Real Estate Investment: Yay or Nay?

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grayfox
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Real Estate Investment: Yay or Nay?

Post by grayfox » Thu Jul 12, 2018 6:58 pm

Any Real Estate investors out there?
Is a good real estate investment for income?

2BR, 1BA Condo
Square Feet: 953
Year Built: 2006
Asking: $159,000
Monthly Rent: $1,000

HOA: $251 per month
Property Tax: $2,432 per year
Insurance: 800 per year??
Maintenance: ??
Gas Heat: $400 per year (paid by tenant?)
Electric: $70 per month (paid by tenant?)

Two cases:
1. Pay cash
2. 20% down, 30-year Fixed Mortgage at 4.75% (P+I = $664)

Assuming the property doesn't go up in value, would this be a good investment?

:?: At which price would this become a good investment?

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willthrill81
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Re: Real Estate Investment: Yay or Nay?

Post by willthrill81 » Thu Jul 12, 2018 7:32 pm

HOA dues, property tax, and insurance alone will consume 52% of the rent payment, in addition to mortgage interest, maintenance, and the inevitable vacancies (many investors estimate one vacant month per year). Some exterior maintenance costs are likely included in the HOA dues, but interior will very likely be your responsibility.

No way would I go for that. You'll have negative cash flow of at least $200 monthly plus interior maintenance costs even with 20% down.

Never assume that you'll experience any price appreciation. That's speculation.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

Tal-
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Re: Real Estate Investment: Yay or Nay?

Post by Tal- » Thu Jul 12, 2018 7:48 pm

No. No No No.

With $1000/mo in rent and a $251 HOA, I would need to pay around $100K for it to be a viable investment - and even that is high for some people.

But, don't get lost in the details. This one is not even close to making sense.
Debt is to personal finance as a knife is to cooking.

FIREwhenready
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Re: Real Estate Investment: Yay or Nay?

Post by FIREwhenready » Thu Jul 12, 2018 7:54 pm

Agree with both responses above. You want enough positive cash flow to make it worth your time (even with a property manager). That number for me is around $1000 net profit per month.

rgs92
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Re: Real Estate Investment: Yay or Nay?

Post by rgs92 » Thu Jul 12, 2018 8:01 pm

It would all depend on the appreciation of the property. From the price and property taxes, it doesn't sound like like it's in a booming area.
But that's just reading the tea leaves. If you feel confident this property will double in 10 years, then it's a good investment, but that's a big "if".

runner540
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Re: Real Estate Investment: Yay or Nay?

Post by runner540 » Thu Jul 12, 2018 8:05 pm

Those mortgage stats sound like a standard owner-occupied mortgage. What are the terms for a rental property?

Also, who will cover water, sewer, trash? Pest control?

myfrogger
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Re: Real Estate Investment: Yay or Nay?

Post by myfrogger » Thu Jul 12, 2018 8:10 pm

This is about double what would be considered a good investment.

Old rule of thumb is 1% of the property value should be the monthly rent. HOA fee is a direct cost so deduct that. So roughly your $800/mo in rent but they want $160,000. I say old rule of thumb because with low interest rates, I see many people way overpaying what they used to due to the low cost of financing...but not nearly to the point you are asking about.

If you want to crunch the numbers further, calculate the cap rate of the property and also your cash on cash return if you borrow. Google cap rate for a more detailed explanation.

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knpstr
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Re: Real Estate Investment: Yay or Nay?

Post by knpstr » Thu Jul 12, 2018 8:24 pm

grayfox wrote:
Thu Jul 12, 2018 6:58 pm
Any Real Estate investors out there?
Is a good real estate investment for income?

2BR, 1BA Condo
Square Feet: 953
Year Built: 2006
Asking: $159,000
Monthly Rent: $1,000

HOA: $251 per month
Property Tax: $2,432 per year
Insurance: 800 per year??
Maintenance: ??
Gas Heat: $400 per year (paid by tenant?)
Electric: $70 per month (paid by tenant?)

