Investing in Real Estate
Requires Solid Planning

Question: My husband and I are interested in purchasing a few houses to use as rental properties. We are looking at buying a foreclosure house with a tax value of $83,000. We hope to buy it for $60,000 and finance it for 15 years at 7% while renting it for $750 a month. Insurance and tax costs should be around $1,300 for the year. Does this arrangement sound like a winner? Are there any calculators or general rules to follow in determining what is a good price to pay for rental properties?

-- Rebecca, Conshohocken, Pa.

Rebecca: Many people interested in investing in real estate have concerns similar to yours. Namely, investors want to know if a given property would be a cash cow or an alligator. A cash cow is a property that brings in positive cash flow every month. An alligator is one that costs you money out of pocket each month and eats you alive.

In your case, if you can buy a home for $60,000 and finance it fully according to the terms you mention, your monthly mortgage payments will be around $540. Adding about $110 per month for taxes and insurance brings your total costs to around $650. So if you can rent the house for $750 a month, you will take home $100 monthly, before any maintenance and repair costs. This is definitely a cash cow, particularly because you can lower your mortgage payments by $140 a month with a 30-year loan. And this equation doesn't even account for the benefits of depreciation.

The general rule is that investors need to buy properties that they can rent for 1% of the purchase price to succeed. This means that you would need to be able to charge a monthly rent of $600 on a $60,000 property. Since you say you can rent the home for much more than that, you are way ahead.

Keep in mind, however, that this is only a general rule, and doesn't take interest rates and other financing variables into account. It's important to be sure you can get the property for $60,000 -- and even more sure you collect a rent of $750 each month. Check what comparable homes are renting for to put your mind at ease. In today's high-priced market, your situation sounds almost too good to be true. And when a real-estate transaction sounds that way, it often is.

-- Mr. Irwin has more than 25 years' experience as a Los Angeles-area real-estate broker. He is the author of more than two dozen books about real estate and is recognized as one of the most knowledgeable writers in the real-estate field. Mr. Irwin's most recent book is "Tips and Traps When Renovating Your Home," (McGraw-Hill, 2000).

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