Author Topic: Newbie - Buying in a super hot market  (Read 1084 times)

Flyingstache

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Newbie - Buying in a super hot market
« on: November 30, 2020, 07:19:47 AM »
Hello!

I have been a follower of MMM for a few years but am just now getting interested in real estate investing as I have heard from many people how great of an option it is for building wealth. Here is a little background info -

Wife & I are soon to be 30yr old teachers/coaches with two kiddos under 3 & likely more on the way in the future. We have no debt other than our home which was purchased almost 3yrs ago. We have $98k left on a 15yr mortgage at 2.75 (refinanced in March). House is valued around $210k. We have about $120k in retirement between investment accounts & IRA's from a previous job rollover. We also have about $70k in savings as we know we will be needed another car at some point & will be moving to a bigger house in the next 5 years.

We live in Central OH & our specific area is one of the fastest growing communities in the state & country. I have grown up here & just in the last 10yrs, housing prices have been crazy! We plan on keeping our current home as a rental once we move as houses in our neighborhood rent for $1,300-$1,800.

I have thought about trying to buy a duplex or other single family homes but am trying to think if there are creative ways to do so without paying the overinflated prices. Please advise on the following -

Growing up here, I know a lot of folks that have houses that would be perfect rentals (smaller, well built houses that have been well maintained) & are in great neighborhoods. Is this a crazy idea...

See if the owners would sell the house now at a discounted price with the deal that they don't have to pay any rent for a year or 2. Basically the thought was they could get $ now (most are close to retirement age or are retired folks on a limited income) & stay in their home for a year or 2. For me the positive would be getting the house at a discounted price & not having to deal with the prices that occur when the house goes on the market (usually multiple offers & price is over ask). Obviously the purchase price would have to be worth not getting any income from the house for a year or 2.

Another option could be doing a land contract. What are your thoughts on land contracts?

Just looking for different ways to get involved. If you think it is smarter to wait until the market slows down that is also a good idea. I just worry with the growth in the community prices will continue to get higher & I will miss out on opportunities.

Hopefully this makes some sense! Thanks for any thoughts!

waltworks

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Re: Newbie - Buying in a super hot market
« Reply #1 on: November 30, 2020, 07:31:10 AM »
Everyone in the US thinks their housing market is hot right now. It won't stay that way.

Sit tight and buy another house when you need to/it makes sense.

Your neighborhood does not sound like an amazing rental investment area, honestly.

-W

Jon Bon

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Re: Newbie - Buying in a super hot market
« Reply #2 on: November 30, 2020, 10:25:41 AM »
Hello!

I have been a follower of MMM for a few years but am just now getting interested in real estate investing as I have heard from many people how great of an option it is for building wealth. Here is a little background info -

Wife & I are soon to be 30yr old teachers/coaches with two kiddos under 3 & likely more on the way in the future. We have no debt other than our home which was purchased almost 3yrs ago. We have $98k left on a 15yr mortgage at 2.75 (refinanced in March). House is valued around $210k. We have about $120k in retirement between investment accounts & IRA's from a previous job rollover. We also have about $70k in savings as we know we will be needed another car at some point & will be moving to a bigger house in the next 5 years.

We live in Central OH & our specific area is one of the fastest growing communities in the state & country. I have grown up here & just in the last 10yrs, housing prices have been crazy! We plan on keeping our current home as a rental once we move as houses in our neighborhood rent for $1,300-$1,800.

I have thought about trying to buy a duplex or other single family homes but am trying to think if there are creative ways to do so without paying the overinflated prices. Please advise on the following -

Growing up here, I know a lot of folks that have houses that would be perfect rentals (smaller, well built houses that have been well maintained) & are in great neighborhoods. Is this a crazy idea...

See if the owners would sell the house now at a discounted price with the deal that they don't have to pay any rent for a year or 2. Basically the thought was they could get $ now (most are close to retirement age or are retired folks on a limited income) & stay in their home for a year or 2. For me the positive would be getting the house at a discounted price & not having to deal with the prices that occur when the house goes on the market (usually multiple offers & price is over ask). Obviously the purchase price would have to be worth not getting any income from the house for a year or 2.

Another option could be doing a land contract. What are your thoughts on land contracts?

Just looking for different ways to get involved. If you think it is smarter to wait until the market slows down that is also a good idea. I just worry with the growth in the community prices will continue to get higher & I will miss out on opportunities.

Hopefully this makes some sense! Thanks for any thoughts!

Please don't do that, your house will make you no money as a rental. Likely you would lose money. Your house likely has much more value as a SFH rather than a rental. Square peg, round hole and all.

I can tell you for sure that from July - October the central Ohio RE market has been pretty divorced from reality.

You are trying to be creative to get a deal on a property that will actually make money on cashflow, and not appreciation. That is a fine plan, the problem is everyone else is doing this as well. I get probably a call a day from someone trying to buy my house for 60% of its value. There is just a shit ton of money out there chasing yield, as a result the yield is being driven down. Do not fall into that trap, we have seen this movie before, it was not that long ago!