Two cases:
1. Pay cash
2. 20% down, 30-year Fixed Mortgage at 4.75% (P+I = $664)

Assuming the property doesn't go up in value, would this be a good investment?

:?: At which price would this become a good investment?
1000-251-203-67-664=-185/mo or you lose $2,220 assuming no repairs or vacancy... this is an EASY pass. This is a terrible investment at these numbers.
Very little is needed to make a happy life; it is all within yourself, in your way of thinking. -Marcus Aurelius

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Dedde
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Re: Real Estate Investment: Yay or Nay?

Post by Dedde » Thu Jul 12, 2018 11:02 pm

CAP Rate = Annual N/I
____
Property Value
= [$1000 - ($251 - $203 - $67 - $100(for mgt) - $100(catch-all, expenses, vacancy, etc...))]*12
__________________________________
$159,000
= $3,348 / $159,000
= 2.1%

S&P 500 = 10% (non inflation adjusted)


So, as everyone has indicated. Pass on the real estate investment. Put your mullah in the equity markets in a Boglean Index. I am pretty sure many can advise which ship to use here ;-)

michaelsieg
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Re: Real Estate Investment: Yay or Nay?

Post by michaelsieg » Thu Jul 12, 2018 11:22 pm

I also don't think you should go for this, the only way that this could work as an investment if you expect capital appreciation, let's say there is massive gentrification going on in the neighborhood of the rental property and you expect that the value will significantly increase over then next few years - but as it was said before, this really is a gamble and such strategies should only be done by real estate investors who have a lot of experience and know the market really well.
I think most people investing in real estate like the cash flow and the tax advantages, and I think these cashflow numbers have to add up from the beginning. I personally think you should have a pre-tax and pre-repair net income of at least 7-8%, that is after a 10% rental income payment to the management company. If you manage the property yourself, it changes the dynamic from an investment into work, and most people don't have the time, knowledge or the patience to do this themselves (including me).

In my (probably too conservative) estimates before I buy, I only count on 10 monthly rents on average, with that you should still not have a loss.
I also don't think the first rental you buy should be a single condo, especially if you want to get a mortgage and don't pay cash for it. I think a duplex is a better way to start, as you have 2 tenants and you will have some rental income every month, even if tenants change. In our area you can get a rental duplex for about 180-200k and the monthly rent for both units is around 3k, something like that makes much more sense.
In terms of land lording/real estate investing, I found good information on bigger pockets.com. But that site is usually used by people who want to manage the properties themselves.

bighatnohorse
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Re: Real Estate Investment: Yay or Nay?

Post by bighatnohorse » Fri Jul 13, 2018 12:27 am

One months rent should cover the property taxes.
Your deal is a loser.

Nate79
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Re: Real Estate Investment: Yay or Nay?

Post by Nate79 » Fri Jul 13, 2018 12:37 am

Horrible investment. You have got a lot to learn before you should be investing in real estate.

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JoMoney
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Re: Real Estate Investment: Yay or Nay?

Post by JoMoney » Fri Jul 13, 2018 12:52 am

Seems a bit high, but if it's a high growth area the expectation for some might be in the price appreciation more than the rent.
San Francisco saw something like a 12% increase in the first six months of 2018.
At that rate, who cares about rent? ... Or even a job... just get into a house and a HELOC
I say that tongue-in-cheek, not really suggesting anybody do it, but it's something to consider about what's going on out there.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Valuethinker
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Re: Real Estate Investment: Yay or Nay?

