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REAL ESTATE 3 bd SFH or 2 bd SFH w/ garage - Need Help

Corrado79

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Sep 24, 2007
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Santa Monica, CA
Hey everyone, I am getting very close to doing my second deal (own a rental Condo), but I have come to a pass and need help from all of your wonderful minds.

I am looking at getting a SFH (actually, more like a Townhouse) which is located in a development near a medium sized college in Colorado. Over half of the residents are families, with the remaining being mostly students. I am looking at two properties and cannot decide which is the better investment. Both of them are priced equally (around $125k). The development was completed in 2004.

Property (1) - 2 bedroom / 2 bath (with a garage)
This property has had some slight improvements (granite/marble countertops, tile instead of linoleum, etc.) and is in great condition. It is currently being rented out at $950/mo through 9/08 by a family with a child who allegedly plan on staying for awhile. That rent appears to be about $100 over market, which could be problematic if the tenants leave when the lease expires in September. These are the most popular units in the development and sell and rent easily. I have calculated its cap rate (using the current rental figure) at 6.1%.

Property (2) - 3 bedroom / 2 bath (no garage)
This property is also in good condition, but without improvements. It is currently being rented out by college students for $850/mo through 12/08. That rent appears to be about $100 under market (it's rented out to the current owner's daughter), which will stick through December. These units primarily only rent to college students because they don't mind the lack of a garage in the winter. Accordingly, the resale market (really only investors) is somewhat slim. Current cap rate is 5.5%.

My plan is to hold and rent the property in 5 years, where I will either sell it if the market is strong or refinance it. Either way, I would like to have some equity available in 5 years to roll into another property. In the interim, I am only putting 5% down so the property only slightly cash flows/breaks even if there is no vacancy or major repairs (possible, but unlikely).

Thoughts? Which one would you take and why? TIA! :thankyousign:
 

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andviv

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Property 1 looks better for me.
 

tbsells

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Jul 27, 2007
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You are basically buying for appreciation. If property number 2 has a limited resale market (investors only,) then it is unlikely to appreciate as much as property number 1 which could be sold to an investor or owner occupant. Also, if prop. 2 is rented to college students it will likely have higher than average wear and tear and repair costs. Based in the info you provided prop. 1 sounds better to me.
 

kurtyordy

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Aug 28, 2007
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The biggest issue for you, is what is your capital strategy for carrying these when the vacancies and repairs occur? Can you afford to carry it if it happens to sit vacant for 6 months or more? If the answer is no, then you need to buy cheaper.

To answer your question though:
It seems you are in pretty much the same boat with either property on the front side, however, if property one has a greater rental market demand, then go with one. Rents will typically continue to rise and will rise faster on the property that has more demand associated with it.
 

rcardin

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Oct 30, 2007
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How can you cash flow with buying a 125k property that brings in 850-950 a month?

If you wanted to keep one longer than 5 years I would say put the money in the college rental. Put stainless steel wrap around counter tops and replace sheet rock as it gets tore up with 1/2" mdf. Over 5 years it should become a bullet proof house for college student rentals. Hence long term hold.

College students either live on campus or eventually move off campus. Daddy and Mommy still write the checks most of the time. Why not offer the alternative to dorm rooms for 3 students who can make the rent together and have their parents pay for it.
 

Corrado79

New Contributor
Sep 24, 2007
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Santa Monica, CA
Thanks everyone! Your sentiments echo my gut feeling, but my only remaining concern is about future rents. I feel that with Property (1), there is room to raise rent, but with Property (2), I might be exposed to a reduction in rent. One of the things I've picked up here is purchasing properties based on possible ways you can improve the management of the property and Property (1) would fall into that category. Property (2) is probably maxed out.
 

8 SNAKE

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Aug 15, 2007
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If I told you that Property (1) (2bd/2ba) ended up being $10k more than Property (2) (3bd/2ba) would your analysis change?
If the future rents and marketability of Property 1 are better (like you've said), it would still seem to be the winner. The real question is whether either one of these will actually break even or cash flow a little bit for you. To me, it would make sense to run your numbers backward from what you're doing to arrive at a purchase price that makes sense for you and your investment plan. Once you arrive at that price, make an offer.
 

tbsells

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Jul 27, 2007
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I agree with 8snake and rcardin. It doesn't sound like either of these will cashflow. Buying on speculation of appreciation over the next five years is more like gambling (another word for speculation) than investing. I would proceed with caution. Nobody knows where the bottom of this real estate cycle is, but there is good reason to think we are not there yet. Your purchase could just as easily decline in value over the next couple years as it could appreciate. If that happens you will have negative cashflow and negative equity. A double whammy.

I'm not negative on real estate. I make my living selling it, buying it, reselling it, and renting it. Its still one of the greatest investment opportunities available. But, it is a time for caution and careful analysis. Buying just because you think the value will go up is dangerous. In my opinion, if it doesn't cash flow on day one don't buy it. Of course all real estate is local and I have no knowledge of your particular market area. If you have very sound reasons for thinking it will appreciate in the next five years that may make a difference.
 

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Corrado79

New Contributor
Sep 24, 2007
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Santa Monica, CA
I appreciate all of the comments. Very helpful! I will go back to the drawing board and re-run the numbers to make sure it makes sense.
 

Corrado79

New Contributor
Sep 24, 2007
86
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12
Santa Monica, CA
As an update, I pulled the plug on this deal. rcardin was right. Although it wasn't going to be -$300/mo, it would be difficult to cash flow with 5% or even 10% down.

I learned an important but difficult lesson from this. Walking away. Once I get so invested in a deal and it "feels" right, it's hard to walk away even though the numbers say I have to. Now I have to start from scratch, but that's okay. It was probably the right move. Just tough to do.
 

rcardin

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Oct 30, 2007
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I use my 1% thory when looking at cashflow. Assuming it is a 30 year note. Take 1% of total cost to buy the house and that should be your rent in order to break even. Things may be a little different in CA market but as long as you are looking for house below 150k it should work.

Here is the type of house I am looking for. Figure 45k at most with closing and paint/basic rehab. Payment shoudl be about 450.00 PITI(pricipal interest tax insurance)
If I can rent it for 650 (which is low for a 3br1ba) I can still cash flow 200.00 a month.

http://ntreislistings.marketlinx.com/SearchDetail/Scripts/PrtBuyFul/PrtBuyFul.asp?EMailKey=33127970&prp=mls&AgentID=0571105

I have a real estate agent emailing me daily with all new listings between 0-60k. These are the homes I can afford to make a payment on if they have to go vacant for a couple of months. With a focussed plan you could pay these off in 10 years or so. Especially if you have a few of them and focus paying one house off with the profits from the others.

Just my opinion and theory. Take it for what it is worth.
 

kurtyordy

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I have a real estate agent emailing me daily with all new listings between 0-60k. These are the homes I can afford to make a payment on if they have to go vacant for a couple of months. With a focussed plan you could pay these off in 10 years or so. Especially if you have a few of them and focus paying one house off with the profits from the others.
This is key for a newbie. The two most important questions you need to ask are, will it cashflow, and can I carry it if it is vacant.
 

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