Question: I’m very interested in getting into real estate investing. Only I don’t > see how I can get positive cash flow. A decent 1 or 2-bedroom condo > where I live goes for about $150,000 (i’m targeting students at a local > college, so I know if I get a condo near a bus line I should have no > problem getting tenants). If I took out a 30 year loan at 5% (the rate > for an FHA 3/1 ARM home loan. I know this might increase [or decrease] > after the first three years, but I’m interested in getting a positive > cash flow from the start, so this is the lowest rate FHA has for the > first few years). According to a mortgage calculator, this would put me > at monthly mortgage payments of just over $800. Then I add on $150 a > month for HOA fees (which include A/C and hot water and heat and > everything), plus taxes, plus property managment, plus probably other > stuff…. problem is that I could probably get this place to rent out > for only around $1000 a month. Just mortgage and HOA (utilities) are > $950, plus another $100 (assuming 10%) for property management (I’m not > gonna deal with landlording), I’m into negative cash flow and haven’t > even taken into account taxes and other things. Am I doing these > numbers right? What could I do to get into positive cash flow?
Answer: There are two obvious answers…buy something cheaper or charge more for rent. If you cannot do either, then the deal is a no-go. You have to look around for a better deal.
People seem to get confused when they deal with property. So lets put it in other terms. You want to buy a car. You have $250 a month for car payments. You want a Ferrari. It costs $2500. 2500 is bigger than 250, so the deal doesn’t work. You have to (a) be willing to pay more per month, or (b) find a cheaper car.
BTW, renting to students can be a real joy. Be ready for them to trash the place, never once do any cleaning, and then they will split on you 3 months before the end of the lease since they don’t stick around for summer. When you go to track them down to serve a lawsuit, they are always out of town or otherwise nearly impossible to find. It is much better to rent to the parents.
Many cities love their schools, but they don’t like student housing. Check your property first and find out if unrelated people are allowed to share the unit. One city that I am familiar with has a zone near the school where unrelated people are allowed to share housing units. The nicer parts of town are all off limits.
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