Post by Valuethinker » Fri Jul 13, 2018 2:10 am

JoMoney wrote:
Fri Jul 13, 2018 12:52 am
Seems a bit high, but if it's a high growth area the expectation for some might be in the price appreciation more than the rent.
San Francisco saw something like a 12% increase in the first six months of 2018.
At that rate, who cares about rent? ... Or even a job... just get into a house and a HELOC
I say that tongue-in-cheek, not really suggesting anybody do it, but it's something to consider about what's going on out there.
This is not a SF flat at USD 160 per :wink:

My guess is that if you get a cap rate more than 5 per cent in those type of markets you are doing well. There is too much unmet need by owner occupiers.

magneto
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Re: Real Estate Investment: Yay or Nay?

Post by magneto » Fri Jul 13, 2018 5:14 am

Suggest may depend on :-
1. What the rest of the porfolio looks like (direct RE can be a useful income producing diversifier).
2. Whether prepared to be patient, bearing in mind QE, etc, has pushed up all Asset Class pricing, and wait for better times?
'There is a tide in the affairs of men ...', Brutus (Market Timer)

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Pajamas
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Re: Real Estate Investment: Yay or Nay?

Post by Pajamas » Fri Jul 13, 2018 9:10 am

If you are unable to determine on your own at what price that condo would be a good investment, you need to learn more about the business before becoming a landlord.

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willthrill81
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Re: Real Estate Investment: Yay or Nay?

Post by willthrill81 » Fri Jul 13, 2018 10:11 am

JoMoney wrote:
Fri Jul 13, 2018 12:52 am
Seems a bit high, but if it's a high growth area the expectation for some might be in the price appreciation more than the rent.
San Francisco saw something like a 12% increase in the first six months of 2018.
At that rate, who cares about rent? ... Or even a job... just get into a house and a HELOC
I say that tongue-in-cheek, not really suggesting anybody do it, but it's something to consider about what's going on out there.
I've heard many real estate investors say that potential property appreciation should not be a factor in one's purchase decision of a rental property because it is entirely speculative. The property may go up in value but may go down or just be flat; all are possibilities, and all have happened. For a deal to work, it should generate an acceptable return from cash flow alone.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

rj49
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Re: Real Estate Investment: Yay or Nay?

Post by rj49 » Fri Jul 13, 2018 10:40 am

I prefer to skip the headaches of rental ownership and but keep the income and potential for gains, by investing in Fundrise, which owns mostly multifamily residential throughout the country, funds new projects, and does some house flipping in high-demand places like LA and DC. I just received my quarterly dividend yesterday, without having to do a second of work. To me it's the same benefits of a mutual fund, diversification and paying someone else to manage a portfolio, although there are unique risks like bad managers making bad decisions, recessions changing returns, so I don't invest more than I can stand to lose.

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grayfox
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Re: Real Estate Investment: Yay or Nay?

Post by grayfox » Fri Jul 13, 2018 10:41 am

Thanks for all the responses. It sounds unanimous that it is a bad deal.

I recall that radio host Bruce Williams had a rule of thumb: monthly rent should be 1% of purchase price. So $1,000 per month rent would imply $100,000 price or lower.

So at $159,000 this property would not pass Bruce Williams. The only reason I considered it is because I was thinking of buying a condo to live in, and the adjacent unit was also for sale. I thought that would make it easy to manage as a rental.

BTW, I will also mention that it is in a vacation lake/ski area rather than in a city where there is a lot of industry. The main industry in the area is tourism. The town itself has population only about 10,000. The whole county is 60,000 people, 30,000 employed. People work in healthcare, retail trade, manufacturing, educational services, construction. Median Household income about $61,000. 10% of the population are below the poverty line. The population swells during the summer, and also during ski season gets a lot of visitors. I think many of the townhomes and houses are second homes for people who don't live there full time.

Nate79
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Re: Real Estate Investment: Yay or Nay?

