This article, “Proof Positive, invest in cash-flow properties” gave me a good laugh. The author advises people to take $150,000 and buy 3 $160,000 townhomes (or priced in that range) and rent them out for a yearly profit after expenses of “$2,460 positive cash flow per year” (each, or about $7500 a year total.)
This guy has never been a landlord. The average tenant never stays longer than 2 years and often less, and when they leave, you find they had pets in violation of the lease, the carpets may be ruined, along with some of the appliances, and the whole interior has to be cleaned and repainted. They may not have paid the last 2 months rent, (having paid 1st and last) telling you to apply their deposit to the last month even though the deposit was less and is supposed to cover the damage they did. So forth and so on. Or they may just stop paying rent and you have to hire an attorney to evict them, which could take more months depending on your state. It may take you several months to find a new tenant and you’ll have lost all those months rent. The taxes on all 3 places have probably gone up since you bought them. Your actual yearly profit may be zero or a loss.
Okay. Now let’s take that same $150,000 and buy 3 older double-wide mobile homes, aka “manufactured housing”, each on their own lots. There are many, many communities all over the U.S. where you can do this and no doubt there are plenty near you. Always buy places near where you live and NEVER in mobile home parks. It’s a rule. They must be on their own city lots.
Pay cash for each place. That $50K is Full Price. Make sure they have good roofs, wiring and the floors are not rotted. Carpets have to be in good shape and they have to have good, clean and working stoves and refrigerators. You can rent these for $500 to $600 each. You’ll be renting to people on welfare, HUD, people with drinking/drug problems, bad credit and so forth, so you need to get references and CHECK OUT ALL THE REFERENCES. Absolutely do a check on credit/evictions/criminal history and never rent to anyone obviously stoned or drunk, with convictions of violence or drugs, or having been previously evicted. All of these people will trash the place.
If their last two landlords said they were okay, they’re a pretty safe bet. If the prospective tenants say they’ve been living with Mom or Dad or Aunt Sadie and have no landlord references it’s because they were kicked out or evicted. Don’t rent to them. It’s another rule.
So. You now have 3 places all paid for, no mortgages, rented for $500 a month each. That’s a total of $18,000 a year as opposed to $7500, and you don’t have mortgage payments. Out of that you have about $1500 a year in property taxes and you will average a net loss of 2 months worth of rent each, per year, in cleaning and repairs. That’s another $3000 off, total $4500 deducted from $18,000 gives you an average yearly net of $13,500!
When you go to sell these places, you will be able to sell them for what you paid for them, provided that you spent that repair money that’s allotted and kept them up. They may not increase in value but chances are your 3 fancy townhouses didn’t either. But if you hold these for 11 years, you will have made back your $150,000 and you’ll still have $150,000 in equity, because once old manufactured homes hit their bottom price, they never go lower as long as they’re maintained in good shape.
With the townhouses, it’s a gamble. They may go up in value or the neighborhood could become a slum, turn out to be on an earthquake fault or a hazardous waste dumping site, who knows? The old manufactured homes will be in an older neighborhood that’s stood the test of time. Everything in life has some risk but with these it’s minimal.
If you get a bad tenant who utterly wipes out the place, you still have the land value, which should be about $30,000 to $35,000. If you maintained insurance, that will replace the trailer, and your loss will be mainly confined to monthly revenue.
If you get a bad tenant in your fancy townhouse, who burns it to the ground, your insurance won’t cover your mortgage payments while the place is being rebuilt, your co-pay on the insurance may be $20,000 or more, and your total losses could wipe out every dime you made on this and the other 2 townhouses for the past 4 or 5 years!
So if you want to get on this Cash-Flow real estate bandwagon, take a hard look at the realities and be prepared to be very hard-nosed as a landlord.
This entry was posted
on Friday, June 8th, 2012 at 1:03 pm and is filed under Commentary.
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LOW(er) Cost Cash-Flow Investing
This article, “Proof Positive, invest in cash-flow properties” gave me a good laugh. The author advises people to take $150,000 and buy 3 $160,000 townhomes (or priced in that range) and rent them out for a yearly profit after expenses of “$2,460 positive cash flow per year” (each, or about $7500 a year total.)
This guy has never been a landlord. The average tenant never stays longer than 2 years and often less, and when they leave, you find they had pets in violation of the lease, the carpets may be ruined, along with some of the appliances, and the whole interior has to be cleaned and repainted. They may not have paid the last 2 months rent, (having paid 1st and last) telling you to apply their deposit to the last month even though the deposit was less and is supposed to cover the damage they did. So forth and so on. Or they may just stop paying rent and you have to hire an attorney to evict them, which could take more months depending on your state. It may take you several months to find a new tenant and you’ll have lost all those months rent. The taxes on all 3 places have probably gone up since you bought them. Your actual yearly profit may be zero or a loss.
Okay. Now let’s take that same $150,000 and buy 3 older double-wide mobile homes, aka “manufactured housing”, each on their own lots. There are many, many communities all over the U.S. where you can do this and no doubt there are plenty near you. Always buy places near where you live and NEVER in mobile home parks. It’s a rule. They must be on their own city lots.
Pay cash for each place. That $50K is Full Price. Make sure they have good roofs, wiring and the floors are not rotted. Carpets have to be in good shape and they have to have good, clean and working stoves and refrigerators. You can rent these for $500 to $600 each. You’ll be renting to people on welfare, HUD, people with drinking/drug problems, bad credit and so forth, so you need to get references and CHECK OUT ALL THE REFERENCES. Absolutely do a check on credit/evictions/criminal history and never rent to anyone obviously stoned or drunk, with convictions of violence or drugs, or having been previously evicted. All of these people will trash the place.
If their last two landlords said they were okay, they’re a pretty safe bet. If the prospective tenants say they’ve been living with Mom or Dad or Aunt Sadie and have no landlord references it’s because they were kicked out or evicted. Don’t rent to them. It’s another rule.
So. You now have 3 places all paid for, no mortgages, rented for $500 a month each. That’s a total of $18,000 a year as opposed to $7500, and you don’t have mortgage payments. Out of that you have about $1500 a year in property taxes and you will average a net loss of 2 months worth of rent each, per year, in cleaning and repairs. That’s another $3000 off, total $4500 deducted from $18,000 gives you an average yearly net of $13,500!
When you go to sell these places, you will be able to sell them for what you paid for them, provided that you spent that repair money that’s allotted and kept them up. They may not increase in value but chances are your 3 fancy townhouses didn’t either. But if you hold these for 11 years, you will have made back your $150,000 and you’ll still have $150,000 in equity, because once old manufactured homes hit their bottom price, they never go lower as long as they’re maintained in good shape.
With the townhouses, it’s a gamble. They may go up in value or the neighborhood could become a slum, turn out to be on an earthquake fault or a hazardous waste dumping site, who knows? The old manufactured homes will be in an older neighborhood that’s stood the test of time. Everything in life has some risk but with these it’s minimal.
If you get a bad tenant who utterly wipes out the place, you still have the land value, which should be about $30,000 to $35,000. If you maintained insurance, that will replace the trailer, and your loss will be mainly confined to monthly revenue.
If you get a bad tenant in your fancy townhouse, who burns it to the ground, your insurance won’t cover your mortgage payments while the place is being rebuilt, your co-pay on the insurance may be $20,000 or more, and your total losses could wipe out every dime you made on this and the other 2 townhouses for the past 4 or 5 years!
So if you want to get on this Cash-Flow real estate bandwagon, take a hard look at the realities and be prepared to be very hard-nosed as a landlord.
This entry was posted on Friday, June 8th, 2012 at 1:03 pm and is filed under Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.