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What’s considered profitable in Real Estate investment terms?

The real estate bubble has burst.  That sucks right? actually it’s the best thing that could have happened.  Man – you’re a mean bastard – some would say to me:  what about all these people affected by foreclosures? My answer to that is: they had it coming.  If you make $60,000 / yr (a decent amount) than what on earth compels you to live in a $700,000 home with an SUV that gulps gas like there is no tomorrow (and in most cases looks ugly to begin with?) – you fed your ego, you wanted to be the same (or better) than your neighbors, you enjoyed it – now you pay with your own home.  You played – you lost.

But let’s say that you have learned from your mistakes, you are back on track – or if you’re lucky, you have not made those mistakes, you have some cash on hand and are willing to risk a little bit to profit in the long run by buying some real estate (yes, you are also risking by investing in real estate – no investment is risk free – as the world has clearly seen).  What do you do?

First – you make sure that you do not bet your farm.  If you have $60,000 in your bank account – don’t be investing in a $600,000 home.  If you have a decent job (making $85,000+) and a decent credit rating you probably would get the credit for it – but than so what?  Why are you buying an investment property for that much?  You should be looking for properties which cost around $165,000 – $180,000 which can be converted into 2 floor living spaces (or even better, which already are converted to that).  What I mean is that you should be looking for a bungalow (for example) with a basement that can be converted into a separate living space from the upstairs.  That way, you rent it to 2 tenants instead of one.

Why 2 tenants? because one will pay you $1,000 / month rent for a full house while 2 will pay you $500 for the basement and $750 for the living space upstairs – that’s $1,250 / month.  But is that even profitable?  I would say that if you are looking into purchasing a property, the total amount of money you make after all the fees / expenses are paid should be within 8% – 10% of your initial investment – by that I mean down-payment for the house you are buying.  Let’s talk examples – here is the starting data:

  • House type: bungalow
  • Renters: 2
  • House price: $185,000
  • Down-payment: $37,000

Based on the above, if your yearly positive cash flow from the property is within the range of $2,960 and $3,700 (i.e. $246 – $308 per month) than you should consider yourself “in the game”. On a side note, finding a property to buy for investment purposes requires time.  But look everywhere as there are always undiscovered gems.

M.

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About Michael W.

Project Manager for a large financial services company. Non-denominational closet investor. Entrepreneur running a small shop with a big idea

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