Author Topic: Would you sacrifice some financial security to control the neighboring house?  (Read 1141 times)

redrocker

  • Stubble
  • **
  • Posts: 117
  • Location: New Orleans, LA
And if so, how much would you be willing to sacrifice?
To summarize some assumptions below: I think I'm looking at spending 20% of my current portfolio (and I'm FIRE).

It's a question I'm seriously considering as the house immediately next to mine has come up for sale. To fully understand why this could be very worthwhile for my situation, here's some context:

The neighboring house faces 90 degrees in the other direction, with it's backyard backing up to the side of my house. I only have about a 3' buffer of land before the property line, separated by a chain link fence at the moment. So if the new owner puts a pack of barking dogs (or barking kids) in the backyard, quality of life could go seriously downhill. Another consideration: these are very old houses in New Orleans, no insulation in the walls, raised house with no subflooring. So any significant change in noise pollution will be directly felt. Airbnb has unfortunately ravaged this town and the neighboring house could easily be renovated into a party pad where I'm enduring bachelor parties every odd weekend in the backyard.

But I also don't want to buy just to avoid the potential negatives. There's a chance we get a good neighbor out of the deal (I'm pessimistic based on the more affluent and more entitled trend of people who have been buying here lately though). I already have two rental properties nearby so I have some experience with renovation/upkeep/landlording. Positives for buying would include possibly splitting the neighboring backyard up so that I have some sideyard for my child to play in (I don't have a yard currently, it's a tight neighborhood). I could also potentially build a small shed/workshop for tool storage and project workspace in the backyard, which would be a huge plus for me. I could possibly sell one or both of my other rentals and just have my investment property right next door instead of a few blocks away - although the time and energy I've invested getting the other properties up to date combined with the relatively low amount of equity I have in them makes me want to just add to the portfolio instead of swap (not to mention difficulty getting financing these days as a "retiree").

Currently SO and I have about $400k in tax-advantaged accounts, $120k in brokerage, and $80k in cash. I'm FIRE, wife is part-time with a labor of love. Plan has been to live off the rental income between the 3 properties I currently have and let the investments grow for at least a decade or two. I'm waiting to hear back from a loan officer about what they'll do for me, as my tax returns show a very low income (deliberately). I got approval for financing last year for a similar situation (another neighboring house that I didn't purchase); was told I could get a commercial loan, 3 year fixed rates, 20 year amortization, 30% down. If it's similar financing this time, I just about have the 30% down in hand (then sell some securities to meet all closing costs). I expect the house to sell in the $300k neighborhood, although I'd guess $25k needs to be spent relatively soon in order to get dwelling insurance as well as reasonably good tenants. So back of the envelope, I'd need to sell around $30k of stocks to get me to the closing table with the other cash on hand. Plus whatever I need for fixing up the property although I could wait til 2018 for tax purposes and do that gradually as needed while working through the punchlist. I expect rent to be a minimum of $1000 for each side of the duplex in its current condition; $1250 or higher is common in this neighborhood for the size of apartments here and the location.  Insurance should run around $3600/yr (dwelling & flood), taxes should run around $4200/yr. I have no experience with commercial loans, but if I assume a 6.5% interest rate on a 20yr loan, I'm looking at a slightly positive cashflow if I rent at $1200 on each side, not taking into account renovations.

Some additional concerns: I've got 3 mortgages currently, so I'm already heavily weighted in real estate (although I have very good cashflow on both my multiplex primary and one of the rentals, the third is getting a makeover this fall and getting higher paying tenants). Flood and hurricane potential is a constant (and worsening) threat, and while this prospective property is some of the highest ground in the city, the National Flood Insurance Program could at any point throw a curve.

My gut tells me this is could potentially be too big of a financial impact and additional headache but the fear of the unknown is really driving me right now. I haven't gotten methodical with setting the ceiling for a purchase price and I was curious if any early retirees on limited income had done evaluations for picking up unplanned-for investment property. With the loose assumptions here, would *you* do it?

ysette9

  • Handlebar Stache
  • *****
  • Posts: 1712
  • Location: Bay Area, CA
There is a lot going on that I can't hope to give you a full answer. However one big thing stood out to me: why on earth would you live in a house in New Orleans without insulation?  The weather there is atrocious and it costs a fortune to cool a house with no insulation in a hot and humid environment. Could you solve some of your problems more easily by spending money insulating the heck out of your existing house?

