Author Topic: Gimme Your Honest Feedback  (Read 2059 times)

Peter Parker

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Gimme Your Honest Feedback
« on: June 02, 2016, 12:57:20 PM »
I'm currently 5-8 years from FI.  Right now we are putting $72K year into our 3 Deferred Comp accounts (2-457's and one 403b with the catch up provision).  All of our money is going into a mixture of stock and bonds.  The money going into the DC accounts are "icing on the cake" as we will also both have pensions....We are doing fine and we are on target to achieve FI without becoming landlords.

We have the opportunity to buy a SFR a couple of houses away from where we live.  This is in the Bay Area where prices (and rentals) aren't cheap.  If we bought the home we would break even or be slightly upside down (Rent less mortgage).  However, we have the ability to build a second unit in the back--and if we did this, we would cash positive--making about $1400/month.

I would build the second unit myself, as I have a lot of experience doing this type of thing  We would pay for the second unit "as we build" and not need additional funds to build it.  We would, however divert approximately $2K per month until we complete the second unit (approx. 3 years).  The existing house has been recently remodeled--and is move in ready.  It is, however, a small 100 year old home.  I have experience with these types of homes, as we live in a 125 year old Victorian.  The fact that the home is old, also means that we would pay about 80% less in property taxes as this home is considered "historic" and qualifies for a special tax break.

I like the idea of diversifying our investment portfolio, but have never been a landlord.  Do you think this is worth it?  How's the stress of being a landlord?  What's your feeling about diversifying one's portfolio to include real estate?  Does the fact that we would have plenty of money (unless the stock market goes down more than 50%) staying the course and not getting involved in real estate change your mind???  ANY AND ALL FEEDBACK IS WELCOME!

dandarc

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Re: Gimme Your Honest Feedback
« Reply #1 on: June 02, 2016, 01:02:03 PM »
You're in the Bay Area, so you know the thing isn't going to cash-flow.  Even with the 2nd unit, I doubt you're making a significant cash return.  So you're primarily banking on appreciation for your return.  Are you OK with that?

dandarc

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Re: Gimme Your Honest Feedback
« Reply #2 on: June 02, 2016, 01:08:40 PM »
To follow up on the appreciation point - by building a 2nd unit, you're also creating some appreciation.  How much will the place be worth in 3 years with the new 2nd unit built?  Maybe the play is to buy, rent while you build, and then cash out once the 2nd unit is on-line?  How much will you have into the new unit?  Including time spent working?

Maybe it makes even more sense to buy / rent / hire-out the build so it happens quickly, then sell.  Basically a flip.  Depends on how much that additional rent will get you in purchase price.

Peter Parker

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Re: Gimme Your Honest Feedback
« Reply #3 on: June 02, 2016, 01:30:12 PM »
You're in the Bay Area, so you know the thing isn't going to cash-flow.  Even with the 2nd unit, I doubt you're making a significant cash return.  So you're primarily banking on appreciation for your return.  Are you OK with that?

I do think the property will appreciate--in fact, I think I could just "landscape" the place and do a few cosmetic things to the inside and flip it for a profit--Appreciation would be nice, but I wasn't counting on it. 

Current rent is $2000/month (for a 866 sf old home).  The mortgage (with 20% down) would less than this.   The second unit would be about the same size--and the cost to build (using a lot of reclaimed materials that I already have on hand) would be about 70K (not including my labor)  This second unit would rent for about $2K month too...I think that would make me "cash positive."

If market conditions stayed the same, I could clear approx $200K if I sold it with a second unit--which would make it enticing to try and "flip" it fast as you have suggested.  However I have 3 college age kids that I'm starting to educate in the Mustachian way of life (unlike their old man)--and I'd like to eventually have these units be "THEIRS" at some point as additional income for them...

Change your opinion?  Or does it reaffirm your feeling that I should skip it, or flip it?
« Last Edit: June 02, 2016, 01:35:43 PM by Peter Parker »

Peter Parker

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Re: Gimme Your Honest Feedback
« Reply #4 on: June 02, 2016, 01:45:51 PM »
To follow up on the appreciation point - by building a 2nd unit, you're also creating some appreciation.  How much will the place be worth in 3 years with the new 2nd unit built?  Maybe the play is to buy, rent while you build, and then cash out once the 2nd unit is on-line?  How much will you have into the new unit?  Including time spent working?

Maybe it makes even more sense to buy / rent / hire-out the build so it happens quickly, then sell.  Basically a flip.  Depends on how much that additional rent will get you in purchase price.

