Author Topic: 2nd house... good investment or anti-mustachian?  (Read 6363 times)

Martz256

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2nd house... good investment or anti-mustachian?
« on: July 23, 2012, 05:28:46 AM »
Hi all,

I've only recently found the blog, love it by the way, and would love to run something by you all. I have a feeling that after writing this all down it's probably going to become obvious to me, but here goes anyway.

We have only been in our first home for 2 years, but we are thinking a lot about the future. If we decide to move in the next 2/3 years would it be sensible to keep our current house and rent it out whilst buying a new property?

Heres the options as i see it:

Current situation:

35yr mortgage (33 left - takes me just short of state retirement!!)
repayments: ~750

By the time we move we will have extra cash that we can put into this / a house so i see it like this:

So if we were to keep just one house (this one or another of the same value) we could increase the deposit and therefore:

- keep same repayments and reduce mortgage length to ~23 yrs
- keep mortgage length the same and reduce payments to ~620 per month
- somewhere in the middle

If we were to put the extra money into a new property and keep this house then

- rent current house ~650 (possibly more but looking on the bleak side)
- keep the same mortgage on ~750 - shortfall of ~100 plus any other landlord related bills
- current house on 33yrs still
- new house ~750
- new house mortgage on 33yrs again

Now the downsides are obvious... ~100 more per month than current, and 2 x 33yr mortgages, which sounds pretty crazy, but this offset in any way by owning 2 properties?

The focus of any monies going forwards would always be paying off the houses and getting the mortgages down to sensible levels.

Or is it a silly notion?

Thanks Guys

Martyn


grantmeaname

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Re: 2nd house... good investment or anti-mustachian?
« Reply #1 on: July 23, 2012, 07:42:46 AM »
That's a bad deal. Normally the standard for rental properties is that your rent should cover the mortgage (including principal, interest, taxes, and insurance) with another 50% to spare, which covers vacancies (even a mere three vacant months in 5 years is 5% of the period), tenant nonpayment (ditto), repair expenses, and so on. Your rent covers 86% of the mortgage, which is nowhere near 200%. Even in the best case scenario (no vacancy, repairs, or nonpayment), you're essentially paying money for the privilege of putting time and effort into the house. You'd be much better off selling it and moving on.

Martz256

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Re: 2nd house... good investment or anti-mustachian?
« Reply #2 on: July 23, 2012, 08:16:33 AM »
Thanks for the POV grantmeaname,

I agree and I think that the idea is too much, too soon into our current mortgage. I don't really want one mortgage, let alone 2, but i guess i'm tempted by owning a second property as a form of pension plan

grantmeaname

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Re: 2nd house... good investment or anti-mustachian?
« Reply #3 on: July 23, 2012, 08:30:25 AM »
There is something really reassuring about owning a concrete thing that can produce an income stream.

The New York Times has a really interesting buy vs. rent calculator that you can use to explore all the 20-odd factors affecting whether buying or renting is better in a given market. The default values are probably not very realistic for the UK, and much of the vocabulary will likely be different, but it could help you explore whether are places near you where it makes sense to buy and lease out a property down the road. A similarly good UK calculator may exist, but my "UK buy rent calculator" query returned nothing exceptional.

sol

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Re: 2nd house... good investment or anti-mustachian?
« Reply #4 on: July 23, 2012, 09:05:33 AM »
I don't know about the UK laws, but here in the states a landlord can depreciate a rental property against income taxes, which is usually enough to turn a small operating loss into a small gain. 

Then when you consider the benefit of having someone else pay into your principal for you, a second home is usually a net income source as long as it is rented for anything close to the mortgage payment.  Most people who are trying to build real estate empires, though, want the rent to cover everything with room to spare because they're not comparing the costs to breaking even, but to earning a better return than they would get on investing their money in the stock market instead.

arebelspy

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Re: 2nd house... good investment or anti-mustachian?
« Reply #5 on: July 23, 2012, 11:58:24 AM »
because they're not comparing the costs to breaking even, but to earning a better return than they would get on investing their money in the stock market instead.

