Author Topic: First Investment Home - What do you think?  (Read 1952 times)

kasperle

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First Investment Home - What do you think?
« on: January 30, 2017, 09:54:58 AM »
I'm looking to purchase my first investment home, and I'm curious to run a house by the folks here to see if I'm on the right track.

Some background: I live in Silicon Valley, and a down payment on any home here would drain all of my savings. Furthermore, by my calculation, no home here could ever cash flow for rent. Therefore, I'm looking outside of the Valley, and even California, for properties.

The past few weeks, I've been studying an east coast city to determine if it might make sense to buy investment properties in. I've reached out to a few agents. One property caught my eye, and got me excited for a minute, but I'm thinking now that it may not be the best option. Here are the facts about it:

List price: $35,000
Long-time tenant paying $700/mo
Property management company in place
The owner is selling because she is getting older, and has moved out of the city, so she is selling her investment properties

By these numbers alone, things might seem promising. A quick calculation shows this meets the 2% rule, although that's not including closing costs, agent fees, any repairs that may need to be made, and so on.

With that said, other homes on the street sold recently for less than this. They sold for $25,000. These other homes are more desirable, in my opinion, as this $35k home is directly next to an industrial garage-like structure. So perhaps I could ask for less, and still get the home.

Another thing to consider is that this home, and all homes on the block, seem to be losing value. This home in particular last sold for $50,000 ten years ago. Will this trend continue, stop, or reverse? Any of them could happen.

I'm leaning no on this home, because I'm concerned that this tenant could leave at any time. They are worried about losing their place of residence, because it is listed for sale, so they may already be looking for another apartment. If they find a better deal, then they may move even if I would love to have them stay. If they decide to move, I might have a vacancy for a long time. And if I decided to sell the home at any point, I may have to list it for less than I bought it for to find a buyer.

Based on this short summary, do you think leaning no on this property is a good idea? This property, and others like it, appeal to be because it strikes me as a relatively low financial risk if everything goes bad. Even if I had to spend $20k in repairs on it, and pay for it outright, I could afford that without completing draining my savings. But perhaps the risk of issues is too high, and I should look for safer investments.

Does anyone have thoughts on this property? Thank you for reading!

radram

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Re: First Investment Home - What do you think?
« Reply #1 on: January 30, 2017, 10:23:17 AM »
When all the numbers say yes, and I can not think of even 1 reason to say no, I still say no sometimes. Why? To account for things I can not account for.

You have listed several reason to say no. Some more:

East Coast City: $35,000 for a home? Where? Location. Location. Location. still applies. Why does this home cost 10-30 times less than one in your area?

Distance: I know some people do this, but I am very hesitant to buy a home I can not visit. You can, paying 1-5% of the cost of the home to do so every time you go.

I can not speak to property management companies. They just seem like a convenient way to take my money. I would be interested in the opinion of others that use one.




MommyCake

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Re: First Investment Home - What do you think?
« Reply #2 on: January 30, 2017, 11:19:50 AM »
I don't have the answer, but I do have a couple of comments:

- The list price isn't necessarily what you will pay.  If others are selling for 25k, I would offer probably 20-21k.

-There are plenty of towns in my home state of NJ with properties at this price and even lower.  I am afraid of investing in these areas because of uncertainty regarding tenants.  Lower income areas make me hesitant that I will find good tenants who will consistently pay their rent.  Perhaps this is not PC of me.  I'm not sure. 

-Home values are mostly rising here in NJ following the recession.  You can check your property and the neighborhood on zillow.  It will tell you if things are on the rise in that particular neighborhood or not. 

-For me, at this point property managers are a luxury I cannot afford.  I hope to be able to utilize them in the future but the ones around my area take 10% of the rent and at this point the cost is not worth the service.  Maybe others have some experience. 

Kroaler

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Re: First Investment Home - What do you think?
« Reply #3 on: January 31, 2017, 09:51:34 AM »
I dont own any property, but you say nicer homes on the block are selling for 25k.

If those homes can command 700$ a month similar to yours, that would be a 33% cap rate.   


Is this neighborhood in a war zone?  That is my first hesitation. Like another poster said location location location.

Cwadda

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Re: First Investment Home - What do you think?
« Reply #4 on: January 31, 2017, 10:07:12 AM »
Is the property section 8 approved? Would you consider getting section 8 tenants?

ChpBstrd

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Re: First Investment Home - What do you think?
« Reply #5 on: January 31, 2017, 01:30:16 PM »
It would seem difficult to be a slumlord across an entire continent. The amount of maintenance needed on a $35k SFH might astound you. Things rot and crack apart in the wetter, more temperature-variable climates. Termites are also popular tenants. One plane ride and rental car per year would destroy your ROI, much less hiring contractors to work unseen.

This can all be hard to visualize because you come from a completely different culture and economy, with higher incomes, more education, a less abusive-to-buildings climate, renters who pay their last two months rent, etc. In my neck of the woods, slumlords who own $35k properties are scruffy handymen who do their own fixing and collections just to barely get by. They spend their days at the hardware store and in crawl spaces. They kick in their own doors to haul delinquent renters' furniture to the curb, where it is rapidly picked off by the rest of the neighborhood. In Silicon Valley, you could do better than that.

Like real estate? Why not just buy nursing home REIT CCP and collect the 9% dividend in exchange for doing no work.


waltworks

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Re: First Investment Home - What do you think?
« Reply #6 on: January 31, 2017, 05:31:17 PM »
NJ? What are the property taxes? That might be your answer on why homes are so cheap. You can run into situations where a $25k house has a $1500 property tax liabiity every year. Boom, profits gone.

-W

adamcollin

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Re: First Investment Home - What do you think?
« Reply #7 on: February 06, 2017, 04:53:17 AM »
You should look for more properties within that area.  It will give a clear picture about the current market conditions and help you get a suitable home at the best price.

rothwem

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Re: First Investment Home - What do you think?
« Reply #8 on: February 06, 2017, 07:54:23 AM »
Everything I've ever read about real estate investing has said to avoid "class D" properties on the first property.  It doesn't matter where you are, a $35,000 home will not attract the cream of the crop in tenants, and its almost certain that that you will have tenant problems.

The people that are able to make money on those properties buy them in batches, and own a shitload of them, so the risk of tenant problems is spread over several properties. 

andysandp

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Re: First Investment Home - What do you think?
« Reply #9 on: February 06, 2017, 09:34:46 AM »
Can you give all the numbers?  Real Estate Tax, Maintenance per year, Insurance, Management Fees?


J Boogie

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Re: First Investment Home - What do you think?
« Reply #10 on: February 06, 2017, 10:47:39 AM »
In my neck of the woods, slumlords who own $35k properties are scruffy handymen who do their own fixing and collections just to barely get by. They spend their days at the hardware store and in crawl spaces. They kick in their own doors to haul delinquent renters' furniture to the curb, where it is rapidly picked off by the rest of the neighborhood. In Silicon Valley, you could do better than that.

Like real estate? Why not just buy nursing home REIT CCP and collect the 9% dividend in exchange for doing no work.

+1 for painting a vivid picture and providing a solid alternative investment.