Author Topic: Buying a rental property a good idea (in my case)?  (Read 2223 times)

jamesbond007

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Buying a rental property a good idea (in my case)?
« on: November 02, 2016, 10:35:53 AM »
Hi,


So I am looking to buy a rental property in a HCOL area. There is a condo that is on sale for $316K and has a $330 HOA. Has great schools (10/10, 8/10, 9/10 from greatschools.org if it matters). If I put 20% down @ 3.625 my PITI+HOA comes to around $2000 per month maximum. It's 1BHK condo. I plan to rent it out at $2100 (Roughly the market rate) so I can cover the extra $100 as a maintenance fund and to cover taxes from rental income etc. Managing is not a big deal as it is just 2 miles away from where I live currently and my wife is a stay at home mom so she can take care of it.


Now, I have about $28K invested in Vanguard, $11K in Wealthfront, $50K in savings to cover 1 year worth of expenses including my current mortgage in case I lose my job and another $160K in 401K.


My gross salary is $175K per year + 20% bonus. So putting down 20% means effectively emptying my emergency fund but I can replenish that in a year. Not a problem.


You think it's a good idea? What are the tax implications? I heard interest rates are higher if it's not a primary residence? If so, how big is it going to be?


I want to make sure I am doing the right thing and secure my future at the same time and rental property in a HCOL is very lucrative.

Murse

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Re: Buying a rental property a good idea (in my case)?
« Reply #1 on: November 02, 2016, 11:14:29 AM »
Nah, not worth it. It doesn't look like you are including vacancies/maintenance (both should be in the 10% neighborhood.) you would actually be cash flow negative. You would have to bet on appreciation and increasing rents.

If I was investing 60k as a down payment I would want AT LEAST 6k per year cash flow after all expenses, meaning around 500$ per month after factoring in Piti, hoa, vacancies, maintenance, and property management (even if you are not using it.)
« Last Edit: November 02, 2016, 11:17:44 AM by Murse »

mskyle

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Re: Buying a rental property a good idea (in my case)?
« Reply #2 on: November 02, 2016, 11:23:16 AM »
I want to make sure I am doing the right thing and secure my future at the same time and rental property in a HCOL is very lucrative.

Could you explain why you feel like this would be a lucrative investment? It seems like potentially an OK place to buy to live in, but a terrible investment property. You would have negative cash flow after income tax, vacancies, and maintenance (maybe neutral cash flow if you were lucky),  so I guess you are counting on the property itself appreciating in value? That's risky enough on its own, and condos often lag in appreciation. And in the meantime you're tying up all that money in a non-liquid investment with big transaction costs (i.e. realtor fees when you sell, *if* you can sell at the price you want) that requires work to maintain.

Basically, why would you invest in this property instead of socking away more in your Vanguard account, maybe in an REIT if you want real estate exposure? A lot of people on here will talk about the "1% rule" (sometimes the 2% rule), basically saying that you should not invest in a rental property unless you can rent it for at least 1% of the purchase price. You're well under that, especially considering the $330 HOA fee.

Buying a rental property might be a good idea for you. Buying this rental property doesn't sound like a particularly good investment.

jamesbond007

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Re: Buying a rental property a good idea (in my case)?
« Reply #3 on: November 02, 2016, 11:24:56 AM »
Good point. But the market I am in (SF Bay Area), for the foreseeable future, has a very high demand for rental property. I am looking to at least break even after all expenses. I could raise the rent to $2200 and sign a long term contract (which is a win-win for both parties). I am just wondering how bad it would be for this kind of market.

jamesbond007

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Re: Buying a rental property a good idea (in my case)?
« Reply #4 on: November 02, 2016, 11:29:08 AM »
I want to make sure I am doing the right thing and secure my future at the same time and rental property in a HCOL is very lucrative.

Could you explain why you feel like this would be a lucrative investment? It seems like potentially an OK place to buy to live in, but a terrible investment property. You would have negative cash flow after income tax, vacancies, and maintenance (maybe neutral cash flow if you were lucky),  so I guess you are counting on the property itself appreciating in value? That's risky enough on its own, and condos often lag in appreciation. And in the meantime you're tying up all that money in a non-liquid investment with big transaction costs (i.e. realtor fees when you sell, *if* you can sell at the price you want) that requires work to maintain.

