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There are a lot of variables that come into play, and they will vary depending on your location. What works in Minneapolis will not necessarily work in Seattle.
Before you get started, you need to have a strategy in mind. Are you investing to get monthly cash flow? Are you banking on future appreciation (either forced or natural)? What's your exit strategy?
Comparing rent to the mortgage price is not nearly detailed enough. You have to take into account vacancy, insurance, maintenance, repairs, taxes, etc. You also have to know the local market to get an idea of how rents are trending and what the vacancy rates are like.
Ball park, your principal and interest payments should be 50% of the rents collected.
For example, if market rent is $2000/month for say a triplex the principal and interest on the mortgage should be limited to $1000.
If you find such a situation JUMP ON IT. Very unlikely. While it is entirely possible to get to a point where an income property has rent that is DOUBLE the principal and interest it is not common for properties to be listed as such.
Much more common is that an older property needing work may barely have cash flow that fits the 50% break. If it is in a desirable area with strong employment trends and no excess of rental properties it MAY be possible to improve the place, raise the rents and improve both equity and cash flow.
That takes TIME, MONEY and HARD WORK as well as more than a little LUCK / cooperation from the BROADER ECONOMY. I have seen many people attempt to do what I have described -- improving a property to increase equity and cash flow, but if things go against them they will NOT end up with positive cash flow. If they over spend on the improvements they will NOT see their equity increase.
If it was easy to do these things there would NOT be so many tales of woe...
I look for a 10% capitalization rate. In other words, take your expected annual rents, deduct annual expenses (not including mortgage payments), and then multiply the result by 10. That is the most that I would pay.
By the way, I prefer multi-family homes over single family. With a single family, it's either fully occupied or fully vacant. With a multi-family, you will always have cashflow, even while you are trying to fill a vacancy.
I agree that multi-family can have some advantages when it comes to cashflow, but that is not the only thing to consider. Multi-family properties are much harder to market as there are far fewer people interested in owning them, similarly the profile of renters for multi-family can be considerably different than single famly housing.
The "time inputs" may be similar, but historically the appreciation of single family, and the flexibility in marketing has been superior. That MAY be changing with the current level of distaste for home ownership that some people have gotten with bad experiences from their foray into highly leveraged home ownership at bubble prices, but I would be shocked if things shifted dramatically over the long term...
At any rate, there are more than enough opportunities for BOTH investors in multi-family and single family income properties to co-exisit for the foreseeable future.
A buddy of mine has 14 units now with that formula. A couple duplexes, and a 4-plex. In Raleigh, NC. The last one he bought he paid $40k or so I believe. I think the 4-plex was $78k.
A buddy of mine has 14 units now with that formula. A couple duplexes, and a 4-plex. In Raleigh, NC. The last one he bought he paid $40k or so I believe. I think the 4-plex was $78k.
They were also bought with no money down.
Wow. Good buy on his part.
I can see 2 trains of thought going here - single-family rent houses bought as much for resale as for rental income, and multi-family units that are the reverse.
Something that has not been mentoned is that renters make "bad pets" - they break things you can't imagine breaking yourself, sometimes they are late with rent, other annoyances. You can hire a property manager if you have enough postive income to pay for their services, depending on how "hands-on" you want to be.
The investment/rental business is a mess due to the housing bubble and the inflated prices people paid for properties. The price of homes was increasing 10+% in most of the country and rent were increasing in the neighborhood of 1 or 2%. Sometimes not even that. Therefore the rent/mortgage equation is out of whack. Home/Investment properties prices are dropping, but it will still be a year or two before buying a rental makes sense. I own a rental property, which I purchased in 1997 near a university. It's worked out for me, but it takes much work. A good owner will stay on top of things such as: repairs, upkeep, upgrades, screening tenants, etc.. If your not willing to do this, do not buy a rental property. It will become a nightmare. You must stay on top of all things, both large and small, if you want to be successful. This is not an easy money type of thing.
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Good luck finding such a situation...
