I am interested in purchasing my first piece of rental real estate. Can you please advise me?

I have read some basic real estate books. I have minimal cash on hand, but can probably come up with $100-$150k in low interest loans for the down payment. The piece of property I’m looking at is currently unoccupied, but has a fair market rental value of $2200-$3000 a month. It is a two bedroom, two bath apartment in san diego. According to zillow.com, it has a value of about $700,000. However, I’m hoping I can make an offer for much less because it has been unoccupied for over six months.

There are several things here:

1) Getting loans for the down payment can be good in the right situation, but you have to buy right. Remember, interest paid is an expense that will cut into your bottom line. Generally, you want to mortgage as much as you can but only as much as you can comfortably pay off through rental receipts. The more you borrow, the harder that is.

2) You give a wide range of possible rental receipts. That tells me you don’t know the rental market for this kind of property well enough. You should be able to a much closer number – ie $2500-$2750 or whatever.

You need to look at all expenses. First, you have to realize there will be some vacancies – no income while it is vacant, advertising costs, etc.

Then there are things like taxes and insurance, and you need a budget to handle repairs. Both short term repairs like plugged toilets, as well as long term expenses like eventually replacing carpet, roof, repainting and the like.

Investors normally figure 50% of the rental will be taken up in maintenance, vacancy expenses, administrative costs, property taxes and the like.

So if we take $2200 as rent, that means that $1100 would be available to pay for the mortgage.

A 30 year mortgage for a $700,000 property is $4,657.12
at $500,000 it is $3,326.51
at $300,000 it is $1,995.91

This is all assuming you can get 7% financing on a non-owner occupied (investor) loan.

So from my perspective, this is a deal that would send me screaming away in terror if I wanted to do a rental.

If this was truly a $700,000 property, if I could buy for $600,000 then I’d consider buying to resell, but in today’s market I’d have to feel incredibly strong about doing it.

Also, be very careful about Zillow, or other on line sites for getting valuations. I’ve seen these in general (and Zillow in particular) to be off by as much as 30%. So much of determining valuation is based on comparing similar properties. Online services have a great difficulty comparing houses that have been rehabbed vs those that haven’t, as well as other amenities that inpact on value, especially in “transitional neighborhoods.”

So from a rental aspect I’d say this is a dog. It could still possibly be a good investment to purchase and resell, especially if there is some need of repair and rehab because it has been vacant for so long, but then we’d have to talk about other numbers.

Some general advice: Most areas have Real Estate Investment (REI) clubs. These are places where real estate investors, lenders, accountants, lawyers and others meet regularly to talk about issues and to network. If you are knew to the business it is a great way to rub elbows with people who work in real estate, make contacts and pick up real life knowledge.

You can find listings for real estate clubs in your area by visiting www.reiclub.com which is also a great resource for new REI.

Consider getting a mentor – or see about partnering up with an established real estate investor. If you can realistically get financing without a problem, there are loads of investors who could partner with you on a couple of deals. They provide the deal, you provide the financing and get to watch a couple deals happen while you make some money. After 2-3 deals like that you will have learned enough to do some on your own.

There is a widely accepted, 3-levels of real estate investment that goes like this:

If there is a deal you can’t do – refer another investor to it (you’ll get a referal fee)

If there is a deal but you can only do part of it – keep some of the profit and pass the rest on to another investor – either as a partner of assign the rights t them (wholesaling)

Do the deals that you can do by yourself.

Good luck

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