Post by Nate79 » Fri Jul 13, 2018 12:03 pm

willthrill81 wrote:
Fri Jul 13, 2018 10:11 am
JoMoney wrote:
Fri Jul 13, 2018 12:52 am
Seems a bit high, but if it's a high growth area the expectation for some might be in the price appreciation more than the rent.
San Francisco saw something like a 12% increase in the first six months of 2018.
At that rate, who cares about rent? ... Or even a job... just get into a house and a HELOC
I say that tongue-in-cheek, not really suggesting anybody do it, but it's something to consider about what's going on out there.
I've heard many real estate investors say that potential property appreciation should not be a factor in one's purchase decision of a rental property because it is entirely speculative. The property may go up in value but may go down or just be flat; all are possibilities, and all have happened. For a deal to work, it should generate an acceptable return from cash flow alone.
While I think this is generally true (and I'm not real estate investing expert myself) I also hear that the real estate deal is made at the buy. Meaning the purchase price is critical on whether it was a good deal or not. And that the really good deals come from purchase price that is a good % discount off the actual value (perhaps as a distressed purchase, home that needs some work, etc). This discount adds to the appreciation value and really makes the real estate a deal. People who had money and bought homes in 08/09 when lots of owners were in distress and could buy at significant discount are sitting on major gains right now.

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willthrill81
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Re: Real Estate Investment: Yay or Nay?

Post by willthrill81 » Fri Jul 13, 2018 12:56 pm

Nate79 wrote:
Fri Jul 13, 2018 12:03 pm
willthrill81 wrote:
Fri Jul 13, 2018 10:11 am
JoMoney wrote:
Fri Jul 13, 2018 12:52 am
Seems a bit high, but if it's a high growth area the expectation for some might be in the price appreciation more than the rent.
San Francisco saw something like a 12% increase in the first six months of 2018.
At that rate, who cares about rent? ... Or even a job... just get into a house and a HELOC
I say that tongue-in-cheek, not really suggesting anybody do it, but it's something to consider about what's going on out there.
I've heard many real estate investors say that potential property appreciation should not be a factor in one's purchase decision of a rental property because it is entirely speculative. The property may go up in value but may go down or just be flat; all are possibilities, and all have happened. For a deal to work, it should generate an acceptable return from cash flow alone.
While I think this is generally true (and I'm not real estate investing expert myself) I also hear that the real estate deal is made at the buy. Meaning the purchase price is critical on whether it was a good deal or not. And that the really good deals come from purchase price that is a good % discount off the actual value (perhaps as a distressed purchase, home that needs some work, etc). This discount adds to the appreciation value and really makes the real estate a deal. People who had money and bought homes in 08/09 when lots of owners were in distress and could buy at significant discount are sitting on major gains right now.
True. I wasn't referring to the price paid per se but rather buying a property on the expectation that it's underlying value will increase over time. Distressed properties are a different animal because immediately upon purchase, the buyer may have significant value. But they know this at the time of the deal, whereas no one knows what prices will be years down the road.

We have some friends who bought a distressed property in 2009 for about $170k that is now worth around $600k. :shock:
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

renue74
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Re: Real Estate Investment: Yay or Nay?

Post by renue74 » Fri Jul 13, 2018 1:03 pm

Bad rental. Your rental analysis:

https://docs.google.com/spreadsheets/d/ ... sp=sharing

Banks will require at least 25% down because it's an investment property.

You'll net -3.28% per year and that's bare bones accounting for expenses.

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willthrill81
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Re: Real Estate Investment: Yay or Nay?

Post by willthrill81 » Fri Jul 13, 2018 1:04 pm

grayfox wrote:
Fri Jul 13, 2018 10:41 am
Thanks for all the responses. It sounds unanimous that it is a bad deal.

