Redicculus! The silly question… - Posted by Soapymac
Posted by Soapymac on December 03, 1998 at 24:48:17:
is the one you DON’T ask.
That being said, here is one man’s 2 cents worth.
Have you done your homework? By that I mean, have you done some comparison shopping to see if the price of the duplex is in line with local market prices?
The idea of “Creative” real estate investing is to be able to purchase property using as little of your own money as possible. Did you locate this duplex through a realtor/broker/agent/salesperson or did you find it without using one of those?
“That should have a positive cash flow.” That phrase scares me…BIG time. In Real Estate investing there is NO SUCH WORD as “should.” Either it does, or it does not. Know that going in. Which leads to the question, “How do I know if it is a good opportunity?”
Behold Soapymac’s “Q&D” (Quick & Dirty) math class. None of this is original, but the answers will give you a pretty good idea.
First, total the gross ANNUAL rents, then subtract out a factor for vacancy (I use 5%,but it may be different in your area. A realtor could give you a working figure.) What’s left is your gross ANNUAL profit.
Second, add up a total for ANNUAL expenses…like:
taxes, insurance, maintenance costs, management costs (even if you fix your own toilets, you should pay yourself), advertising any vacancies, water bills, sewer bills, utility bills if you aren’t on seperate meters…stuff like that.
Third, subtract your gross rents from your expense total. The amount that’s left over is your Net Operating Income (“NOI”)…and it is THIS figure that you use to pay your mortgage(s).
Fourth, subtract your ANNUALIZED mortgage payment. If there is anything left over, that is your spendable cash flow. If the figure is negative, that’s the amount of money you will have to pay OUT OF YOUR OWN POCKET to keep the place. In business terms, if the number is a negative, the whole deal is called an “alligator”…'cause it will eat you alive!
This is why you will hear many people say on this board, that you make your profit GOING IN to a “deal,” not while you are in it.
By the way, I have deliberately left for someone else the LEGAL alligators you have to watch out for.
If you still want to invest after all this “help,” then welcome to the club. You will find some great people on this site who are willing to share what they know to keep you from losing your shirt, pants, and socks!
Tell you what…do some homework and bring the numbers back to us here. We will be happy to help you learn.