keep renting vs buy a triplex scenario

[mitchm]

Hi all, generally satisfied renter of a 3/2 in HCOL ($3000/month) who has been passively keeping an eye out for listings in the neighborhood.  I really like the neighborhood and would like to stay here long term. There is a very unique triplex that has come on the market down the street-- I'm interested enough that I've gone ahead and gotten preapproved for a mortgage and am seriously pondering an offer. Being a landlord and a first time homeowner, however, would be a major change for me and I am trying to carefully think through both the financial and non-financial implications before I move forward.

I have put together a pretty simple financial model based on the mortgage interest rate (7.75 % or a little higher, depending on whether I end up with 40% down or not), how much I'd have for a down payment, potential offer prices, rental income I could generate, etc. Was hoping experienced folks on this board might be willing to test/pick apart some of the assumptions I'm using here. With my current assumptions, I'm feeling like with the 600K down, an offer of 1.5M would be about the max I'd be comfortable making (and to be honest, I'm guessing the house will go for more,
so this may all be just a thought experiment).

Edit: here is the listing https://redf.in/PUHFEz

A few additional pieces of info that will also be helpful to know:

1) My downpayment of $600k would come from a) 300K from selling index funds (pretty much my entire taxable brokerage account) and 300K from an informal 30-year 5% loan from my father.

2) I have reviewed the disclosures for this property in detail and there are no serious issues re: maintenance, insurability, etc.

3) The 3 separate units were previously rented at 4000, 4000, and 3000 (basement unit is smaller and not as nice) respectively.

4) Job is very stable and have close to no other major costs besides food. I own a $2000 car but rarely use it. No debt.

5) I am aware that being a landlord is a job and not just a piggy bank; having successfully sued a past landlord, am also aware that there are risks/liabilities. This is all part of the calculus.

[Metalcat]

Just to clarify, are you planning to live in this building or continue renting?

[BiggerFishToFI]

2) I have reviewed the disclosures for this property in detail and there are no serious issues re: maintenance, insurability, etc.

4) Job is very stable and have close to no other major costs besides food. I own a $2000 car but rarely use it. No debt.

Just a couple points:

Just because the disclosures show no serious issues, does not mean that there are not serious issues. In fact, I would almost guarantee there are some "serious" issues in a house that is over 130 years old.

What is your income? It makes a big difference if you are making $500k vs $150k, and I am assuming you are closer to $150k given your taxable savings. I'd want at least a $50k emergency fund after purchase to deal with any issues.

All that being said, $12k monthly rents on a $995k property isn't bad. It's been on the market for 9 days, why are you assuming it will go for 1.5 times the listing price?

[Metalcat]

2) I have reviewed the disclosures for this property in detail and there are no serious issues re: maintenance, insurability, etc.

4) Job is very stable and have close to no other major costs besides food. I own a $2000 car but rarely use it. No debt.

Just a couple points:

Just because the disclosures show no serious issues, does not mean that there are not serious issues. In fact, I would almost guarantee there are some "serious" issues in a house that is over 130 years old.

What is your income? It makes a big difference if you are making $500k vs $150k, and I am assuming you are closer to $150k given your taxable savings. I'd want at least a $50k emergency fund after purchase to deal with any issues.

All that being said, $12k monthly rents on a $995k property isn't bad. It's been on the market for 9 days, why are you assuming it will go for 1.5 times the listing price?

Lol, yeah, I had a pretty clean disclosure on a house that turned out to be a total tear down on inspection.

[mitchm]

Just to clarify, are you planning to live in this building or continue renting?

Planning to live in the top unit (with a roommate) and rent the bottom two units.

RE: Income, it's about 101K/year gross. While making this purchase would require me to liquidate my brokerage account, I'd still have an employer-sponsored retirement account with about 100K in it, almost all of it in Roth contributions which could be accessed in the event of emergency. I also have about 25K in checking/savings that wouldn't be touched.

RE: my assumption about selling price...it is just how it works in my area (Oakland/East Bay). Properties are grossly underpriced to spark a bidding war and go for over asking price nearly 100% of the time. Comps in the area are between 1.4-1.7 million.

[uniwelder]

Looking at details, these are some nitpick questions for you---

1) What do you expect the property taxes to be?  The autogenerated number from Redfin is about $12,500 per year.  It shows $4,200 being paid from the current owner with a tax assessment of $165k.  I don't live in California, so don't understand their tax system, but is it possible you'll actually be paying 6-10x the current amount?  So up to $40k per year?