We just signed a contract to have our house insulated to the max (including all interior walls) and I live in a mild part of California. This is highly important to me for comfort. I don't need to worry about utilities bills since even a drafty house isn't expensive to hear, but cost savings there are a secondary benefit.
"It'll be great!"

Dicey

  • Walrus Stache
  • *******
  • Posts: 6009
  • Age: 59
  • Location: NorCal
First, I think you're brave to pull the  FIRE trigger with $600k and rental income. It's aggressive, but under the circumstances, I think I might do it. I'd look for less expensive financing options and I'd try like hell not to tap any equities. Can you find a lender who'll work with 25% down, for example? Next, can you work the 0% credit cards to pay for the improvements or maybe pull a heloc on your primary home?

How comfortable are you with stock market variations? What if the market dumps? What if there's another Katrina?
I think it would require nerves of steel. I do think your reasons for wanting to do this are solid.
I did it! I have a journal!
A Lot Like This
And hell yes, I am still moving confidently in the direction of my dreams...

Fishindude

  • Handlebar Stache
  • *****
  • Posts: 1493
Several years ago at our rural location, the neighbor place sold and a family with three young boys moved in.  All was good at first, then dad and the kids build a dirt bike track on the few acres behind the house.  Dad, the kids and their buddies are running those loud two stroke dirt bikes seemingly non-stop, and when breeze was from the west (the prevailing direction) the dust all came our way.  Made it unpleasant to sit out on our deck 300 yards away.  Put up with that for about two years then they get divorced and you can see the property slowly start to erode and go to crap.  Junk accumulates, weeds grow up, etc.

Dude must have lost his job, because the place went to Sheriff sale and was advertised in the paper.   Decided I was going to pay whatever it took to buy the place so I didn't have to deal with that anymore and could get back to peaceful country living.   We bought the place at auction, kicked out the old owner (with some challenges), removed and sold the modular home, tore everything down, bulldozed and buried anything we could, then took the rest to the dump.   Put the ground back into farm and consider that one of the better moves we've made.

redrocker

  • Stubble
  • **
  • Posts: 117
  • Location: New Orleans, LA
There is a lot going on that I can't hope to give you a full answer. However one big thing stood out to me: why on earth would you live in a house in New Orleans without insulation?  The weather there is atrocious and it costs a fortune to cool a house with no insulation in a hot and humid environment. Could you solve some of your problems more easily by spending money insulating the heck out of your existing house?

The attic is actually both insulated and I installed radiant barrier there several years ago as well. It's the walls and floor that aren't insulated. Insulating the walls is complicated, first due to likelihood of moisture entrapment as well as access. I will likely do a DIY insulation of the floor eventually but moisture is again a complicating factor as well as decreased ability to detect the Formosan termites that New Orleans is also famous for. And if I even address those issues, there's still the single paned windows that I have no choice but to keep (historic district).

The heat is managable in the summer due to high ceilings, and the utility bill isn't that bad ~$120/mo from keeping the thermostat relatively high.

You do have a point that there are some mitigating actions I can take if the house falls in the wrong hands. That said, the house on the other side of me has already been a lesson in just how unpredictable things can get.

redrocker

  • Stubble
  • **
  • Posts: 117
  • Location: New Orleans, LA
First, I think you're brave to pull the  FIRE trigger with $600k and rental income. It's aggressive, but under the circumstances, I think I might do it. I'd look for less expensive financing options and I'd try like hell not to tap any equities. Can you find a lender who'll work with 25% down, for example? Next, can you work the 0% credit cards to pay for the improvements or maybe pull a heloc on your primary home?