I recall that radio host Bruce Williams had a rule of thumb: monthly rent should be 1% of purchase price. So $1,000 per month rent would imply $100,000 price or lower.
That's a good 'back of the envelope' metric to use as a first pass when evaluating properties. A property with a 1% cap rate is not automatically a good deal, but it's a good screening criteria.
grayfox wrote:
Fri Jul 13, 2018 10:41 am
BTW, I will also mention that it is in a vacation lake/ski area rather than in a city where there is a lot of industry. The main industry in the area is tourism. The town itself has population only about 10,000. The whole county is 60,000 people, 30,000 employed. People work in healthcare, retail trade, manufacturing, educational services, construction. Median Household income about $61,000. 10% of the population are below the poverty line. The population swells during the summer, and also during ski season gets a lot of visitors. I think many of the townhomes and houses are second homes for people who don't live there full time.
I would urge caution with rental properties dependent on tourism, either directly or indirectly. It sounds like that property would be very dependent on tourism, even if not rented out to tourists, and recessions like the last one we had can cause tourism to dry up quickly.

Some real estate investors argue that the type of homes that appeal to working class folks just starting out or the next 'level' above are the most reliable because even during recessions, there is nearly always strong demand for them. I know of one investor who owns many properties currently valued between $50k-$75k in low cost of living areas and makes a solid income with them. Then, of course, there is location, location, location.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Pajamas
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Re: Real Estate Investment: Yay or Nay?

Post by Pajamas » Fri Jul 13, 2018 1:07 pm

willthrill81 wrote:
Fri Jul 13, 2018 1:04 pm

I would urge caution with rental properties dependent on tourism, either directly or indirectly. It sounds like that property would be very dependent on tourism, even if not rented out to tourists, and recessions like the last one we had can cause tourism to dry up quickly.
As far as tourism, it's not just recessions but also problems such as changing weather patterns resulting in less snow in areas popular for winter sports and hurricanes for coastal property ruining entire prime rental seasons. It can take years for tourism in an area to recover after a hurricane and some ski areas never recover. Even something like increased law enforcement efforts can cause problems, say against drunken behavior in Florida vacation spots or in restrictions against short-term rentals.

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grayfox
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Re: Real Estate Investment: Yay or Nay?

Post by grayfox » Sun Jul 15, 2018 11:07 am

renue74 wrote:
Fri Jul 13, 2018 1:03 pm
Bad rental. Your rental analysis:

https://docs.google.com/spreadsheets/d/ ... sp=sharing

Banks will require at least 25% down because it's an investment property.

You'll net -3.28% per year and that's bare bones accounting for expenses.
Excellent detailed analysis. Bravo!

jibantik
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Re: Real Estate Investment: Yay or Nay?

Post by jibantik » Sun Jul 15, 2018 11:24 am

grayfox wrote:
Thu Jul 12, 2018 6:58 pm
Any Real Estate investors out there?
Is a good real estate investment for income?

2BR, 1BA Condo
Square Feet: 953
Year Built: 2006
Asking: $159,000
Monthly Rent: $1,000

HOA: $251 per month
Property Tax: $2,432 per year
Insurance: 800 per year??
Maintenance: ??
Gas Heat: $400 per year (paid by tenant?)
Electric: $70 per month (paid by tenant?)

Two cases:
1. Pay cash
2. 20% down, 30-year Fixed Mortgage at 4.75% (P+I = $664)

Assuming the property doesn't go up in value, would this be a good investment?

:?: At which price would this become a good investment?

Image

Stormbringer
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Re: Real Estate Investment: Yay or Nay?

Post by Stormbringer » Sun Jul 15, 2018 11:50 am

Condo associations are usually pretty hostile to investors and tenants. I would steer clear.
"Compound interest is the most powerful force in the universe." - Albert Einstein

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Sasquatch
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Re: Real Estate Investment: Yay or Nay?

Post by Sasquatch » Sun Jul 15, 2018 12:26 pm

Pass for me. >4.5% net of all expenses is my threshold. Don’t assume Home / rent appreciation will bail you out.


I had a 50% cash position on my RE portfolio then came the housing crash. Had several vacancies and I ended up having to feed them for a while. That crash was a black swan for the ages in housing but even 50% cash didn’t protect me.

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