2) This looks like a very high maintenance house.  Do you expect to do all the repairs yourself or hire that out?  Considering the HCOL labor rates, historical appearance, and age of the building, I think $6,000 per year is very low.  Maybe $15-40k is more realistic, depending on whether you're doing all the work.

3) You say the house was previously rented for 4k, 4k, and 3k.  Do you think that is overpriced?  I'm curious why your spreadsheet dropped the middle level to $3,500.  Also why you would only charge a roommate $1,200 to split the top level.

4) Why $500/month for utilities?  All the levels are metered separately for electric.  What runs on gas--- stove and dryer? heat? I guess you're also paying for water in the whole building? 

5) As already mentioned, I wouldn't put down any more for down payment than necessary.  You'll want to keep your cash reserves as large as possible.  Also, if the house is foreclosed for any reason, thats money you'll never get back.  Its wise to keep as little sunk into the mortgage as possible unless you can afford to pay it off entirely at once.

[sonofsven]

Pretty much all the work/maintenance you'll need to do on that house is going to be insanely expensive, especially the exterior; it's more a museum piece than a house. Nothing wrong with that, per se, but a house of that vintage requires deep pockets. In fact, many owners consider themselves caretakers of that kind of place.

I'd check if it's a "real" triplex in the eyes of the city. If it were to burn down tomorrow, does the current zoning allow for a replacement triplex?

[Metalcat]

Just to clarify, are you planning to live in this building or continue renting?

Planning to live in the top unit (with a roommate) and rent the bottom two units.

RE: Income, it's about 101K/year gross. While making this purchase would require me to liquidate my brokerage account, I'd still have an employer-sponsored retirement account with about 100K in it, almost all of it in Roth contributions which could be accessed in the event of emergency. I also have about 25K in checking/savings that wouldn't be touched.

RE: my assumption about selling price...it is just how it works in my area (Oakland/East Bay). Properties are grossly underpriced to spark a bidding war and go for over asking price nearly 100% of the time. Comps in the area are between 1.4-1.7 million.

Oof, no, I would not buy a building like that with that little capital to access, not unless you make hundreds pf thousands a year.

I think you might be radically underestimating how expensive it can be to maintain that kind of building.

I also would never out myself in a position where I have to live in a building where I'm the landlord. When you live among your tenants, you aren't just the landlord, you're also the super.

I had intended to buy a multi unit to live in and ended up buying a duplex. It was in a city where I cannot move for a few years due to logistical reasons, but found a place priced so well I decided to buy it and rent it out until I could move there.

I lived there for 6 weeks to renovate the upper unit and that was enough for me to learn that I never want to live among my tenants. Some people can no problem, but I wouldn't want to be stuck in a situation where I have no choice because I'm too leveraged/too tight on cash flow to buy a separate home.

It's also way more NW in real estate than I would personally want. It will leave you extremely poorly diversified, and doesn't sound like it will be positive cash flow.

This is just something I wouldn't personally feel comfortable doing, even as someone with experience with rentals.

[SilentC]

I think no one can judge your risk tolerance, but personally I wouldn’t put that much capital into something unless I was convinced it was a total layup and very confident in all my #s.  I think knowing both of these comes from experience.

[mitchm]

Looking at details, these are some nitpick questions for you---

1) What do you expect the property taxes to be?  The autogenerated number from Redfin is about $12,500 per year.  It shows $4,200 being paid from the current owner with a tax assessment of $165k.  I don't live in California, so don't understand their tax system, but is it possible you'll actually be paying 6-10x the current amount?  So up to $40k per year?

Yep, California's property tax system is broken. Google "Prop 13." Taxes would be approx. 1.2% of sale price yearly. The current owner's taxes are so low because the house hasn't changed hands in decades.

2) This looks like a very high maintenance house.  Do you expect to do all the repairs yourself or hire that out?  Considering the HCOL labor rates, historical appearance, and age of the building, I think $6,000 per year is very low.  Maybe $15-40k is more realistic, depending on whether you're doing all the work.

Minor fixes myself and excited to do whatever I can DIY, but realistically I will need to hire out a significant share of the work. So yes, my estimate may well be low. I will say that per the disclosures (again, acknowleding that as other posters have said, there will inevitably be surprises), the roof, foundation, and electrical have all been replaced somewhat recently.


3) You say the house was previously rented for 4k, 4k, and 3k.  Do you think that is overpriced?  I'm curious why your spreadsheet dropped the middle level to $3,500.  Also why you would only charge a roommate $1,200 to split the top level.

