Author Topic: First Time Rental Property-condo or half a house?  (Read 5289 times)

I Love Cake

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First Time Rental Property-condo or half a house?
« on: November 14, 2012, 08:20:56 PM »
Hello everyone. I had some great advice on investing on this forum and after talking to dh we have almost decided that we would like to put most of our liquid savings into a rental property.

So, first thing I did was buy and begin to read 'Cash Flow for Life' by Scott McHunky (not his real name but that's what I call him!) I also read a free downloaded book called 'Investor's toolbook' and have learned quite a bit.

Here is our dilemma and one I hope you far more experienced landlords/ladies can help us with.

We live in a very expensive city. Housing prices are obscene. In my neck of the woods a tiny row house with no parking fetches about $600k.

So, we could either
1. Buy a condo that hasn't been built yet

Pros- neither dh or I are very handy so no worries about tenants calling us at 3am that the roof is leaking/banister fell off/their kid flushed a plastic submarine toy down the toilet and now the whole floor is flooded

We can afford to put the down payment (at least 10%) on our own. One bedrooms fetch about $300k-still small but at least it has a bedroom

Maybe a condo is a good way to ease into rentals?

Cons-the freaking maintenance fees. We are stuck paying those and the condo board can raise them every year.

I hear condos are not as good of an investment as homes

For homes, we would look for something out of our neighbourhood- in a 'struggling to come up out of the depths of working class/petty crime/angry teens' area. A single family home costs about $450k and we could possibly rent both main floor and basement

Pros-I am banking the neighbourhood comes up-already the neighbourhoods close by are getting to be costly as the hipsters try to move into our neighbourhood but can't afford it so travel a bit out of the way-so eventually, where we want to buy will be decent. It has hit bottom and is coming back up

We could get two rentals out of one home-basement and main floor

Far better resale value

Cons-argh-all the maintenance we would potentially have to do. We would end up hiring a plumber, roofer, candle stick maker because we wouldn't be able to solve any house problems

We would probably go in this with a friend who is anxious to get into this as well. Just to help with costs-both initial purchase cost and potential maintenance cost

So, which would you do oh wise folks? A relatively risk free condo or a home?

Another Reader

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Re: First Time Rental Property-condo or half a house?
« Reply #1 on: November 14, 2012, 08:41:07 PM »
The fact that you have provided none of the financial information on these two investments is a huge red flag to me.  The numbers are what make an investment work or fail.  No point in looking at various property types if the investment does not pencil out for any of them.
 
With no experience, you are risking a lot of money.  Some markets just don't make sense for investment property.  Yours may be one of them.  You may be better off lending money or investing in another market where rentals make sense.  Post some numbers and let some of the experienced investors here tell you what they think.

I Love Cake

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Re: First Time Rental Property-condo or half a house?
« Reply #2 on: November 14, 2012, 09:12:54 PM »
Here's the thing. We don't have a house we want to buy yet. But here are some tentative #s

Condo-$300k to buy.
Maintenance fees are $300 per month
property tax-$100 per month
utilities-paid by tenant
We could charge $1200/mth

House-$450k to buy.
property tax-$200/mth
utilities-paid by tenant
We could charge: $1000 for basement. $1300 for main floor

OK, thanks....I guess that settles it-no condo-we'll lose money

but for the house-is it better to buy with someone or find something cheaper. The book I read cautions against going too far to buy a rental property. It should be within half an hour from your home or work-this is for the first rental property you own
« Last Edit: November 14, 2012, 09:48:23 PM by I Love Cake »

totoro

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Re: First Time Rental Property-condo or half a house?
« Reply #3 on: November 14, 2012, 09:28:44 PM »
Those numbers - even for a house - don't look good unless you are banking on appreciation which is never a sure thing in the short term.  You haven't accounted for costs like O&M, insurance, and vacancies.  After these costs, you are probably losing money each month.

In addition, the house might cost you more than you think to reno and you are not handy.     

I would rethink the idea that you have to be 30 minutes away if the numbers are much more favourable elsewhere, as they are in some areas of the states, and support the use of a property manager.

Another Reader

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Re: First Time Rental Property-condo or half a house?
« Reply #4 on: November 14, 2012, 09:37:58 PM »
You will likely lose money on the half house as well.  You have not accounted for vacancy and collection loss or operating expenses such as repairs and maintenance, utilities between tenants, insurance, advertising/leasing expenses, etc.  Property taxes must be unusually low in your area with the numbers you state, like half a percent or less per year. 

My guess is I would not invest in your market if I lived there.  I live in the SF Bay Area, and it makes no sense to invest here for cash flow.  Most of my rentals are out of state.  Property management makes this possible.

Reading a couple of books is not adequate preparation to spend the money you are talking about.  Read up on the 50 percent rule in some of the threads here.  Get to know some experienced investors in your market.  Join a real estate investing group.  Partner with another more experienced investor to start.  Do all this and more before you write that large down payment check.


