Author Topic: Need input on buying a very non-mustachian house as an investment  (Read 544 times)

ericrugiero

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I've been looking at a foreclosure house for sale and I'd like some input on whether it makes sense to buy with the intention of living in it for two years and reselling after we meet the two year time limit for capital gains tax. 

Background, I live in an area where real estate is pretty cheap.  Current house is a fairly nice home with 2300 square foot living space.  We like the house but it's not in a convenient or bike-able location so I'd like to move at some point in the future but we aren't in any rush.  Value is probably ~$150,000 and we owe $40,000. 

The house I'm looking at is a mansion (by my standards) with over 5,400 square foot of living space (plus a full basement) not including a small detached rental duplex.  The 5,000 square foot does include a 2BR, 1 bath area with a full kitchen that could be rented out or used as a mother in law apartment.  It sits on 11 acres with a pond and a picnic shelter.  It's easily "worth" $500,000 and would cost more than that to build.  It's currently on sale for $280,000 but I may be able to get it for $250,000 or less.  If I purchased it, the goal would be to live there for two years and then sell it to make a ~$200,000 profit.  There are some minor repairs and upgrades needed on the interior but most of the work is external (grass hasn't been mowed all summer, needs painting, etc)  The detached rental needs more work than the main house.   

Upsides: 
Potentially doubling my money in 2 years while living in a nice place.  (potentially making $100,000/yr to live in a mansion)
Tax free (no capital gains tax) money that is in after tax accounts would be nice for early retirement.  Currently most of my net worth is in my 401K or my house.  If I made $200,000 or more that could be my buffer for the 5 years of the roth conversion ladder from my 401k.
Potential to rent out from 1-3 "units" and cover some expenses.  The one that's part of the house we would probably only want to rent to family or friends.  Potential rental income is $500-$1500/month.  But, do we rent when we aren't planning to stay long term?

Downsides:
Risk, what if I can't sell it in a reasonable time?  Houses in this price range don't tend to move very quickly in my area.  It could be a long process and with the much larger tax, insurance and mortgage I would need to dial back some of my other investments to cover the difference.
Having to move twice.
Risk of getting used to the larger house and not wanting to downsize. 

I've bought foreclosure's twice to live in and saved money each time.  Both of them were about $100,000 dollar purchase price.  Other than that, I don't have a lot of experience in real estate but I'm interested in getting involved.  This would be a large first step.  Would it make sense to do this or to start smaller?   

waltworks

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #1 on: October 10, 2018, 01:15:53 PM »
Why do you think it's "worth" $500k when it's sitting on the market (with apparently so little interest that you can lowball the seller) for $280k?

I mean, the "if it seems too good to be true" test should be applied here. Why is it so cheap? Will you actually be able to sell it for $500k in a few years? RE in the US is IMO broadly overpriced right now and interest rates are going up. I wouldn't count on any appreciation at all for something like a decade.

Does this place have 2 rental units (detached + attached) or one? I couldn't tell from your post. Could you rent them? If so, for how much? What would the whole place rent for if you couldn't sell it?

Also, how much is it going to cost (in either money or time or both) to maintain 11 freaking acres (grass? forest? farmland?)

-W

Mrs.Piano

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #2 on: October 10, 2018, 01:51:59 PM »
I ask how much percentage of your NW would you be tying up in this? If it goes bad, how will it affect you?

tralfamadorian

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #3 on: October 10, 2018, 05:57:29 PM »
+1 walt's thoughts. If there are no buyers for $250-280k now, what gives you confidence that there will be buyers for $500k in two years?

Papa bear

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #4 on: October 10, 2018, 06:55:13 PM »
How much work does this place need to get to 500k?  This is basically a slow flip. You should look at this as the purchase price + rehab cost, including pricing your labor, should be 60-70% of the value when you sell. This is the ARV, or after repair value.

There are diamonds in the rough out there, but they usually get picked up quickly, especially in today’s market.

If you do go into this with intent to “slow flip,” I would seriously consider an interest only loan or a 5/1 ARM.

Are you handy? Have you done rehab work before?  Can you carry the PITI if you can’t sell quickly?


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AccidentalMiser

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #5 on: October 10, 2018, 07:20:16 PM »
My stomach is churning just thinking about what you're describing.  All the other posters have summarized what I would say to you.  It sounds like you're a relative newbie to real estate investing, I'd run away from this "deal" with all speed.

ericrugiero

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #6 on: October 11, 2018, 07:18:40 AM »
Thanks for the input.  I am leaning towards not pursuing it just from the risk standpoint.  I do truly believe it's "worth" 500k based on the size, location, space, etc.  However, it's probably more risk than I should take on at this time.  The reason I think it's sitting on the market now is that it's a foreclosure that needs some work and most people in that price range don't want a fixer upper.  However, there is no guarantee that 2 years from now somebody is going to be sitting there ready to buy who likes this particular house.  There just aren't many buyers in that price range in this area.  The national real estate market doesn't really affect this area much.  We haven't seen the boom or the bust that other places have.  What would affect us would be if one of the large local businesses went under.  (The most likely buyer for this house would be a Dr at the hospital 7 minutes down the road). 

