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Originally Posted by srt050
I know you have gone over this before so forgive me. But where exactly should I be hunting? I am a member of my local real estate club, I have cold called, I have made business cards with "we buy houses" and passed them out (not as much as I should have, and I have slacked off lately, but have passed out a few hundreds) and I have scouted neighborhoods extensively, although admittedly they were probably not the best neighborhoods for rental properties. Any other strategies that you can think of? I have the time and energy to hunt for deals.
Are you attending auctions? Also, if you want to find properties that cash flow you've GOT to stay out of middle class neighborhoods. You can't find deals there and you'll be spinning your wheels.
Another thing you could try is research at the court house. Pick a handful of smaller apartment buildings and research who owns them, what liens there are, etc. When you find one that has been owned by the same guy for 20 years, contact him and find out when and if he wants to sell.
Have some patience. The deals will come.
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The point I was trying to make here is you cannot expect the same return for different types of investments. A duplex in an upper middle class neighborhood will invariably have a lower cap rate, because the tenant risk is much lower than a 16 unit apartment complex in a low income neighborhood. I guess what I was trying to say was I sholdn't be so fixated on a 10% cap rate because I am looking at different kinds of properties than you?
I disagree. The way I would do it is figure out what kind of return on my investment I want and then seek out properties that will give me that kind of return. It seems backwards to chose what kind of property I want to buy and then live with the returns for that property. Doesnt' make sense.
First you need to know what your goal is. After you have that, you can consider what kind of investments will get you to that goal. Do you think that my goal is to own low income housing? Of course it isn't. My goals are financial. I don't allow properties to dictate my goals. I determine my goals then find investments that will get me there.
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But let try and use an example to explain what I am talking about. Say you have the oppurtunity to buy a property for $500,000. All you have to put down is 2% or $10,000. Would you every buy the property and play it for appreciation if you could get it to break even or just barely cash flow?
Well, we have to define this scenario more. First, 99% of the time if you can get your hands on a property for 2% down that property is going to need significant work, which means significantly more capital investment. Second, transaction costs will ding you for another 3% or so for buying. So already this scenario is unrealistic. But I'll play ball anyway so as to not ruin your example.
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Here is what I mean. Say the Gross Rent for the property is $48,000. Net opertating income is Gross Rent-(50% Expenses)= NOI=$24,000. So you can pay roughly $2,000 month in mortage payments. And say the seller offered you owner financing at 4.75% interest only. Your monthly payment comes out to $1,939.58. Would/Should you ever consider something like this and play it for appreciation?
Ok, hold on. Let me get your scenario straight in my mind. So what you're saying is that you found a seller that is willing to carry 98% of the PP on a perfect property, already rented, and at 4.75% interest only payments? The chances of you putting together a deal like this are miniscule.
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Say 3% annual appreciation, (afterall most landlords structure 5% rent increases each year, and as you know rental properties value is tied to it's income stream; so IMO this is reasonable) your return on the year for appreciation is 150%.
Well, there would be transaction costs for selling the property, so your ROI would be much lower than 150%. Second, we don't know that the property will appreciate. It might stay the same. It might be worth less. We don't really know what will happen.
You have to consider that if next year banks are lending at 12% interest, your property will be worth significanly LESS than it is this year. Or say that the county government decides on a 10 mill tax hike. Guess what happens to your appreciation. Or say that the federal government decides that landlords have it too good, and to change the rules for deductions on income properties. Guess what happens to your appreciation. Or say that after you buy the house the neighborhood association decides to go on a crusade against rentals in that area. If they get restrictive covenants in place w/ the city that will affect any future owner, guess what happens to you appreciation. Or say that the house next door sells to a guy that moves several junk cars into the yard and paints the house blaze orange in tribute to deer season. Guess what happens to your appreciation. You get my point?
Not to mention the fact that properties don't manage themselves. Any time that you spend on this deal, including bookkeeping, etc, are hours of FREE labor. PLUS, what if something goes wrong in that first year. What if some drunk jerk runs into your house with his car? What if a tree falls on the roof and makes a hole? What if the furnace or A/C dies? You've got no extra income to fall back on. That is even more captial investment...
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I am having trouble finding properties that meet your criterias for cash flow returns and this is an investment strategy I am considering taking a look at and would love to get more knowledgeable opinions. Also, thinking about doing something similar (barely breaking even cash flow wise) but buying properties with equity.
Who said that your properties have to meet my criteria? They don't. It sounds to me like you need to sit down and figure out what your goals are and then go from there. Your goals don't have to be the same as mine. Good luck.