Author Topic: Pros and Cons of different property types  (Read 3332 times)

DangleStash

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Pros and Cons of different property types
« on: February 25, 2015, 08:01:02 AM »
I'm saving to purchase my first property, and it will be one that I live in.  I really want a 2 family home, but prices are insane right now (thankfully I'm still saving for another year).  I am torn between the following options:

2 family home, rent 1 unit out and live in the other - $500k+, $600k+ probably more realistic with $1800-$2400/mo rental income for 1 unit.

Buy a Condo - $300k (estimate) for a 2bed 1-2 bath

Single family fixer upper - $200k-$250k+ +repairs/improvement

Finances:
$100k down payment, but can save longer @ $2.5k/mo if necessary.  Can get some family assistance if needed.
If Condo/Single Family, want total monthly expenses $2k or below.

Dilemma:
I could get away with a condo, but the majority don't need work, so it's tough to build sweat equity.  Ones that need work are in crappy buildings.

Single family would be fun, but there is another house ready for me when I settle down/have kids in an area with great schools, so I need to think about the investment qualities of whatever I buy.

2 family would be ideal, and I am familiar with the legwork required to rent/deal with tenants.  I have my real estate license, have done rentals, and my family personally owns 4 buildings that are rented out in a blend of residential and commercial.

Any suggestions for how to decide which route?  Although I have my preferences, I think I could be happy with all 3 options.  Right now my current strategy is to have the cash in the bank, then go with whatever presents itself as the best deal.  I want something where I have the option to rent out a room or the other unit, enabling me to buy slightly more than would make sense for just me alone.

As far as a fixer upper - I am handy, have family for masonry, handyman stuff, plumbing, electrical, can get flooring materials very inexpensively, and really want to be able to work on something.

jda1984

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Re: Pros and Cons of different property types
« Reply #1 on: February 25, 2015, 08:53:08 AM »
The multi-family offers some benefits obviously.  One of which is you can get rental property (one of the units) with conventional (owner occupied) financing.  That was the path we took with our first property and has so far been working out great.

One issue with multi-family fixer-uppers is that some municipalities have restrictions on who can perform permit required work on them.  In my city, owners can only do work on their own residence as long as it is not multi-family.  There's another caveat too that you can only improve 1 property in a 24 month period (I'm not quite sure how they count this, my instinct is you have to hold for 24 months or go 24 months between pulling a permit for another property whichever comes first).  You could do work on your own multi-family property, but you'd need to take the contractor test and become licensed (and possibly insured/bonded) for the same type of work.

You mentioned that you've been involved in rentals in the past.  If you're familiar with the jurisdiction you're looking to purchase in and fixer-uppers aren't as big of an issue there as they are here, great!  I'd go that direction myself.  If you have to hire out the work or incur additional expenses (testing, licensing, insurance) fixer-uppers don't look so good.  In that case, I'd steer more toward a single family you could fix up while you live there and rent out down the road.

DangleStash

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Re: Pros and Cons of different property types
« Reply #2 on: February 25, 2015, 09:03:26 AM »
Thanks for your experience!

I think if I go the multi route, it would be buying something liveable.  I can deal with dated fixtures and replace things as they wear out, and paint/light fixtures work wonders, but I don't want one requiring extensive renovations.

I'm in a position right now where I can save $2.5k/mo or higher rate almost indefinitely (moved back home), so it's not an extreme rush to buy a place.  Another benefit of the multi would be the ability to write off some expense (or portions of them) against the income.

The biggest hurdle is the crazy prices they are selling for.  My personal theory is that since the market tanked, people lost some confidence and are trying to diversify more into physical assets like property in addition to funds.  Time on market is low, and in some cases the rental income barely covers the mortgage/tax/insurance cost.

MissPeach

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Re: Pros and Cons of different property types
« Reply #3 on: February 25, 2015, 01:37:23 PM »
The biggest hurdle is the crazy prices they are selling for.  My personal theory is that since the market tanked, people lost some confidence and are trying to diversify more into physical assets like property in addition to funds.  Time on market is low, and in some cases the rental income barely covers the mortgage/tax/insurance cost.

I have thought about rental properties too (that's why I'm lurking here) but in my area a 2 bedroom condo is $600+, has HOA fees of $500+, and approx $500 property taxes for a property that rents $,2000-3,000. I want to buy somewhere reasonable close so I can manage certain things myself but these numbers don't make sense at all to me until I go about an hour from the city. The suburbs are even higher prices than the city due to some high paying employers in that area.

Anyway, you mention that your local area also has crazy prices.

I have found some articles in my area that there are a lot of outside companies buying in my city as investments. There are a lot of bidding wars and cash offers even at these prices. The percentage of locals buying in my part of town were under 50%.

Perhaps this is happening in your area?

« Last Edit: February 25, 2015, 01:39:59 PM by MissPeach »

Overseas Stache

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Re: Pros and Cons of different property types
« Reply #4 on: February 26, 2015, 02:59:46 AM »
Based on the prices that properties are selling for compared to the rental income it probably won't matter which type of property you get they aren't going to cash flow. It probably just means your immediate location is not a good place to buy an investment property. Maybe you need to follow Arebelspy's advice and invest in property in another state.

DangleStash

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Re: Pros and Cons of different property types
« Reply #5 on: February 27, 2015, 07:06:36 AM »
MissPeach - I think that is happening here too, especially with the 3+ unit multi-family buildings.  Companies or groups of investors looking for a safer investment buy in cash and pull properties off the market in days.

Overseas Stache - I tend to agree with you on this too.

I like the cash generation aspect of a multi, but am starting to think I'd be better off starting with a SF that needs a little bit of TLC in a good area, building up some sweat equity over the next 4-5 years, then seeing where it takes me.

This would also let me have a smaller down payment ($60k) and let me buy a bit earlier.  The key is finding the right property that has potential to appreciate and/or room for an addition.

MissPeach

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Re: Pros and Cons of different property types
« Reply #6 on: February 27, 2015, 04:57:24 PM »
There is another blog out there called retirebyforty.org . He had a multi-unit in Portland and eventually decided to sell. The reason I mention it is because he had a lot of posts on his rentals (he sold them recently) and perhaps it can give you a better idea of what you would be in for versus a few posts on a message board.

clarkfan1979

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Re: Pros and Cons of different property types
« Reply #7 on: March 08, 2015, 12:42:28 PM »
The author of "Rich Dad Poor Dad" recommends to never buy a duplex in which you live in one side. The argument is that the other tenant will bother you with lots of little things because you are right next door. I have never personally experienced this, but I think it makes a lot of sense. I don't want to be a dream crusher, so still do it, if you want to. However, you might get more requests to fix stuff and take a look at stuff if you live right next door.