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Ask Dave

Should I Buy?

Gina thinks he may be getting a good deal if she invests in a trailer park, but Dave doesn't like the idea of borrowing in order to invest.

QUESTION: Gina wants to know if she should invest in a trailer park that appraised at $250,000.  The seller is asking $225,000.  The bank will not give Gina more than a 3 to 5 year loan for the trailer park property.  Should they stick with the rental house that they have right now?

ANSWER: First of all, make sure the appraisal was accurate and that it wasn’t just done by the bank that has a loan on the property. 

Second, you should never borrow in order to invest.

You should never pay more than 10 times your annual net profit for a rental property.  If you add in vacancies, operating costs, and taxes, $225,000 is asking too much for this trailer park.

With a trailer park, you’re dealing with a high turnover of renters which could easily lead to collection problems.  There’s going to be a lot of hassle, so you need to make a very good return on this to make it worth your time and effort. 

I would move forward slowly or not at all in this situation.