Re: Is positive cashflow possible on a new home? - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on September 08, 2003 at 10:07:31:
Chip---------------
Please do not use real estate agents as advisers for real estate investing. Unless they are actively investing themselves and can prove it. Even then, I would put them lower as advisers than other local investors who are not real estate salespeople and the posters to this and similar forums.
You have to know yourself what you are doing. Would you recommend that a 15 year old start driving a stick-shift car without some instruction in how to stear and work the brakes and clutch? I feel that it is possible that you are in the position of being the 15-year-old driver here. It sounds to me as though you are just stumbling along at this time. Tnere is nothing wrong with being a beginners, none of us were born knowing how to be real estate investors, with the possible exception of Donald Trump.
However, my believe is that real estate investing is difficult enough that one has to study up on it for a few moneths before actually venturing out to spend money to buy properties. I suspect, from your questions and comments that you have not spent enough time studying. Have you read my post for beginning investors? Put “beginners success” into the archive search function of this main board forum of this CREONLINE.COM website.
DO you know what expenses to add up to get a projection of costs for the next year and beyond? If not, you are not, in my view, ready to start seriously spending money on investment properties. Have you read a book on property management yet? If not, I recommend doing that before buying or as you are buying. I recommend both Jack Reed’s managing book, found on his www.johntreed.com website, and Leigh Robinson’s “Landlording.”
I am not bery enthusiastic about buying brand new properties for rental investment. One usually pays a premium for new. It is probable that you will pay a far better price for a used property which will rent for the same amount. Have you studied the market prices for existing homes? If not, again I feel you are not ready to buy. Have you study the rental marketplace whre you propose to buy? Do you know the rents being charged by similar properties? Do you know how long it will take to get a property rented out?
If you have read my “beginners success” you know that there are three categories of income for rental properties. Appreciation is one of them. If there is appreciation, you will make money, even with a break even cash flow. If there is high appreication you CAN make money even with negative cash flow. Investors here in Coastal California have been doing that for decades. However, some investors in other parts of the country suggest that investors discount the effect of appreciation and just buy if properties provide an acceptable level of positive cash flow. I don’t know where you are and even if I did I probably couldn’t predict the appreciation you will experience.
If you re going to invest with appreciation as your dominant goal, over that of cash flow, I recommend that you buy in locations where you expect very high appreciation over the next few years. Also buy the types of properties that are likely to appreciate more than average. And invest with a strategy that assures higher returns if there is appreciation–such as with high leverage. You probably will have little cash flow, but then remember we are talking about investing to maximize appreciation profits, not tax flow profits.
I feel that NONCOASTAL California is a great place to invest for future appreciation. There may be other places that will be good also. For the past 5 years or so there has been great appreciation in NY, NJ, CO, MA and perhaps other parts of the NE USA> Whether that is likely to continue, I don’t know and don’t make any projections that it will.
If you believe in “regression toward the mean of appreciation,” you would invest in areas where prices have “lagged.” Where they have gone up LESS than that in surrouding or comparable areas. If you believe in that approach you might consider NM or TX along the Mexican border. There may be reasons for areas not to appreciate much and those reasons may continue and cause them to continue to lag. I don’t know why the low-appreciation areas as the way they are. It takes some studying to hope to at least partly understand what is going on. I’m not about to take the time to try to do that sort of analysis. There would be no need. I have already got my investment program and it does not involving looking for the “lagging” areas. Robert Campbell touts this approach. However I find his book “Timing the Real Estate Market” to be completely unconvincing in terms of using if for my own investing. Perhaps you will feel differently.
Now, I may be wrong about you. Perhaps you are ready to risk thousands of dollars on the salesperson’s recommendation. However, I worry that salespeople will say what they think you want to hear to convince you to buy. They don’t have to live with the long-term consequences of your making a poor purchase. You do. I feel it just does not sound like you are ready to drive an investment vehicle. Perhaps I am incorrect. I have no stake if you do or do not buy. I just hope you don’t run off the road and hurt yourself or wreck your investing program.
Good InvestingRon Starr***