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Originally Posted by mustard76  Am I being unrealistic to expect the rent to cover the mortgage or am I looking the wrong neighborhoods? |
What's true is, market forces demand that rents be lower than mortgages in almost all cases. Suppose someone moves to Boston and is looking for a place to live. If market rent is $2000/month, but they can buy a house for $1800/month mortgage, why would they ever rent? This is clearly not the case -- overwhelmingly, people DO rent, so it must be true that overwhelmingly, it's cheaper to rent than to buy. In any market with even slightly intelligent landlords, the average mortgage will be higher than the average rent, usually significantly so.
There are several ways around this. One is to accumulate a lot of money, and eat negative cashflow each month for years, until you have enough equity in the place that you can refinance to a lower payment. Another is to start with a lot of money so that you can start with that kind of equity. One is to take out an interest-only loan, with its associated lower payments, and pray that the value of the property goes up before the loan is due. The solution that I believe is the most widely accepted by successful RE investors is to look for exceptions to the rule.
If you look at all the properties in a neighborhood, there will be a median value, and values higher or lower than this, distributed along a bell curve. Your goal is to find the one or two properties at the VERY LEFT end of this bell curve; the ones you can buy for about 60% of what the other houses are selling for. Maybe they're really run-down, but if you fix them up you can sell them for what the other houses are going for (fix-and-flip). Maybe the owner is desperate to sell, for whatever reason (divorce, lost a job, relocation) and willing to take 60% of the value if you'll just get rid of it. Maybe they inheirited the house from their parents, and they have to split it equally with their siblings, and they're tired of the phone calls saying, "Where's my money!" They'll take 60% of the value to get their siblings off their back. Maybe the bank foreclosed on them, and now the bank's sitting here holding this property that it doesn't want. They'll sell it for the balance of the loan. For whatever reason, if you buy them cheaply, you can rent them out profitably.
Dolf de Roos, who is a full-time real estate investor, says that you can eliminate most properties on the market immediately. The seller is asking something close to the market value, and has every reason to expect that they'll recieve it. If you find 100 properties that ARE worth looking at (they're asking far below market, or the seller is asking full price, but you have reason to think they'd take less), 10 will be worth looking at further, actually "crunching the numbers". Of those 10, 3 will be worth actually making an offer on. Of the 3 offers, 1 will be accepted. So after you eliminate most proprties on the market, you still have only about 1% of the rest of them that you'll end up buying. Plus, you'll probably end up looking at a lot of houses that Dolf would immediately dismiss, because you don't have his experience. So your ratio will probably be closer to .5%. Which probably means you're right on track.
The other possibility (again, depending on how much of a pain commercial property is in MA) is to look at commercial. Where residential property is valued based on what other houses in the neighborhood are selling for (comps), commercial property is valued based on how much money it brings in. Usually the value is C times the yearly income, where C is some constant that varies from market to market. For the ease of math, let's say that C is 10. Then if you find an apartment building that brings in $2000 cashflow/month, then the property is worth $240,000 (2K*12months*10). If the seller wants more than that (and they'll try) you negotiate with them, and offer what you can afford, based on what the property brings in. If they refuse, you move onto the next property, confident that you just avoided buying a bad deal.
Because stupid investors don't last very long, C is always a number such that you can cover the mortgage out of the rent. So with commercial properties it's not such a big deal to find them, you just have to have the patience to find properties for sale, and the money to make the down payment.
Sorry about the long, lectury post -- I'm not a good enough writer to explain it in a short space.
