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Should I buy this house as an investment property? Part 2

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You write that the property location is in San Jose. You neither said what the going rent for that area is nor what kind of vacancy rate there is. Therefore I will have to do some guessing here. I assume a vacancy rate of 10%; this means a house offered on the rental market on average will be 5.4 weeks vacant per year. You can google the web for vacancy rates and/ or call some property management companies that work in San Jose to give you an impression. Make sure to call several because I found that their stories will vary widely.
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I kind of know that in San Jose you may get $2000 - $3000 monthly rent for a single family home. Let's assume you are renting for $2500. We further assume that you have 20% for a down payment. Be honest with your lender that it will be a rental property. Some lenders like Citimortgage give very good terms on rental properties, with very little punishment for the fact that you're not going to live in it. Let's assume you get a 5.75% interest rate.

$750,000
$150,000 = 20% down payment
$600,000 to be financed at 5.75%

The $150,000 invested elsewhere at 5.75% would yield you $720 a month.
The $600,000 will cost you $2875 a month.
Property tax will be $7000 a year or $583 a month.
Insurance may be $800 a year or $67 a month (not including earthquake coverage!)

Total expense: $720 + $2875 + $583 + $67 = $4245 a month.
Rental income: $2500 * (1 - vacancy rate of 10%) = 2500 * 0.9 = $2250.

Looks like you lose $2000 every month and we did not even include cost for a property management company or maintenance (repairs are needed when the tenant moves – don't even believe that a 1 month security deposit will cover it). Definitely, in one year you'd lose close to $24,000.
I say ‘close to' because with every month, you will pay down the loan a little more and the numbers are changing in the direction of your advantage. However, it would take many years in your particular case to just break even. If you lost $24k in the first year, then you would have to sell the house for a very much higher price. You read earlier how the transaction cost will eat up all your profits, right?

In short, forget about buying in San Jose. It's not worth it for a rental property nor is it worth it for a short-term flip (unless you can put it under contract and find a buyer).


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