That's how everyone should compare it, IMO, with a bais against real estate, as it takes much more work.
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JJ

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Re: 2nd house... good investment or anti-mustachian?
« Reply #6 on: July 25, 2012, 06:27:10 PM »
That's a bad deal. Normally the standard for rental properties is that your rent should cover the mortgage (including principal, interest, taxes, and insurance) with another 50% to spare, which covers vacancies (even a mere three vacant months in 5 years is 5% of the period), tenant nonpayment (ditto), repair expenses, and so on. Your rent covers 86% of the mortgage, which is nowhere near 200%. Even in the best case scenario (no vacancy, repairs, or nonpayment), you're essentially paying money for the privilege of putting time and effort into the house. You'd be much better off selling it and moving on.
The models for making money from real estate are a little different in UK, Oz and, to a lesser extent, NZ from the US - the relative rental returns are typically a lot lower because the house prices are, on the whole, a lot higher so "the standard" from the US doesn't really apply (although it would be nice).  I try to go for positive cash-flow properties here in Oz, but they are very hard to come by - you typically need to buy in a small, remote mining town (risky) to get 10% gross return which still isn't double your costs as borrowing rates run at over 6%. Generally the model is to have your holding costs covered and wait for inflation to lift rents and devalue the mortgage, or add value by renoing/rehabbing/subdividing.  People have done very well over the years with these approaches.  However, the first approach is high risk as it assumes growth off an already high base.

Hmmm... Maybe I should buy in the US - anyone want to help me with property management?

tannybrown

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Re: 2nd house... good investment or anti-mustachian?
« Reply #7 on: July 25, 2012, 07:10:13 PM »
If you want to buy in Phoenix, I'm game. :)

arebelspy

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Re: 2nd house... good investment or anti-mustachian?
« Reply #8 on: July 25, 2012, 08:17:08 PM »
The models for making money from real estate are a little different in UK, Oz and, to a lesser extent, NZ from the US - the relative rental returns are typically a lot lower because the house prices are, on the whole, a lot higher so "the standard" from the US doesn't really apply (although it would be nice).  I try to go for positive cash-flow properties here in Oz, but they are very hard to come by - you typically need to buy in a small, remote mining town (risky) to get 10% gross return which still isn't double your costs as borrowing rates run at over 6%. Generally the model is to have your holding costs covered and wait for inflation to lift rents and devalue the mortgage, or add value by renoing/rehabbing/subdividing.  People have done very well over the years with these approaches.  However, the first approach is high risk as it assumes growth off an already high base.

Yeah, that doesn't sound worth doing versus other investments.

Hmmm... Maybe I should buy in the US - anyone want to help me with property management?

Probably the easiest thing to do would be to become a private money lender - essentially you'll make a loan to a real estate investor and they pay you money for that loan.  Basically you're becoming the bank and creating a mortgage on the house and creating a lien on it.

Overseas investing with holding actual property adds many other complications.
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Mr Mark

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Re: 2nd house... good investment or anti-mustachian?
« Reply #9 on: July 25, 2012, 09:05:07 PM »
That's a bad deal. Normally the standard for rental properties is that your rent should cover the mortgage (including principal, interest, taxes, and insurance) with another 50% to spare, which covers vacancies (even a mere three vacant months in 5 years is 5% of the period), tenant nonpayment (ditto), repair expenses, and so on. Your rent covers 86% of the mortgage, which is nowhere near 200%. Even in the best case scenario (no vacancy, repairs, or nonpayment), you're essentially paying money for the privilege of putting time and effort into the house. You'd be much better off selling it and moving on.
The models for making money from real estate are a little different in UK, Oz and, to a lesser extent, NZ from the US - the relative rental returns are typically a lot lower because the house prices are, on the whole, a lot higher so "the standard" from the US doesn't really apply (although it would be nice).  I try to go for positive cash-flow properties here in Oz, but they are very hard to come by - you typically need to buy in a small, remote mining town (risky) to get 10% gross return which still isn't double your costs as borrowing rates run at over 6%. Generally the model is to have your holding costs covered and wait for inflation to lift rents and devalue the mortgage, or add value by renoing/rehabbing/subdividing.  People have done very well over the years with these approaches.  However, the first approach is high risk as it assumes growth off an already high base.

