Buying a single family home for investment purposes

Recently, I’ve had some people approach me about buying houses for investment purposes.

The concept is simple: There are loads of people out there who either can’t or won’t buy a house right now. They choose to rent (hopefully from me!) instead. But there are lots of people trying to sell their houses… both individual owners and also banks (which got them through foreclosure). So there is an opportunity for investors with cash and / or the ability to get mortgages to  step into the breach, buy unwanted houses, and rent them to appreciative renters.

Depending on the neighborhood, you can even find individual houses that, as rentals, not only cover the mortgage but also yield some cashflow. (That’s pretty much all the evidence you need that it’s time to buy real estate.)

Let’s do some math on a real, sample property in Echo Park to find out how the numbers work. Here are the facts about Property A:

  • Single family home
  • 2 bed / 1.75 bath, plus bonus studio
  • 860 sq ft home on 4,00 sq ft of land
  • Priced at $400k

Say you buy it for $380k as an investment property. Here’s how the deal works:

  • Put down 20% (banks require at least that much for an investment property these days), or $76k
  • Borrow $304k at 4.5% (interest rates are a little higher for investment properties) fixed for 30 years
  • Mortgage payment of $1,540 / month
  • Property taxes of ($380k x 1.25%) / 12 months = $396 / month
  • Add in $100 / month for gardener plus another $100 / month for insurance
  • Total costs of $1,540 + $396 + $100 + $100 = $2,136 / month
  • Rent the house out for $2,400 (you might do better, but let’s be conservative)
  • You’re netting $264 / month or $3,168 / year in cash
  • Plus, you’re reducing your loan balance by about $400 / month or $4,800 / year of your mortgage (this goes up gradually over time)
  • So your total return on your downpayment is ($3,168 + $4,800) / $76,000 = 10% in the first year

And that’s not all. You’ve got a fairly highly leveraged investment. If the property appreciates by 1% over the first year, the value of your equity will grow by an additional $3,800 (ignoring transaction costs involved in actually selling).

One caveat: As previously discussed here, it’s a little risky to depend so heavily on one tenant to make your mortgage payments. You need to be in a position financially where a month or two of vacancy won’t kill you… otherwise, buy a fourplex.

Interested in buying the property above or one like it? Have $75-100k in the bank and decent credit? Get in touch!