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Author: FoolMeOnce Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 5069  
Subject: Re: A Strategy for Retiring Early Date: 8/8/2003 12:05 PM
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mazske writes:

I see houses for sale in my area in the range of 50-60K. I don't know rental prices and this is where I need to do my homework, but I guessing something like this would rent for $400/month.

A rule of thumb that I use is to try to keep the price of a property purchased with a 20% down payment to 120-130 times the monthly rent. In some areas this is not difficult to do. In others it is very difficult. It is just a rule of thumb though. Each property should be evaluated on its own merits.

I think you said something in another post about 0% down deals. Are these possible to get for investment properties and are they worthwhile, or do you think its better for someone to save up a down payment?

I think it's better to save up a down payment. “Nothing-down” deals have been popularized by various gurus appealing to the naïve and under-capitalized. The ability to leverage your real estate investments is a good thing, but like all good things, it can be taken to excess. In many areas, a nothing down transaction means poor, nonexistent or negative cash flows. It also means that you will be relying much more on appreciation than cash flow to provide your investment return. This has the effect of making the purchase more speculative. In the short term, appreciation is unpredictable. If rents decline, or your personal situation affects your ability to handle the negative cash flows, the whole enterprise may go belly-up. I think it far preferable for anyone contemplating real estate investing to exercise the discipline of saving for a down payment and accumulating an emergency fund to handle the unexpected. This is just good risk management.

Since owner-occupied dwellings are easier to finance with less down, an easy way to get started is to purchase a house to live in and then some time later purchase a new personal dwelling and convert the old to as rental.



Regards,
FMO



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