Any flaws with this idea?

Posted by Sir Four at 10:18am Feb 22 '12
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I was randomly looking at real estate listings in a suburban central FL town, which was hit pretty hard with foreclosures and such. There are plenty of 2 BR and 3 BR houses for quite cheap. For example, this one is a 2 BR (actually 3 BR because they converted the garage), listed at $39,000. There are many crap homes in this price range, but this one actually has some upgrades in it.

For a 15 year loan with 30% down ($12,000), Zillow estimates the mortgage, taxes and insurance would be ~$350 monthly. Zillow also estimates the home would rent for $873/month. Of course, this rental estimate is probably not super accurate. Round it down to $800/month. $800 - $350 = $450/month net income. Having the property managed would cost ~$80/month, so $370/month net income. That's $4,440 per year. Assume one month vacancy per year, so $3,640. Set aside $500/year for maintenance $3,140. Round down to $3,000.

$3,000 annual income from this property would be a 25% rate of return on the $12,000 investment, which is phenomenal. And in addition, equity in the home is growing. And furthermore, long-term, the house will probably hold its value relative to inflation.

Doesn't it sound like a no-brainer? Of course Zillow could be wildly over-estimating the rent, or maybe there is some major undisclosed problem with the house, etc. It'd take a lot more research to know for sure.
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