Basically, why would you invest in this property instead of socking away more in your Vanguard account, maybe in an REIT if you want real estate exposure? A lot of people on here will talk about the "1% rule" (sometimes the 2% rule), basically saying that you should not invest in a rental property unless you can rent it for at least 1% of the purchase price. You're well under that, especially considering the $330 HOA fee.

Buying a rental property might be a good idea for you. Buying this rental property doesn't sound like a particularly good investment.

Very valid points. I think this is a lucrative investment because on the fact that the rental market has always been very attractive here in the SF Bay Area. It'll probably stay that way for the foreseeable future. I understand that I may not be cashflow positive in the short term but I want to make sure I have an income stream besides my investments when I retire. That's why I thought maybe I will buy this property. Another reason is that I rented in this locality for almost 8 years before I bought my house. So I know what renters look for. That's why I thought it'd be great.

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Re: Buying a rental property a good idea (in my case)?
« Reply #5 on: November 02, 2016, 11:37:33 AM »
Good point. But the market I am in (SF Bay Area), for the foreseeable future, has a very high demand for rental property. I am looking to at least break even after all expenses. I could raise the rent to $2200 and sign a long term contract (which is a win-win for both parties). I am just wondering how bad it would be for this kind of market.

Why wonder?  Just ask your agent to dredge up some comps from 2009-2011.  Yes, the Bay Area is one of the most desirable markets.  However, a $316k condo is not going to be in the most desirable location.  Rents go down faster in secondary locations and values can drop dramatically as well.

This unit will not cash flow.  If I am making an appreciation play, I want to buy at the bottom of the market, not the top.  You would be buying at the top, or very close.

jamesbond007

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Re: Buying a rental property a good idea (in my case)?
« Reply #6 on: November 02, 2016, 11:42:36 AM »
Why wonder?  Just ask your agent to dredge up some comps from 2009-2011.  Yes, the Bay Area is one of the most desirable markets.  However, a $316k condo is not going to be in the most desirable location.  Rents go down faster in secondary locations and values can drop dramatically as well.

This unit will not cash flow.  If I am making an appreciation play, I want to buy at the bottom of the market, not the top.  You would be buying at the top, or very close.

This is in a location very close to Bart (5min walk) and the schools are great. I live in the area so I know the area very well. Now the question about why this is selling for low is because it is a 750sft living space. The price per sft is very much in line with the rest of the market.

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Re: Buying a rental property a good idea (in my case)?
« Reply #7 on: November 02, 2016, 11:52:37 AM »
At that price, I assumed one bedroom, one bath and one parking space, possibly in a carport.  "Near Bart" could mean a lot of different places.

Get those comps.  Otherwise, I will probably buy it in a short sale for $150,000 cash when you bail.

jamesbond007

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Re: Buying a rental property a good idea (in my case)?
« Reply #8 on: November 02, 2016, 11:57:44 AM »
At that price, I assumed one bedroom, one bath and one parking space, possibly in a carport.  "Near Bart" could mean a lot of different places.

Get those comps.  Otherwise, I will probably buy it in a short sale for $150,000 cash when you bail.

Yep it is 1bed room, 1 kitchen, 1 bath, 1 carport. HOA includes water/sewage and garbage. This is in Fremont if it makes sense so not some shady area "near" BART :)

But yeah I will get the comps.

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Re: Buying a rental property a good idea (in my case)?
« Reply #9 on: November 02, 2016, 12:11:40 PM »
http://www.mlslistings.com/property/ml81614660/38455-bronson-320-fremont-ca-94536/

Been on Zillow for 109 days.  There are two comps,  no pictures.  Looks like a late 60's apartment conversion.

In your shoes, I would stash cash and wait for a better buying opportunity.  I try to buy property when it's on sale.

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Re: Buying a rental property a good idea (in my case)?
« Reply #10 on: November 02, 2016, 12:23:02 PM »
Your market continues to amuse and horrify me.

I'm looking at two four-plexes generating $4K total, for less than $300K. Good condition, all brick, new roofs, fully occupied, management literally next door.