Also probably relevant to this calculus is my age: 34. I have a lot of time for portfolio growth.
I also have some potential upside in the rents (below market on 3 out of 6 units). We're getting by even with a decent travel budget currently and I can always cut discretionary spending if need be. Lending options in New Orleans market are somewhat limited to begin with even before taking the low income into account but you're right I should at least shop around. I do not currently have a HELOC so I guess that's another option.


How comfortable are you with stock market variations? What if the market dumps? What if there's another Katrina?
I think it would require nerves of steel. I do think your reasons for wanting to do this are solid.

I'm very comfortable with market volatility (if there'd been more lately, that $80k wouldn't be in cash, it'd be in the market). I don't need to touch my investments with how things are currently set up. Unfortunately, it's not *if* it's *when* there's another hurricane here. City actually flooded from rainfall back in July. I'm not trying to talk down the risks of this RE market. They are indeed high. However, both my house and the neighboring house are raised and are on a block that didn't flood in Katrina. Perhaps I'm over-reliant on insurance in my mind but if we had devastation at or worse than Katrina's level, my assumption is I would evaluate rebuilding or taking the insurance check and moving when that time comes. Due to New Orleans' port activity alone, I'm pretty confident the country will not abandon it and there should always be a need for housing here. My real estate values would slump after a natural disaster but the following housing shortage would likely bump them back up as long as I hold on for a years.

« Last Edit: September 27, 2017, 08:55:20 AM by redrocker »

redrocker

  • Stubble
  • **
  • Posts: 117
  • Location: New Orleans, LA
Decided I was going to pay whatever it took to buy the place so I didn't have to deal with that anymore and could get back to peaceful country living.   We bought the place at auction, kicked out the old owner (with some challenges), removed and sold the modular home, tore everything down, bulldozed and buried anything we could, then took the rest to the dump.   Put the ground back into farm and consider that one of the better moves we've made.

Good story, thanks for sharing. My equivalent of kids on dirtbikes is the proverbial noisy vacation rental next door. That's really my greatest fear at this point (coupled with the fact that our police force is so understaffed that noise complaints etc will absolutely not be responded to).

Dicey

  • Walrus Stache
  • *******
  • Posts: 6009
  • Age: 59
  • Location: NorCal
Under the circumstances, I'd definitely do it. Just try to make the money part of the deal as cost-effective  as possible. Another angle to explore is a balloon note. Since you have the option of selling another property, if need be, to cover the balloon, it might be more cost effective. I'd also sniff around for private money and try to set up something like a 7-year, interest only balloon at something like 6%. That would most likely only come from family or a trusted friend, but could be a win-win. My realtor actually has a few private parties she uses to do these kinds of loans. It pays better than passbook rates or CD's and is more predictable than the stock market. Hmmm, any chance the current owner might be willing to carry all or part of the note?
I did it! I have a journal!
A Lot Like This
And hell yes, I am still moving confidently in the direction of my dreams...

SweetRedWine

  • 5 O'Clock Shadow
  • *
  • Posts: 31
Buy the house.  Bad neighbors can have an extremely negative impact on your quality of life and ability to feel safe at home.   

Goldielocks

  • Magnum Stache
  • ******
  • Posts: 4583
  • Location: BC
How much more do homes with a yard sell for in your area?

e.g., could you acquire this, and eventually rezone it to split the yard in two, giving each property an outdoor space, and increasing your net profits?   Or, you could claim the yard on your property, then convert the other home (if smaller and less attractive) into a full rental, perhaps with a suite..?

There may be more ways to make this work than you think at first.   Because you already are in the real estate / landlord business, and because you don't have a yard now, but may eventually move to get one (if you feel like this now, it just gets stronger), I think I would take it on.

The biggest concern is the cashflow.   I assume rental income is generally good in your region and that you have this covered.

redrocker

  • Stubble
  • **
  • Posts: 117
  • Location: New Orleans, LA
How much more do homes with a yard sell for in your area?

It varies greatly. Driveways are probably more desirable than anything else.


e.g., could you acquire this, and eventually rezone it to split the yard in two, giving each property an outdoor space, and increasing your net profits?   Or, you could claim the yard on your property, then convert the other home (if smaller and less attractive) into a full rental, perhaps with a suite..?

