All Forum Posts by: Matt Blutowski

Hello Amanda,

Utilities are separate, and though I took a look at the hardware, I couldn't estimate age. I'll get more info before I proceed of course. The electrical looked fairly new. The windows were solid, but older. The tenants in the larger unit said they paid $150 for gas. It's a large 2 bedroom and they said they keep it warm, but that might be a combination of poor/no insulation and inefficient heater.

A washer and drier are in the basement and both units have stair access.

Hello Jim,
I will manage this myself, at least for the foreseable future. Both apartments are rented, the 1 bedroom is turning over right now without any gap. I would be moving into the smaller unit.

I saw the interior and was satisfied. Both apartments are in good condition, except one or two points on the gutters - nothing urgent. The property could be cleaned up with painting and accents, especially the smaller unit. I would add off-street parking.

There is an updated 3bed/2 bath renting across the street for $1500 w/ G&E.

Hi Glenn,

For Glenn, I thought the 50% rule included taxes and insurance and not P + I. P&I will be ~ $700 while monthly income (after reducing 50%) is $835. I don't have $100/ door, but would have some cash flow. Is this wrong?

I've located a property which I believe is promising and would love some feedback from you pros!

Good condition duplex, selling for $150,000. Rents currently are $975 for the 2 bed/2 bath, and $695 for the 1 bed/ 1 bath: $1670 total. Taxes are $3,000. I'll see the interior today. The exterior building is well cared for, though there is parking potential that hasn't been exploited.

The area is mixed SFH and multis. There aren't very good comps. Current rents seem reasonable for the area. Newer townhomes are mixed with lower middle/middle class SFHs and a variety of multis. A high-end hotel going up now with 200 rooms and scheduled 40some townhomes about 1 mile away.

I'll be buying owner-occupier. Would love questions or opinions. Thanks ahead!

Thank you Rusty & Brian. Your answers seem to agree with what I was thinking. I think my friend is concerned because though it is in a nice area, great schools and some shopping, the immediate area is more single family with just a few duplexes (though there are no vacancies in any of them).

I'm looking at my first properties, and have been cautioned by a friend to avoid a duplex that looks good because it does not have a rental history.

A granny owned the duplex, and since she died one of her adult grandchildren has been occupying the property, leaving the upstairs vacant.

My general question is, do you look suspiciously at vacancies, or disregard them if you find suitable reasons for the vacancy??

This has been the more informative thread I've read on this forum so far. I'm happy to see a variety of perspectives, approaches and methods and thank those of you who participated!

" If you sell it - you're homeless unless you buy something else?"

People often downsize when they sell their primary.

"NO! I don't gamble. Everything I do is as close to a sure thing as I can get."

No such thing as a sure thing, but I understand how a rule of thumb like the 50% rule can make a deal much safer - but not riskless.

"doing what I do and what you're proposing (buying a property with negative cash flow and hoping for appreciation)."

No, I'm not proposing this. I'm questioning the validity of

a) a conservative rule of thumb like the 2% or 50% rule
b) having someone pay your mortgage is a sound investment
c) money spent on a home is lost

I don't think I'm pushing any of these views, just trying to learn. I see A as the wiser choice and better investment. I'm going to look for A. However, I'm not sure my friend is wrong when she lets tenants pay the mortgage, and a bit of the extra cost. I'm not (yet) convinced that property only makes sense if you have $100/door over all costs, or even all costs.

"The question is why would you buy a property with a negative cash flow hoping for appreciation when you could buy a positive cash flow property; have instant equity; and still hope for future appreciation?"

You are right, this is the best approach. But is everything else a loser? I'll need property management if I find a good place, I might not make it to 50% - I have an interest in knowing what is/isn't a loss.

"The 50% Rule has absolutely nothing to do with appreciation, rising rents, or inflation. "

Doesn't it? This rule tells us which buys are winners, and which are losers. If you don't follow this rule, you will LOSE money. But, if a person can select an area with favorable trends (appreciation, rents, inflation) - and I think this IS possible (e.g., the RE market is not that efficient), then I can see circumstances where someone can make money, even though they start underwater. I think my friend is making a modest return. She doesn't trust stocks, and she is happy with her decision.

