Crunching the numbers

[Mr Good]

Hi,

I want to buy a single family home as a longterm investment. I already own a nice home and I have around $300k in short-term CDs ready to invest. I like the idea of earning rental revenue far more than the stock market or bank rate of interest.

I found what looks to be a nice home that meets my general criteria. It's in good shape (same owner since 1980), initial review looks good. There is an upstairs area with 1.5 ba and 3 bdrm which I can rent for about $1400/mo. There is a separate downstairs, with private entry, with kitchen, 1 br and 1 ba, I can rent this for $800 easily. So total is $2200 rental revenue. It is not a legal duplex but I believe in this area I would not have a problem renting it to two parties.

The owner has it listed at $370k on the MLS but the owner said there is a clause that says they can sell it independently as FSBO. I already purchased one home with FSBO and I have no problem with this. I found the home via For Sale By Owner advertisement.

What do you gurus say about the numbers--assuming $2200 per month and basic cost of maintenance, what kind of price should I pay today if I expect to get 5% on my money per year irrespective of property appreciation? Right now the market is very slow so I will likely at least start with a lowball offer, but I wonder what pricetag gets me 5% return assuming rents of $2200/mo.

Thanks for any responses!

[Richard Warren]

If it was easy to find great properties that were good investments with positive cash flow everyone would do it. The fact is that investing is work. If you buy a house with the idea that it will appreciate you are speculating. There is nothing wrong with speculating and a lot of people have made a fortune doing just that. A large down payment or cash purchase is just buying your cash flow and Wheatie’s comparison to a CD is appropriate in that case. Any investment should be looking on the return on the cash that you invest. It’s easy to rationalize a purchase by saying that you can’t buy for less in this area. The fact is that investors need to buy properties at a discount not retail. Is it easy to find? Absolutely not. Many newbie investors post on this board with their potential investments and the more experienced investors here try to keep them from making mistakes that could cause them great financial harm. Your aversion to debt will keep you from getting burned, the worst that will happen is that you might not earn as much as you could. But you might wind up doing very well and all investment entails some risk. So you might find the comments “hilarious” but quite a few novice investors have used advice like that to keep from making some huge blunders.

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