Hmmm... Maybe I should buy in the US - anyone want to help me with property management?

Tulip, anyone?

If the premium over alternatives is so poor, and real returns so low, you would want to rent, and not own a home at all :-)

It seems most places - UK, NZ, Aussie, Singapore,Spain, ... - housing prices are still firmly in bubble-land, compared to rents and after-tax median income. The US market is incredible value.

JJ

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Re: 2nd house... good investment or anti-mustachian?
« Reply #10 on: July 25, 2012, 10:47:52 PM »
Quote
Tulip, anyone?
It's a slow growing bubble - it has been around 15 years since gross rental returns in a capital city were above borrowing interest rates.  But you are right - the rent v. buy equation definitely leans towards renting.

Quote
Probably the easiest thing to do would be to become a private money lender...
Good idea - although it would probably be best to do that locally - the interest rates from the banks are quite a lot higher here so private lending will be higher again and free of fx risk.

It may be worth running a portfolio overseas, but only if you went in big.  $500k here buys you one property for, say $30k rent.  $500K there can get you 5-10 for $100K+ rent - probably worth a couple of flights across the Pacific if you have $70K extra a year to play with.  Buying just one or two would be a waste of time though.

Sacadoh

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Re: 2nd house... good investment or anti-mustachian?
« Reply #11 on: July 25, 2012, 11:14:46 PM »
I'd be less critical on long term house prices in the UK & still think it is possible to buy good income generators in the UK. There are a couple of fundamental drivers in the UK that support the model that I think are absent from Auz & the US.

That said, I have done it and would not underestimate the potential for hassle and stress and would not recommend it in your circumstances.

Irishmam

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Re: 2nd house... good investment or anti-mustachian?
« Reply #12 on: July 26, 2012, 12:01:45 AM »
Our experience in being landlords on both sides of the Atlantic are that the US is more favorable to landlords, i.e. writing down / depreciating a property each year, fees, insurance, etc are tax write offs. I'm not sure how favorable UK tax laws are to landlords, that is certainly something to consider when deciding. You might also want to check out tenant rights in the UK, as I know Irish tenants are VERY well looked after. Being a landlord is not for the faint-hearted and your margin seems quite fragile, e.g. would burst pipes on a Bank Holiday weekend make a serious dent in your budget, or is it something you could repair yourself? Who would mow the lawn, power wash the driveway, clean the windows? (These are some of our recent tenant complaints) Just my tuppence worth..

Martz256

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Re: 2nd house... good investment or anti-mustachian?
« Reply #13 on: July 31, 2012, 07:49:00 AM »
Thanks for all of the input guys. I still like the idea of owning multiple properties and the growth potential that they have but i think that the large mortgages, slim margins and tenant hassles will probably keep me away for now. A bit further down the line when i can afford a more competitive mortgage we will look at it again :-)

thanks again


arebelspy

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Re: 2nd house... good investment or anti-mustachian?
« Reply #14 on: August 07, 2012, 08:38:47 PM »
Quote
Tulip, anyone?
It's a slow growing bubble - it has been around 15 years since gross rental returns in a capital city were above borrowing interest rates.  But you are right - the rent v. buy equation definitely leans towards renting.

Quote
Probably the easiest thing to do would be to become a private money lender...
Good idea - although it would probably be best to do that locally - the interest rates from the banks are quite a lot higher here so private lending will be higher again and free of fx risk.