There may be more ways to make this work than you think at first.   Because you already are in the real estate / landlord business, and because you don't have a yard now, but may eventually move to get one (if you feel like this now, it just gets stronger), I think I would take it on.

I probably won't move to get a yard (it's kinda nice not having the maintenance required right now). I'd move to have a workshop though.

The biggest concern is the cashflow.   I assume rental income is generally good in your region and that you have this covered.
Waiting to hear back from a 2nd loan officer. I'm told I'm right on the cusp of qualifying for a residential loan which would make this a lot easier cashflow wise.

hoping2retire35

  • Handlebar Stache
  • *****
  • Posts: 1086
  • Location: UPCOUNTRY CAROLINA
It sounds like it would be borderline cash flow. But you have the money and it gives you a yard for your kid and peace of mind. In your particular shoes, I would do it. Or just move.

Frankies Girl

  • Handlebar Stache
  • *****
  • Posts: 2479
  • Age: 2012
  • Typical Ghoul Next Door
Under the same circumstances, I'd do it too. I have no interest in RE/landlording, but with you already doing so, it seems like a great idea.

I've lived in places where we've had terrible neighbors, so I am biased.

Good luck with the financing!
I frequently have no idea what I'm talking about. Like now.

FIREd as of: March 6th, 2015!

Ting is awesome! Get $25 if you use my referral code: https://z0p1rd31m89.ting.com/

trollwithamustache

  • Bristles
  • ***
  • Posts: 271
If this wasn't the house next door, what price would you be willing to pay for it to buy/fix and have as a 4th rental?


JayKay

  • 5 O'Clock Shadow
  • *
  • Posts: 64
I was unknowingly in a similar position last year when my neighbor across the street went up for sale.  Was tempted, for sure.  Unfortunately, the new owner basically turned the place into a short-term hotel and there's now at least 6-8 trucks parked on or near the driveway most days.  All are younger guys and they rip through the street where the kids play, making the parents nervous.

Looking back, I could have made an offer and started renting it out, helping to keep the neighborhood quality up.  But, I'm not interested in being the captain/steward of my neighborhood and the cashflow wouldn't have been enough to justify the purchase.  Basically, ask yourself if you'd buy it as a rental if you weren't living near it.  If the answer is "no", then I wouldn't.  (And that's pretty much why I didn't pull the trigger on this home, with no regrets).

Also keep in mind that just because you live there now, that doesn't mean you won't be moving.  On average, I think this happens every seven years in the US.  In my circumstance, I'm now considering downsizing my home, so buying that one across the street would have just made things more complicated and wasteful.  Instead, I got a smaller rental that cashflows reasonable, and am happier with that.

alexpkeaton

  • 5 O'Clock Shadow
  • *
  • Posts: 99
  • Age: 37
  • Location: NYC
Just to answer the question asked in the title of this thread: Yes, too bad I don't have $8 million lying around. :D

redrocker

  • Stubble
  • **
  • Posts: 117
  • Location: New Orleans, LA
If this wasn't the house next door, what price would you be willing to pay for it to buy/fix and have as a 4th rental?

Good question. I have enough on my plate currently (as well as related income0 to keep me from seeking out other property. This one wasn't planned and it will be a stretch.

redrocker

  • Stubble
  • **
  • Posts: 117
  • Location: New Orleans, LA
So I've heard back from financing, they can possibly accept 20% down if I use my primary as collateral. 20yr commercial loan at 5.9% (fixed for 3 years). Loan officer suggested getting the place rented at market rate for a few years then try to refi for a conventional loan.

The beauty of the 20% down is I really won't have to sell anything, just use cash in hand. The downside of the interest and term is that I probably won't have positive cashflow at least in the first year but I'll be close. I'm trying to convince myself that's ok because I'd be putting $6500 toward principal in the first year.

Getting a sneak peek tomorrow. Listing is supposedly active on Wednesday. Thanks for the input so far. Currently leaning towards making an offer just a bit over list price.
« Last Edit: October 03, 2017, 08:48:28 AM by redrocker »