"That's the two-edged sword of leverage. If you buy a stock, and it loses 20% of its value, you sell and still have 80% of your money. If you buy property with a 20% down payment (plus closing costs, making your front end cost more like 22%), and it drops 20%, you have to pay all the sales costs to get rid of it. If it drops 40%, you have to pay all the costs, plus the 20% loss to get rid of it. Better be dang sure that 1) you can sustain the negative cash flow, and 2) you're willing to ride a loser or sell on the way down. Lots and lots of people tried to speculate and got caught in the bubble and have, literally, had their lives destroyed by a single RE investment."

I understand. I'm originally from PA, so I don't know many people who went house crazy, then lost a bunch, but I know they are out there. My friend bought in 1998 SoCal, she still has plenty of equity in her home.

For me, I'm going to be looking post-bubble, but I do understand we could see prices go lower. Case-Shiller and plenty of other analysts believe it (although I have heard that parts of Cali are coming back). For the first time this decade, property prices are starting to look reasonable, even cheap when you find short sales (where I'm looking).

"How do you manage to own no property and pay no rent? Where do you live?"

And I don't pay taxes, either! :D I work overseas for about 8-9 months of the year. My employer provides housing. My friend does too. She buys a property every two years.

"While high inflation does tend to drive up the values of hard assets, like real estate, it also drives up interest rates"

I'm locking in a rate under 5% (actually much lower due to my Yen loan). This is another reason why I feel like it makes a lot of sense to look for a good first deal.

"Owning a home isn't financial suicide any more than owning a car is financial suicide. "

I agree. My point was that if someone can make a case for home ownership being a break-even deal in the long run, then how is it possible that having someone pay your P & I is 'losing money'.

"However, as I said earlier, the real question is whether this is the best use of your money and is the long term gamble worth the month-in and month-out loss?"

But even with the 50% rule, you are still taking a gamble, right? All the same problems exist, except you are putting money into the property.

It seems like if you live according to the 50% rule, you believe that a property is a cash flow machine - and that the market is efficient enough that you won't earn a real return through appreciation, rising rents, inflation reducing the real interest your paying - so if you don't have a positive income flow, don't do it.

I don't believe the RE market is nearly that efficient... of course I'm not claiming I can beat the market - but I bet many of you people do.

If you are in a low interest rate environment, with crashing homes prices (where I'm looking - as of course markets tend to overcorrect..), but demographics for the area look sound, and inflation is very likely going to exceed the 10 year avg in the near future... then someone should be able to find a 50% rule property now - but even if they only come close, it could be a very sound investment, and a great way to diversify for a guy (me :D ) who owns no property, pays no rent, and is has all his savings in stocks/bonds.

Thanks Mike,

"The real question should be whether the money, time, and effort of investing in real estate (that loses money each month) is really the best use of that money, time, and effort! Could that money be better spent on another investment - one that would actually make money?"

I agree, there certainly might be better returns to be had elsewhere, but this still leaves open the question as to how good of an investment a property is if you can't meet the 50% rule.

For instance, if what you are saying is true, then owning a home is financial suicide. You are paying 100% of PITI and costs go up with inflation. Your left with the inflation adjusted zero return on future value of the home.

If a home can make any financial sense (and I think it can), then it must be true that having someone pay for the bulk of your expenses (but not near the 50% rule) would still make you an ok real return - not considering any appreciation.

It seems to me that my friend has a point - and she is likely making a return in the future. Where I think she is mistaken is that her 'loss' is an opportunity cost - she could probably get a better return elsewhere. But she does gain.

The homeowner has built up equity - lets assume it kept pace with inflation. My friend has equity, most of it was paid for by someone else along the way.

"A rental is better because you have a tenant kicking in part of the payment. Better still if its at least break even, i.e, rent is 2X the P&I payment. Or, for me, I consider break even to be the rent is at least 1.667x the P&I because I'm willing to manage them myself for free (that is, expenses are 40% of the rent.)"

So one can make money if they are not able to meet the 50% rule, but they could be making more, right?