I would rent the first unit while I built the second. The rent of the first unit would roughly cover the mortgage while I cash-flowed (diverting some DC funds) into the build of the second unit.  The second unit would cost approx $70K to build using a whole bunch of reclaimed and on hand materials--but this doesn't include my labor.  Once this second unit is built, it would rent for the same amount of the first unit.

While appreciation is nice, it's not my goal--which is ultimately get my kids started in a more mustachian lifestyle.....(see my other reply to your post)

Thank you for your input!  Does any of this change your suggestions?  Thanks!

KMB

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Re: Gimme Your Honest Feedback
« Reply #5 on: June 03, 2016, 08:41:27 AM »
I owned a duplex next door to the single family that I lived in. There could not have been a better situation to become a landlord. Tenants self select when they know you live close. Some tenants thinks it would be great to live next to the landlord and some tenants think it would be terrible. You want the former...

Maintenance is a breeze when you can just walk next door to fix something.

If you're handy enough to build something from scratch you can solve any maintenance issue a tenant will throw at you.

You're well capitalized. There doesn't appear to be any downside to this deal other than general market risk. Seems like an ideal situation to me. I'd pull the trigger.

calimom

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Re: Gimme Your Honest Feedback
« Reply #6 on: June 03, 2016, 09:26:10 AM »
I owned a duplex next door to the single family that I lived in. There could not have been a better situation to become a landlord. Tenants self select when they know you live close. Some tenants thinks it would be great to live next to the landlord and some tenants think it would be terrible. You want the former...

Maintenance is a breeze when you can just walk next door to fix something.

If you're handy enough to build something from scratch you can solve any maintenance issue a tenant will throw at you.

You're well capitalized. There doesn't appear to be any downside to this deal other than general market risk. Seems like an ideal situation to me. I'd pull the trigger.

Another vote for "do it". The SF Bay Area is in the middle of a housing shortage that's not going away anytime soon. If you can buy a historic small house on your very street, add a unit with sweat equity and reclaimed materials, it is a fantastic plan.

Real estate makes a nice addition to a portfolio, FIRE or not, especially as the above poster says, you're well capitalized already. Good luck with your decision!

hucktard

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Re: Gimme Your Honest Feedback
« Reply #7 on: June 03, 2016, 09:44:31 AM »
It seems like a decent idea with the limited info you have provided. Before you pull the trigger make sure you are actually calculating your cash flow correctly. As a rough guideline subtracting 10% for maintenance and vacancy might work, although you should have a better feel for that as you live in the area. Also you should try to calculate your return on investment using your down payment amount, and your estimated cashflow. These are really the basic calculations that you should do before buying the property. I personally would not buy a property that had no cashflow, even in SF, unless I was planning on flipping it right away.

radram

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Re: Gimme Your Honest Feedback
« Reply #8 on: June 03, 2016, 09:59:25 AM »
What about this idea?

Move to the front unit while you build the back unit.  Meanwhile, rent out monthly or via air B&B your current location.  When you have been there 3 years (and the unit is done), can't you sell it and exclude your capital gains from taxes?  Then move back into your current place for at least 1 year and you can sell that place as well while excluding capital gains(I still think 3 out of the last 5 years is the guideline).

The only question would be the new building and how it is treated for capital gains. Would it be treated like a duplex?  What if it is sold just BEFORE the occupancy permit was issued?  Would it be treated different?

Radram

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Re: Gimme Your Honest Feedback
« Reply #9 on: June 03, 2016, 12:52:16 PM »
I don't know RE investing, but I have some questions:
  • Would you be able to keep the property tax exemption once a non-historic second unit is added?  Would just the second unit be assessed property tax?
  • Would the second unit be a separate building on the same lot or attached to the first unit?
  • Would the rent you can collect on the first unit be decreased when first unit no longer has exclusive access to the yard AND the yard size has shrunk significantly?
  • Would the rent you can collect on the first unit be decreased because of construction noise, debris, and other annoyances?

Also, I thought that being Mustachian involved earning and saving your own way up.  Giving your children an income-producing property doesn't really seem to be in line with that, unless I am missing something.  (This is not a criticism.  I am just not understanding the logic in calling it Mustachian.)

Peter Parker

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Re: Gimme Your Honest Feedback
« Reply #10 on: June 04, 2016, 02:19:23 PM »
Just wanted to say "thank you" to all that replied.  After lots of consideration, we decided not to go through with the purchase.  We decided it was going to be too much of a hassle.  If we were younger, we probably would have done it, but getting to be an older fart, means that I just don't have the energy deal with it....We are doing fine without it, and decided to be happy with what we've  got.