Feel free to PM if you have specific questions about RE/landlording.


Flyingstache

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Re: Newbie - Buying in a super hot market
« Reply #3 on: November 30, 2020, 10:39:24 AM »
Really appreciate all the insights & advice about this!

I love the idea of having other ways of increasing our $$$ since teaching isn't a lucrative career & real estate always pops up as an idea. However, I want to be smart & proceed with caution so I really appreciate your help!

Flyingstache

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Re: Newbie - Buying in a super hot market
« Reply #4 on: December 02, 2020, 10:02:24 AM »
How common is it for folks to either use their primary residence (especially to get started) or rental properties to do a cash out refi to buy more properties? On a crazier note...with interest rates super low, do folks ever do a cash out refi & then just use that $ to invest?

waltworks

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Re: Newbie - Buying in a super hot market
« Reply #5 on: December 02, 2020, 11:20:08 AM »
How common is it for folks to either use their primary residence (especially to get started) or rental properties to do a cash out refi to buy more properties? On a crazier note...with interest rates super low, do folks ever do a cash out refi & then just use that $ to invest?

I cash out refi'd this spring and invested the money in the market. I'm already RE-heavy due to the insane home appreciation here (half a million bucks in 6 months, yikes) but if there had been RE deals available that I found attractive I would have considered that.

But it's not common.

-W

PMJL34

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Re: Newbie - Buying in a super hot market
« Reply #6 on: December 02, 2020, 11:56:03 AM »
Wow, that's bold Walt! I certainly wrestled with this myself, but not too seriously. May I ask how much you leveraged out of your primary to put in the market? Did you by chance get lucky and invest it before the recent 30k dow climb?

PMJL34

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Re: Newbie - Buying in a super hot market
« Reply #7 on: December 02, 2020, 11:58:57 AM »
OP,

if you are serious about this and I mean willing to really put the work in...then cold call/knocking on neighbors with the hope of buying homes through personal relationships will certainly give you a leg up. None of that, land or purchase with them staying in the home stuff though, just straight purchase. Other than that, I don't see any value in buying rentals in your hood on MLS at this very moment.

Best of luck

waltworks

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Re: Newbie - Buying in a super hot market
« Reply #8 on: December 02, 2020, 12:09:35 PM »
Wow, that's bold Walt! I certainly wrestled with this myself, but not too seriously. May I ask how much you leveraged out of your primary to put in the market? Did you by chance get lucky and invest it before the recent 30k dow climb?

I make almost no money/don't work that much, so the most they would let us get a mortgage for was $300k (it had previously been $200k). House worth $1.5 million or so.

So I only managed to get down to 80% LTV, hah.

To be clear, I was mostly refinancing for the rate, which seemed to good to pass up. But I figured I might as well pull out money if possible too. I would not have bothered doing the refi just to extract capital.

I don't remember exactly when the money went in, nor have I tracked it's performance. At 3% interest, I'm sure I'll be happy I did it in 30 years, so whatever.

-W
« Last Edit: December 02, 2020, 12:11:47 PM by waltworks »

PMJL34

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Re: Newbie - Buying in a super hot market
« Reply #9 on: December 02, 2020, 12:38:51 PM »
Nice Walt! Pretty ballsy imo, but sounds like it's not a huge risk for you. Cheers!

EDIT: I think you meant 20% LTV :)
« Last Edit: December 02, 2020, 06:41:47 PM by lilbenny34 »

waltworks

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Re: Newbie - Buying in a super hot market
« Reply #10 on: December 02, 2020, 03:38:33 PM »
Yeah, derp. 20%.

I think there are many ways of looking at risk, but buying stock when it's near a 20 year low on P/E is probably not very risky.

That said, I'm sure my timing wasn't perfect. It was basically an accident.

-W

Flyingstache

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Re: Newbie - Buying in a super hot market
« Reply #11 on: December 03, 2020, 08:48:51 AM »
As always, I really appreciate the great insights! I think the plan right now is as follows

Stay in our primary residence for another 2-3 years & then rent it out after we move. We should have about 85k left on the mortgage at that point with the house being valued at $210k or so. Should be able to rent out for $1,600/month & our mortgage is $1k with insurance & taxes included.

Reach out to folks who own specific properties & see if they would sell. If not, I will wait for better opportunities & keep saving in the mean time!

Thanks again!

waltworks

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Re: Newbie - Buying in a super hot market
« Reply #12 on: December 03, 2020, 09:11:21 AM »
Your house is probably a terrible rental, but if you're really going to do that, at least run *all* the numbers with vacancy/management/maintenance so you understand what you're getting into.