I Love Cake

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Re: First Time Rental Property-condo or half a house?
« Reply #5 on: November 14, 2012, 09:46:34 PM »
thanks for the replies. Looking at those number and reading your replies tells me you are right. And since I don't want to buy something too far away from my city it doesn't make sense. The news tells us Canada isn't in a bubble and my city has a lot of new jobs so people from everywhere are flocking to here or outlying areas. My city has seen major growth in the past few years and will continue to for the foreseeable future-as long as oil is around-haha

but you are right. And we are so risk adverse too. I will keep reading and not sign away our life savings until we are on solid ground

thanks!
« Last Edit: November 14, 2012, 09:53:20 PM by I Love Cake »

arebelspy

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Re: First Time Rental Property-condo or half a house?
« Reply #6 on: November 14, 2012, 10:20:44 PM »
Agree with the other comments, those are definitely a pass.  The condo numbers may well give me nightmares tonight.

The news tells us Canada isn't in a bubble

Are you actually reading real estate news sources, or mainstream news?  My readings have just been confirming Canada is in a bubble, not the other way around.

Here's an article I read a week or so ago about it: http://www.zerohedge.com/news/2012-11-05/guest-post-canadas-housing-bubble-different

Mainstream media can put their hands over their ears and say "la la la no bubble la la la," but from the research and data I've seen, it's the very definition of a bubble, and it's when, not if, it will pop.  YMMV, IMO, etc.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
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I Love Cake

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Re: First Time Rental Property-condo or half a house?
« Reply #7 on: November 15, 2012, 05:39:23 AM »
Thanks arebeispy. Going to check out that article. Yeah, I know..sometimes I think 'thou doth protest too much' when they keep insisting we aren't in a bubble.

Oh well, maybe we'll scoop up a home after the bubble bursts!

capital

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Re: First Time Rental Property-condo or half a house?
« Reply #8 on: November 15, 2012, 09:23:21 AM »
Buying a rental in the market you sell your labor also carries very correlated risk-- if your labor market goes through a bad period for whatever reason, your rental income is likely to decrease at the same time your employment income will decline. Gentrification of "bad neighborhoods" might slow or stop, and marginal neighborhoods like the one you're thinking about buying in could go downhill. Or what if climate change makes your city or neighborhood suck 30 years out? At least in NYC, a lot of new development is in low-lying floodplains, and a lot of people probably just took a big hit in their property values when it became clear what even a Category 1 storm could do. Buying a pre-construction condo also means risking the condo being poorly built.

It's hard to know when property values are in an unsustainable bubble are not ahead of time. High property values in certain jurisdictions can be sustainable for a long period of time if there is a high population of high-income people and land use is restricted enough that housing units are distributed by rich people outbidding poor people for existing housing, so poor people are displaced to other places, rather than more housing being built. Cities with diversified economies are different from places like Phoenix, with housing demand being driven by construction employment building more houses, and utterly unsustainable loans, compared to loans being driven merely by pledging a huge proportion of a lifetime of wage labor.

DoubleDown

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Re: First Time Rental Property-condo or half a house?
« Reply #9 on: November 15, 2012, 09:30:18 AM »
Since no one has touched on this aspect yet: If you do decide to buy a rental property in the future, I would advise against going in with a friend. It's fraught with peril. Even if you have a rock solid written agreement, there are all kinds of things that can go wrong. The sole exception to that might be if you have your friend as a "silent partner", where the agreement states that you make all the decisions and your friend is strictly an investor with no decision-making authority. But even then all kinds of things can go wrong.

It's too risky when one of you decides he or she wants out, and the other does not. You or your friend might have an emergency where they need to cash out. You can't split a house in half, and it might be impossible for one of you to buy the other out. Or you might differ on improvements/repairs that need to be made, or whether to accept a particular purchase offer when you want to sell, and so on.

One way you can be a real estate investor without being a landlord is with REITs; you might consider looking into that.

arebelspy

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Re: First Time Rental Property-condo or half a house?
« Reply #10 on: November 15, 2012, 05:59:22 PM »
One way you can be a real estate investor without being a landlord is with REITs; you might consider looking into that.

REITs and real estate are as about related as running a business and investing in a business.

REITs are actually often more correlated with the stock market than it is real estate.  I personally wouldn't substitute it for the hard asset if real estate was a part of my asset allocation (which it is currently, but likely won't be long term).  YMMV.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, 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.

I Love Cake

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Re: First Time Rental Property-condo or half a house?
« Reply #11 on: November 16, 2012, 05:57:48 PM »
Wow, just reading these replies shows me we are a long way off to buy rental property. I agree buying with a friend could spell disaster. Especially this guy who is quite assertive but generally has good ideas and he is quite handy. He also has wayyy more $ than us, so it would probably be us that needed to sell-which isn't fair to him.

After reading that article arebeispy posted I worry we are in a bubble.

The market is strong and doubtful it will crumble-the economy here-but nothing is impossible.

We have a bit of savings and we wanted to make it work for us. After learning a lot about investing from this board, I've switched a few things but I don't want to put all my eggs in one basket

sigh, I know MMM is against EF but they make me sleep at night

I guess I'll follow the old adage 'when in doubt, do nothing'