How Do I Prepare for a Real Estate Opportunity?

Ultimately my husband and I might buy another rental property near the beach. With the real estate market in a semi-chaotic state we’re keeping our eyes peeled for bargains. The question is: how do we plan for a buying opportunity?

The first issue: we have mortgages on both our primary residence and our rental home. Our primary residence is a 15 year fixed mortgage at 4.875%, while our vacation home is a 30 year fixed at 6.00%. (I don’t know if we’ll ever see a rate below 5% again in our lifetime.) The biggest problem I see with purchasing a third home is trying to pay the mortgages on all three properties each month.

The second issue: my husband and I have invested the majority of our money, (outside of our emergency fund), in the market. We know that the DOW may very well far below it’s current marks, but most of our money will remain in the market for the long haul, so we figure we might as well invest it. If we don’t end up purchasing another property we’ll probably leave this money in the market for the next thirty years. Of course, if we do decide to purchase a third home our money may be tied up in a very unpredictable market. What if the market is down when we decide to seize an opportunity? On the other hand, what if an opportunity never arises and we our money has been sitting idle in cash and money market funds for years?

I’m wondering… What is the best way to prepare for a real estate opportunity?

5 thoughts on “How Do I Prepare for a Real Estate Opportunity?”

  1. I would be very leary to pick up a third mortgage unless the deal was VERY good and the potential to rent the place was VERY good. If you bring enough income each month to pay for all three mortgages on top of your expenses – without relying on any rental income, then go for it. But very few people can afford three mortgages at once. If the place doesn’t rent as expected, you’re in trouble.

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  2. You are absolutely right about not counting on rental income. The income from our rental home at the beach only covers 6 months of the mortgage. Add on another 6 months of mortgage plus utilities and you quickly realize that we bought the home because we love the beach not because the house pays for itself.

    As for the issue of three mortgages: we could pay off a good portion of our first mortgage, but the interest rate is so low that it just doesn’t make much sense.

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  3. One of the things I’ve found with those who invest in real estate is that they don’t necessarily wait for an opportunity, but they create an opportunity.

    You can find out what the current rents in the area are and figure out what all the associated expenses are and then you can figure out what the maximum amount you can offer is.

    Even if your offer is quite low, you never know what may be accepted until you try.

    Nice blog by the way.

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  4. Limeade — That’s exactly how we figured out whether or not we could afford our first beach/vacation home. We calculated rents, mortgage payments, utilities, etc and determined just how much we could afford. In the past we also placed stink-bids on properties in the area. We’ve never attained a property this way, but you’re right, you never know how low a seller is willing to go.

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  5. Questions for Frugal Girl:

    Do I want to own and manage another investment property? – Think of this as a lifestyle and time-management question.

    What is the Return on Investment (ROI) for my current property?

    What would the ROI be on a second rental? – consider that you could rent it out for the whole season, and not use it yourself at all.

    What is the ROI on my stock portfolio?

    When considering ROI on real estate, consider a *leveraged* ROI. ie: A $40,000 downpayment on a $200,000 property is still only a $40,000 investment. – don’t forget your closing costs.

    DO NOT pay down a mortgage that is 4.875% You will never find money that cheap *ever again*. If you don’t believe me, Google “should I pre-pay my mortgage”.

    What is my debt to income ratio for the prospective rental property and for the portfolio as a whole?

    What is the LTV for the portfolio as a whole?

    If I don’t rent for my target rents, and I have to discount my rent, can I still pay the debt service. – I find the important question is usually not “Will this rent?” but “Will this rent for $ X ?” Usually, if you discount *enough*, it will *always* rent.

    Am I ok with this risk?

    Personally, I love rental income and property management, and do not mind the associated risks. But first and foremost it is a matter of lifestyle preference.

    Have fun at the beach!

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