Just an approximation and trying to be conservative. My current rent for a 3/2 in the same neighborhood that is roughly half the size of the top two units is 3K, so I do think 4k/4k/3k is realistic, but don't want to have to count on it. $1200 for splitting the top unit is again trying to be conservative.

4) Why $500/month for utilities?  All the levels are metered separately for electric.  What runs on gas--- stove and dryer? heat? I guess you're also paying for water in the whole building? 

The apartments are all metered separated but yes I would pay the full water bill (though I could probably pass on a share to the renters). It is again a high estimate just to be safe. I did ask for a sample utility bill from the listing agent but haven't received it yet.

5) As already mentioned, I wouldn't put down any more for down payment than necessary.  You'll want to keep your cash reserves as large as possible.  Also, if the house is foreclosed for any reason, thats money you'll never get back.  Its wise to keep as little sunk into the mortgage as possible unless you can afford to pay it off entirely at once.

Interesting, and you feel that way even with 8% mortgage rates? The less I put down, the higher the monthly payment, so there is only so low I could go...

[mitchm]

This is all good info; thanks to everyone who has weighed in thus far!

[Jon Bon]

Wow lots to unpack.

-Most folks don't buy a 1.5 million dollar house as their first house on a 100k salary.
-Taxes, prop 13 in cali is weird, can you calculate what it will be?
-Maintenance - others have mentioned
-Cash flow - it looks like you are barely breaking even on CF. So you have 600k in dead money, earning zero percent.
-This also puts all your eggs in one basket.
-Tenants Rights - Cali sucks to be a landlord (I have read, no idea on actual)

I hate to throw water on someone trying to invest became real estate investing is awesome and one of the best ways to get rich but i don't see how this one works for you.*

The numbers don't look great on this one. I like the thought (house hacking is awesome for the folks that can swing it) but this one feels pretty bad. Sure buy it for 900k, it works, but at 1.7m I would run.








*unless you are going to do this as a pure speculation play, which works awesome until it doesn't.  See: South Seas Company, Tulip Mania, Leeson Nick, Bankman-Fried Sam.

[uniwelder]

...
5) As already mentioned, I wouldn't put down any more for down payment than necessary.  You'll want to keep your cash reserves as large as possible.  Also, if the house is foreclosed for any reason, thats money you'll never get back.  Its wise to keep as little sunk into the mortgage as possible unless you can afford to pay it off entirely at once.

Interesting, and you feel that way even with 8% mortgage rates? The less I put down, the higher the monthly payment, so there is only so low I could go...

Even at 8%, you'll likely earn as much in the stock market over the long term.  Selling off all of your stock holdings (and it sounds like almost all of your savings) for a higher down payment doesn't make sense.  Unless of course, the personal loan you're getting is contingent on you putting all your own money towards the house, which sounds really bad.  As mentioned, you'd be a major house fix away from a disastrous personal finance situation.

[Miss Piggy]

They're calling it a triplex, but with those staircases, it doesn't seem like there are three separate entrances. Am I missing them?

[uniwelder]

They're calling it a triplex, but with those staircases, it doesn't seem like there are three separate entrances. Am I missing them?

I agree. From the photos, it looks like you have to walk through the mid level section of house to get to the upstairs. I suppose the basement level has a private entrance.

If it were rented, I would think everyone on the top two levels would need to be very friendly with each other.

[mitchm]

They're calling it a triplex, but with those staircases, it doesn't seem like there are three separate entrances. Am I missing them?

Actually yeah it's kind of hard to see in the pics, but at the front entrance at the bottom of the stairs, there are locking doors that would stay permanently locked. And then at the top of the staircase, there is also a locking door, so the front room with the stairwell serves as sort of a common area.

[PMJL34]

OP,

It's now pending, are you under contract?

1. You can't have a real estate discussion about bay area with people outside the area. We just sound dumb and crazy to outsiders (we are to a degree).

I am very familiar with the area (are you?) and here are my thoughts:

-You are buying the most expensive/nicest house in the neighborhood.
-Multis are taking a beating and I doubt this needs(or needed) a 1.5 mil offer.
-As everyone said, maintaining this home will cost you an arm and a leg. Whoever said this was a museum is correct.
-Rents are taking a big hit, especially in Oakland right now as you know.

Question: what is your end goal? Are you hoping to for cashflow and/or appreciation? Are you buying for long term? Do you eventually want to do something else to the property?

Best of luck!