There will always be demand for housing where you are, but I'd hesitate to park so much cash in something that amounts to a speculation play. One major system failure could eat years' worth of profit. And they do happen.

frugaliknowit

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Re: Buying a rental property a good idea (in my case)?
« Reply #11 on: November 02, 2016, 12:37:37 PM »
Nah, not worth it. It doesn't look like you are including vacancies/maintenance (both should be in the 10% neighborhood.) you would actually be cash flow negative. You would have to bet on appreciation and increasing rents.

If I was investing 60k as a down payment I would want AT LEAST 6k per year cash flow after all expenses, meaning around 500$ per month after factoring in Piti, hoa, vacancies, maintenance, and property management (even if you are not using it.)

+1

mskyle

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Re: Buying a rental property a good idea (in my case)?
« Reply #12 on: November 02, 2016, 02:04:42 PM »
Why wonder?  Just ask your agent to dredge up some comps from 2009-2011.  Yes, the Bay Area is one of the most desirable markets.  However, a $316k condo is not going to be in the most desirable location.  Rents go down faster in secondary locations and values can drop dramatically as well.

This unit will not cash flow.  If I am making an appreciation play, I want to buy at the bottom of the market, not the top.  You would be buying at the top, or very close.

This is in a location very close to Bart (5min walk) and the schools are great. I live in the area so I know the area very well. Now the question about why this is selling for low is because it is a 750sft living space. The price per sft is very much in line with the rest of the market.

You keep talking about the schools... do you expect to rent (or even eventually sell) this 750sqft 1-bed to a family with school-age children? If not, stop factoring the schools into the value of the condo. They just don't matter. If you *do* expect to have a family with children as tenants I don't think you're being realistic about vacancy and maintenance.

It seems really unlikely that you'll do better than break even on this place. I live in a hot market too. I understand the temptation. But this is not a good deal. If you're OK with breaking even, just put the money in a savings account and save yourself a lot of work and risk.

SwordGuy

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Re: Buying a rental property a good idea (in my case)?
« Reply #13 on: November 02, 2016, 03:36:38 PM »
James Bond 007,  if you buy this property you can expect the Spectre of Losing Money to plague you and yours.

It's a horrible cash flow property.   I would not touch it as a buy and hold rental.

Now, if you are into speculation (i.e., gambling) and you expect the price of this property to go way up in the next few years, renting it out in the meantime will reduce the cash outlay until you sell it.   But, as I mentioned, that's called gambling.   If the price doesn't go up substantially you'll have a property that returns very little.

Have you read any of the books listed in the thread at the top of the rental and landlording portion of this forum? 
I would strongly suggest you do so.

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Re: Buying a rental property a good idea (in my case)?
« Reply #14 on: November 05, 2016, 11:03:36 PM »
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jamesbond007

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Re: Buying a rental property a good idea (in my case)?
« Reply #15 on: November 07, 2016, 11:47:59 AM »
Thanks all for the suggestions and opinions. Just looking at the market in general around me, I don't think I should be concerned about the house ever being vacant for more than a month in my neighborhood. Just looking at the past 8 years worth of anecdotal data here. But again, it is still a gamble so I decided to stay away. Another reason is, if I included all costs, then I'd have to rent it out for slightly above market which makes this a non starter.

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Re: Buying a rental property a good idea (in my case)?
« Reply #16 on: November 08, 2016, 12:27:56 PM »
You also seem to be volunteering your wife to be a manager/plumber/door-fixer/key-supplier-for-lockout-by-tenant worker.  Figure she's going to be called once a week for argument's sake to fix the leaky faucet, my toilet's plugged, we mistakenly threw the microwave through the window......  Landlording is NOT, NOT, NOT a passive investment.  It involves work.  It involves throwing people out who don't belong there.  It involves knowing the laws to properly evict a tenant who hasn't paid his rent in 6 months.  It's standing by helplessly when a pissed off tenant turns on every faucet in the apartment to run up the water bill......and you can't do anything about it because the health department would fine you and then turn the water back on.  Happy $350 a month water bill.

Been there, seen the movie, would NEVER do it again.