There is a house with a garage apartment and an additional duplex.  The duplex isn't very nice. 

Also, I wouldn't be low balling at $280k, that is the current asking price.  I would offer much lower. 
« Last Edit: October 11, 2018, 07:23:00 AM by ericrugiero »

Linda_Norway

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #7 on: October 11, 2018, 07:26:56 AM »
Houses that are difficult to sell will cause you a lot of stress when you are going to sell it. If that is combined with a high mortgage and you depending on a good outcome, then it is probably not worth it.

former player

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #8 on: October 11, 2018, 07:29:56 AM »
I'm currently having my much smaller (1,100 sq ft) house re-roofed.  The thought of the maintenance on 5,400 sq ft gives me conniptions.

Car Jack

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #9 on: October 11, 2018, 07:30:21 AM »
Let me apply something that happened to me, so it's not all that far fetched.

I bought a house (our first).  We spent 7 years in it, put a bunch of work and money into it and then started looking for a somewhat nicer location, more land home.  We put our house on the market and sold it and were able to then move to our new home.

The financials:  We paid $125k for it.  Probably put $20k into it in upgrades, re-roof (which I did myself, so only cost of materials).  Sold the house for $123k, minus 6% for the real estate agency.  So the thoughts of "House as an investment" do not always pay off.

I'm going to add that the house you're looking at sounds possibly unique for the area.  In many areas (mine for sure), unique means you're not going to get Plain Jane and Bob people looking.  You'll only get rock star artists and off the wall trust fund kids.  So instead of the 100 people who looked at my cookie cutter starter house, you'll get 3.  I honestly think you're setting yourself up for a huge loss.

MrsWolfeRN

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #10 on: October 11, 2018, 08:29:33 AM »
The MMM article on "why Bitcoin is stupid" provides a good summary of the difference between an investment and speculation. Buying a house for the purpose of capital appreciation is speculation. Buying a house because you want a nice place to live is spending.  A rental house is not an investment unless you know you can rent it for enough to cover all expenses and make you some profit, generally 1% of the value of the house per month.

Tuskalusa

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #11 on: October 11, 2018, 08:40:54 AM »
While I love the idea of making money in real estate, I tend to view any house I live in as an expense (vs. investment).  As a result, I focus on the qualities of the house that make for enjoyable living. This house, while it sounds pretty neat, doesn’t seem to align with your top priorities. For that reason, I’d recommend passing.

rothwem

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #12 on: October 11, 2018, 11:16:21 AM »
I have no idea what your rental market is like, but what you’re describing sounds like a quad with one really awesome unit on it. If you could pay 250k for the house, a 30 year note would be something like $1500/month with taxes and insurance.

If you could get $800 for each of the duplex units and $500 for the MIL suite, then you could basically clear $600/month for maintenance costs while you live in the main house.

Seems like a pretty sweet house hack, but then again, I have no idea if those numbers are even possible, AND you’d have to be a landlord. Not everyone is cut out to be a landlord.

Fishindude

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Re: Need input on buying a very non-mustachian house as an investment
« Reply #13 on: October 11, 2018, 02:04:47 PM »
Where we live is similar.   There is just no market for houses over $300K, so they can be quite difficult to sell.   Have seen case after case where big shot builds $1mil plus mcmansion, then has to move away due to job circumstances and the place sells for 1/3 of what he's got in it.   These can be a great bargain for the second or third buyer if it is set up to your liking and someplace that you would like to live for a while, but don't plan on hitting a home run when you sell.

theoverlook

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This all sounds very similar to something I did 4 years ago. I bought a 6000sf+ foreclosure house at less than half of its appraised value prior to being neglected and sent into foreclosure. One thing you have to realize is that everything - and I mean absolutely everything - on a house this size costs serious money. You could be $90k into a renovation of it and only be half done if that. I've done well, but I've still spent more money than I could have dreamed of spending on repairing things, and that's with me doing quite a bit of the labor. How many furnaces and A/C units does it have? I have four of each. And two of the AC units have gone out and been replaced, and all the remaining equipment is 20 years old so pretty much at the end of its expected service life. Are you prepared for an $8k furnace and ac replacement bill? What about four of those bills?

In the end, you MIGHT break even, which in my situation would be fine with me as I've had an awesome house in an amazing location for years at low cost if that happens. But if you did it just intending to make money you would be full of regret.

As to why a property like this might be available cheaply: the people shopping for this sort of property do not want a fixer upper and they do not want to deal with a bank on the foreclosure and question marks on everything. If I had simply bought this property, taken care of the glaring issues, and resold it with it qualifying for a conforming loan I probably would have done very well. My downfall was in wanting to live in it for a decade or two first. ;-)