Buying Rental Properties?

[Arraya]

I have an opportunity to purchase a property @ 55% off peak and 50% off the 11/2004 purchase price. It is a short sale. This puts the PITI payment about $100-500 over what I could rent it for.

Are there any situations where rents can go down? It is in a slightly sketchy neighborhood.

[(former)FormerSanDiegan]

This would be a rare occurrance in today’s San Diego market, so it is either a great find or a really crappy neighborhood.
Rents can indeed fall, but what percent decline would be associated with your $100-500 difference ?

Some details would help address this …, such as
purchase price and monthly rent.

With this little margin, you would still be counting on appreciation. The 100-500 difference is likely to get eaten into by maintenance costs. $100 per month is not much. One major repair (heater, water heater, A/C, pipe break, dishwasher) per year eats that up. Trust me, I’ve had each of these things happen to me in a property I’ve for 6 years. One per year is standard, plus all the other minor maintenance issues (clogged toilet, skunk removal, paint) and vacancies will take your positive cash flow.

You’ll still likely have the tax benefit associated with depreciation, which might save you a few hundred $ per year in taxes, depending on your situation.

So, you won’t get much cash off this place, all things considered. You’ll still have to depend on appreciation to make money on this deal.

If you get numbers like this in Barrio Logan I would not buy. However, for bread-and-butter areas like Clairemont, when the numbers look like that (a few hundred bucks positive per month) I would buy. We are a long ways from that in the current market.

[(former)FormerSanDiegan]

This would be a rare occurrance in today’s San Diego market, so it is either a great find or a really crappy neighborhood.
Rents can indeed fall, but what percent decline would be associated with your $100-500 difference ?

Some details would help address this …, such as
purchase price and monthly rent.

With this little margin, you would still be counting on appreciation. The 100-500 difference is likely to get eaten into by maintenance costs. $100 per month is not much. One major repair (heater, water heater, A/C, pipe break, dishwasher) per year eats that up. Trust me, I’ve had each of these things happen to me in a property I’ve for 6 years. One per year is standard, plus all the other minor maintenance issues (clogged toilet, skunk removal, paint) and vacancies will take your positive cash flow.

You’ll still likely have the tax benefit associated with depreciation, which might save you a few hundred $ per year in taxes, depending on your situation.

So, you won’t get much cash off this place, all things considered. You’ll still have to depend on appreciation to make money on this deal.

If you get numbers like this in Barrio Logan I would not buy. However, for bread-and-butter areas like Clairemont, when the numbers look like that (a few hundred bucks positive per month) I would buy. We are a long ways from that in the current market.

[Bugs]

And they said it would never happen.

In your place I’d check the rents out very carefully, both the reported rents as well as the real market rent level for the area. You may find there’s a bigger difference than you’re being told.

[Bugs]

And they said it would never happen.

In your place I’d check the rents out very carefully, both the reported rents as well as the real market rent level for the area. You may find there’s a bigger difference than you’re being told.

[Arraya]

The property is a 2/1 in north park. I waited until a month before auction to put an offer in. I low balled just for the hell of it several months ago when they listed it and he just laughed at me, ironically the listing agent is also the seller. I’m sure it hurt his ego to get an offer of 200K of his 04 purchase price.

I waited it out and he ended up calling me a month ago trying to strike a comprimise. I submitted the lowest comps I could find and asked for 20% off that all comps we of short sales and fixers. I did an amature appraisal. At this point he decided to work with me, probably frantic about being forclosed on. At first the bank said no and then they changed there tune a week later to which I lowered my offer another 10K. Funny how desperate they are they took it.

Yes it is in a crappy part of north park and it is hard to determine rent. I am most likely going to walk away but thought it was an interesting story for you guys….

[Arraya]

The property is a 2/1 in north park. I waited until a month before auction to put an offer in. I low balled just for the hell of it several months ago when they listed it and he just laughed at me, ironically the listing agent is also the seller. I’m sure it hurt his ego to get an offer of 200K of his 04 purchase price.

I waited it out and he ended up calling me a month ago trying to strike a comprimise. I submitted the lowest comps I could find and asked for 20% off that all comps we of short sales and fixers. I did an amature appraisal. At this point he decided to work with me, probably frantic about being forclosed on. At first the bank said no and then they changed there tune a week later to which I lowered my offer another 10K. Funny how desperate they are they took it.

Yes it is in a crappy part of north park and it is hard to determine rent. I am most likely going to walk away but thought it was an interesting story for you guys….

[gn]

arraya,

Thanks for the story. It shows lenders/sellers desperation.

In the future, if you look at rental properties, I would recommend the following formula:

real rent – (0.1 * real rent) – PITI = cashflow.

The 10% is for maintenance/vacancy. The property may look new/good, but, if you’re going to be a landlord in the long run, you will surely have maintenance costs & vacancies.

And, BTW, the PITI above would have to be on a 30-yr fixed mortgage, not an ARM 🙂

[gn]

arraya,

Thanks for the story. It shows lenders/sellers desperation.

In the future, if you look at rental properties, I would recommend the following formula:

real rent – (0.1 * real rent) – PITI = cashflow.

The 10% is for maintenance/vacancy. The property may look new/good, but, if you’re going to be a landlord in the long run, you will surely have maintenance costs & vacancies.

And, BTW, the PITI above would have to be on a 30-yr fixed mortgage, not an ARM 🙂

[surveyor]

better return

I am currently pursuing a set of three four-plexes in Alabama. Asking price is $335k, can probably put 10% down, and it will cash flow about $1000/mo.

Consider the return on a property like this vs. a property here in San Diego. You should make your money work harder for you.

Still, not a bad purchase…

[surveyor]

better return

I am currently pursuing a set of three four-plexes in Alabama. Asking price is $335k, can probably put 10% down, and it will cash flow about $1000/mo.

Consider the return on a property like this vs. a property here in San Diego. You should make your money work harder for you.

Still, not a bad purchase…

[(former)FormerSanDiegan]

Surveyor is right. From a cash flow perspective there are much better places to consider. But, for many of us, out-of-town is tough. Even if you have a property manager, and even if you get plenty of extra cash flow to compensate, it is very difficult to understand the subtle issues of various sub-markets of out of town investments. I would suggest areas that you are familiar and have someone you trust outside of your RE team (e.g. former home town, areas where relatives live and you visit occasionally, etc) if you are to consider this.

As for this particular property. You might get a second look at it this fall when it becomes a REO.

[(former)FormerSanDiegan]

Surveyor is right. From a cash flow perspective there are much better places to consider. But, for many of us, out-of-town is tough. Even if you have a property manager, and even if you get plenty of extra cash flow to compensate, it is very difficult to understand the subtle issues of various sub-markets of out of town investments. I would suggest areas that you are familiar and have someone you trust outside of your RE team (e.g. former home town, areas where relatives live and you visit occasionally, etc) if you are to consider this.

As for this particular property. You might get a second look at it this fall when it becomes a REO.

[SD Realtor]

Agreed with Surveyor and FSD. Many better opportunities out of state. Wait a year or two for San Diego rental properties at least.

SD Realtor

[SD Realtor]

Agreed with Surveyor and FSD. Many better opportunities out of state. Wait a year or two for San Diego rental properties at least.

SD Realtor

[Author]

Posts