Any freestanding house (ie, not a condo) is going to cost at least a couple hundred bucks a month to maintain (which will come in big chunks at irregular intervals, so I don't want to hear about how you only spend $75 on maintenance this year... wait until you need to do the roof). Managing a rental is a job, so figure out your hourly rate for that and subtract from the return. There will be vacancy when tenants move in/out sometimes, deduct 5-10% for that.

By the time you're done, you're probably losing money, or at best paying yourself minimum wage to manage the place.

Even if you have zero maintenance, management, vacancy, etc costs, $7000 a year on $100-130k of equity is not great.

-W

AlexK

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Re: Newbie - Buying in a super hot market
« Reply #13 on: December 03, 2020, 09:45:12 AM »
I'm with Walt on this. I learned the hard way about real estate. It served me well and I made a lot of money but if I had just invested in the S&P 500 over the same time period I would have come out slightly ahead. And that was buying RE near the bottom of the housing market in 2010 and 2012. You don't know terror until you're on vacation and the phone rings and it's your tenant's or property manager's number on the caller ID. The stock market goes up and sometimes down but it has never called me with bad news that I need to act upon right now.

On my 4-plex once a CO detector went off so the tenant called the fire department. The fire department looked at the gas line going into the property, the one that had been working fine for 40 years, and said it was too small. They shut off the gas meter and red tagged it until I replaced all of the gas lines in the property. This was in the middle of a winter cold snap and it left 4 tenants without heat, hot water, and cooking ability. After paying $8k for the plumbing I had to replace a furnace too which was the real cause of the problem. So be sure to factor those kinds of things into your calculations, even though you can't possibly know what calamity is waiting for you. Put a value on your mental stress.

Also, check out this video I made of a unit after a tenant left:
https://www.youtube.com/watch?v=b6HjuclK2T8
Is cleaning up that mess how you would like to spend your 4th of July weekend? This tenant had been vetted by a professional property manager.

I think buying real estate as an investment makes sense when some disturbance happens in the market where the cost to buy a house is much less than the cost to build that house. That is true with any investment type though. The fact that housing prices "have been crazy lately" is a sign that is not the case now. If you had $200k cash lying around would you buy that rental house with it? The argument could be made that low interest rates and financing can turn a poor yielding real estate investment into a high yielding one. I had a lot of friends that thought this way in 2006 and they all went broke. Extrapolating trends during good times into the future works sometimes and other times it doesn't.

PMJL34

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Re: Newbie - Buying in a super hot market
« Reply #14 on: December 03, 2020, 10:14:00 AM »
OP,

that's a solid plan. Just wait a few years and see where things are and then make a decision. Keep in mind, there is nothing stopping you from asking around your neighbors now. That stuff takes a long time with very low success rate.

Alex, I appreciate you sharing your experience because this forum has been extremely optimistic lately. I would say your story is more on the rare/infrequent side, but it's certainly a cautionary tale. I hope your rentals have been kinder to you lately.

I think the biggest thing for the reader's to know is to how to track their cashflow accurately. It seems like, even in 2020 on a real estate forum, posters are saying rent - mortgage = profit. This is flat out false.

Paper Chaser

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Re: Newbie - Buying in a super hot market
« Reply #15 on: December 03, 2020, 10:41:04 AM »
As always, I really appreciate the great insights! I think the plan right now is as follows

Stay in our primary residence for another 2-3 years & then rent it out after we move. We should have about 85k left on the mortgage at that point with the house being valued at $210k or so. Should be able to rent out for $1,600/month & our mortgage is $1k with insurance & taxes included.

Reach out to folks who own specific properties & see if they would sell. If not, I will wait for better opportunities & keep saving in the mean time!

Thanks again!

Keep in mind that if you sell your primary home, there are no capital gains on the profits. If it's worth $210 in a few years, you could sell and pocket all of the profit tax free, and then use that money for whatever investment you'd like (stocks, other real estate, etc). There's a very good chance that going that route would lead to a better result for you long term.

Jon Bon

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Re: Newbie - Buying in a super hot market
« Reply #16 on: December 03, 2020, 02:26:49 PM »
As always, I really appreciate the great insights! I think the plan right now is as follows

Stay in our primary residence for another 2-3 years & then rent it out after we move. We should have about 85k left on the mortgage at that point with the house being valued at $210k or so. Should be able to rent out for $1,600/month & our mortgage is $1k with insurance & taxes included.

Reach out to folks who own specific properties & see if they would sell. If not, I will wait for better opportunities & keep saving in the mean time!

Thanks again!

That is not a good return on your equity.

So you will be clearing <$300 after expenses, even that is likely generous as your monthly cash flow will be negative as many months as positive.

So your return on your equity is:

(300*12)/(210,000-85,000) = .0288

That is less than a 3% return. Sell the house, buy a real rental and/or put it into the market. Turning your current house into a rental is a easy way to get into being a landlord but a terrible way to actually make money.  A new AC/Roof/Furnace/month of vacancy wipes out your profit for an entire year or more.