally posted by Steve Babiak:

How many times have you actually used that home warranty?

More importantly, how many times have you tried to use it and they told you the repair wasn't covered?

So, you think your cashflow is $620/month. And in most months it probably will be.

Then one day, you'll need a new roof, and your cashflow that money will be -$6000. And one day you'll need a new HVAC system, and your cashflow that month will be -$5000. And some days you'll need siding/gutter/water heater/plumbing/electrical repairs, and those months your cashflow will be -$500 perhaps.

The fact that you claim to purposefully ignore those expenses is even more disturbing. What other expenses are your ignoring? And how much are they costing you in addition? As an investor, you can't ignore expenses because they are uncommon or far into the future. Even if you sell before you have to replace that roof, the new owner will account for the depreciation in his offer to you, so you will lose that money one way or the other.

Just because your typical cashflow is $620/month doesn't mean your cashflow is $620/month.