Maybe.. except that you're inherently lending against the underlying asset.  If you're lending against assets in a bubble, and that bubble pops, you don't get paid.  If you lend against assets that are undervalued, even if at a slightly lower percent (say 10, maybe 12% that HMLs are going for here), you have a lot less risk.

It may be worth running a portfolio overseas, but only if you went in big.  $500k here buys you one property for, say $30k rent.  $500K there can get you 5-10 for $100K+ rent - probably worth a couple of flights across the Pacific if you have $70K extra a year to play with.  Buying just one or two would be a waste of time though.

Again, maybe.  Depends on how much you are investing and what type.  If you're actually buying properties, that's different than lending money against properties.  And even the latter can be done.

For example, I just bought a mortgage on a house in Mississippi.  I live 1,678 miles from that house.  I plan to never see that house with my own two eyes.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
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champion

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Re: 2nd house... good investment or anti-mustachian?
« Reply #15 on: August 09, 2012, 01:41:12 AM »
Arebelspy,

Can you explain a bit more about Hard Money Lending and also your example of buying a mortgage on a house in Mississippi? 

I'm the poster who said I wasn't handy.  I'm looking for some real estate exposure that requires very little hassle/landlording.  And I want to be able to do it in a market with low prices and high rental yields, but I live in a market with very high prices and low rental yields, so I'd have to do this remotely.

It sounds like you do both things:  1) directly own and manage, skip a management company, think of it as a part time job getting tenants and collecting rent, etc., and minimize any need to "be handy" by just paying contractors.  Then 2) you also do some hard money lending and mortgage buying?

I'd love to hear more about the latter.

arebelspy

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Re: 2nd house... good investment or anti-mustachian?
« Reply #16 on: August 09, 2012, 10:16:42 AM »
Arebelspy,

Can you explain a bit more about Hard Money Lending and also your example of buying a mortgage on a house in Mississippi? 

I'm the poster who said I wasn't handy.  I'm looking for some real estate exposure that requires very little hassle/landlording.  And I want to be able to do it in a market with low prices and high rental yields, but I live in a market with very high prices and low rental yields, so I'd have to do this remotely.

It sounds like you do both things:  1) directly own and manage, skip a management company, think of it as a part time job getting tenants and collecting rent, etc., and minimize any need to "be handy" by just paying contractors.  Then 2) you also do some hard money lending and mortgage buying?

I'd love to hear more about the latter.

Man, some good real estate talk in the last few days, this is making me happy.

Yes, I am doing a number of things in real estate, from buy and hold landlording to rehabbing to purchasing notes to joint ventures with others.  I don't do HML loans myself (simply because I'd be on the receiving end of them, if I were partnering with someone), although I do loan money for RE projects at times (not HMLs though).

I like to invest to maximize my return versus time invested.  That frees me up to do what I really enjoy.

For someone in your situation, I would recommend picking the area you are interested in, and then finding a local investor.  Make sure they have a proven track record, are trustworthy/dependable, know what they are talking about, etc.

A common saying in real estate is "There's no substitute for boots on the ground."  That is, if you can't be there yourself, you should have someone local who knows the market and knows what they're doing.

A hard money loan is one way to do this.  A joint venture (equity partnership) would be another.

Regarding the house in Mississippi, I purchased a nonperforming note. We'll foreclose, rehab the house, and sell it.  Like a flip, but utilizing NPNs to get a better return (versus, say, a foreclosure, short sale, or REO).

My two biggest advantages in real estate are knowledge (I've put a LOT of hours into studying RE and various related strategies) and my Mustachianism (which gives me a high savings rate, so I can put money down, and don't have to take on more risky "no money down" stuff, and a great credit score).

If I were in the situation of less knowledge, I'd be partnering with someone with more (and indeed, have in the past), and investing with them. I'm all about finding people you can trust though, some people are less comfortable with that. 

They should probably stick to REITs.  More risk, less upside, but less work.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.