Author Topic: Should I buy the property I'm renting?  (Read 7154 times)

mr_mustash

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Age: 30
  • Location: Oakland, CA
Should I buy the property I'm renting?
« on: July 17, 2014, 03:16:49 AM »
I have a bit of an interesting opportunity coming up and I wanted to get some mustachian's opinions on it.

I moved from Portland to Oakland a little over a year ago to further my career. I have loved everything about it so far, except for the rental prices. My plan was to buy a 4-plex property, rent three of the units, and live in one. I mentioned this to my landlord a while back and he offered to sell me the 4-plex that I'm living. This area of Oakland has really come up in the last few years, and Zillow is predicting home prices to rise 11% over the next year.

House price: $750,000
Money for down payment: $40,000
Current rent: $1650
Other three units rents total: $4650
Property Taxes: 1.45%

From the number that I've ran it seems like I'll just be breaking even for the first few years.

Thank you all in advance for your advice!

mooreprop

  • 5 O'Clock Shadow
  • *
  • Posts: 85
Re: Should I buy the property I'm renting?
« Reply #1 on: July 17, 2014, 06:39:05 AM »
This property does not even come close to the 1% rule, so I would not buy it.  As you mentioned, the only rationale for buying the house is for hopeful appreciation.  This should not be the basis for buying real estate, but just an added bonus.  I am guessing that you will lose money on this after repairs and maintenance are taken into consideration.

Fishingmn

  • Bristles
  • ***
  • Posts: 335
  • Location: Twin Cities
  • You never have to recover from a good start
Re: Should I buy the property I'm renting?
« Reply #2 on: July 17, 2014, 10:39:24 AM »
This property does not even come close to the 1% rule, so I would not buy it.  As you mentioned, the only rationale for buying the house is for hopeful appreciation.  This should not be the basis for buying real estate, but just an added bonus.  I am guessing that you will lose money on this after repairs and maintenance are taken into consideration.

Totally agree

mr_mustash

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Age: 30
  • Location: Oakland, CA
Re: Should I buy the property I'm renting?
« Reply #3 on: July 17, 2014, 11:08:33 AM »
This property does not even come close to the 1% rule, so I would not buy it.  As you mentioned, the only rationale for buying the house is for hopeful appreciation.  This should not be the basis for buying real estate, but just an added bonus.  I am guessing that you will lose money on this after repairs and maintenance are taken into consideration.

Thank you very much for your reply. Since real estate and buying an investment property are still new to me I don't know what the 1% rule is. If you should shed some light on it, that would be great.

PloddingInsight

  • Bristles
  • ***
  • Posts: 308
Re: Should I buy the property I'm renting?
« Reply #4 on: July 17, 2014, 11:18:12 AM »
I believe its total monthly rent divided by price of the home.  So a $750k house should generate $7500 in rents per month.

CptCool

  • Stubble
  • **
  • Posts: 230
Re: Should I buy the property I'm renting?
« Reply #5 on: July 17, 2014, 11:39:58 AM »
Don't forget that taxes would likely have a huge bump once sold since CA caps it's tax increases. Once it is sold, it is re-appraised and assessed at that amount

waltworks

  • Magnum Stache
  • ******
  • Posts: 3441
Re: Should I buy the property I'm renting?
« Reply #6 on: July 17, 2014, 12:31:52 PM »
First: Go read some of the rent vs. sell threads in the forum or just google "1% rule for real estate".
Second: Do not buy the place.

-W

duanemark

  • 5 O'Clock Shadow
  • *
  • Posts: 14
Re: Should I buy the property I'm renting?
« Reply #7 on: July 17, 2014, 02:12:29 PM »
Is there any way you could raise rents substantially?  I know the Oakland rental market is rising rapidly. 

http://www.socketsite.com/archives/2014/07/san-francisco-rents-climb-oakland-rents-soar.html#comments

Altogether doesn't seem like a good deal, but it might not be as cut and dry as others think. 

Another Reader

  • Walrus Stache
  • *******
  • Posts: 5146
Re: Should I buy the property I'm renting?
« Reply #8 on: July 17, 2014, 02:18:25 PM »
Why does your landlord want to sell?

Kierun

  • Bristles
  • ***
  • Posts: 367
  • Location: HI
Re: Should I buy the property I'm renting?
« Reply #9 on: July 17, 2014, 03:20:26 PM »
In addition to the above mentioned of rents being below 1% of the purchase price, you mentioned a down payment of $40,000, which is quite a bit below 20% so you will also be paying PMI and that is also not ideal.  And as previously mentioned, generally don't want to take speculative appreciation of the property as part of the analysis unless you can predict the future.

mr_mustash

  • 5 O'Clock Shadow
  • *
  • Posts: 4
  • Age: 30
  • Location: Oakland, CA
Re: Should I buy the property I'm renting?
« Reply #10 on: July 17, 2014, 07:41:56 PM »
I believe its total monthly rent divided by price of the home.  So a $750k house should generate $7500 in rents per month.

Should I include the fair market rent of my unit though since it'll be owner occupied? That would bring the total up to $6500/month.

Is there any way you could raise rents substantially?  I know the Oakland rental market is rising rapidly. 

I could raise the rents on the two one-bedroom units by about $200/month each at this point. The second two-bedroom unit just was filled by someone paying slightly above the market average.

In addition to the above mentioned of rents being below 1% of the purchase price, you mentioned a down payment of $40,000, which is quite a bit below 20% so you will also be paying PMI and that is also not ideal.  And as previously mentioned, generally don't want to take speculative appreciation of the property as part of the analysis unless you can predict the future.

To find a home around here I'll have to fork over somewhere between $700 and $800. With my new mustachian level of savings I could get to a 20% downpayment in a couple of years no problem, but it seems unwise to fork over most of my savings for a home downpayment.

SDREMNGR

  • Bristles
  • ***
  • Posts: 324
Re: Should I buy the property I'm renting?
« Reply #11 on: July 17, 2014, 09:45:24 PM »
Who is lending you the money?  A carry back?  Loan rate?   

Scuba Stache

  • 5 O'Clock Shadow
  • *
  • Posts: 40
  • Location: Florida
Re: Should I buy the property I'm renting?
« Reply #12 on: July 18, 2014, 06:21:46 AM »
I believe its total monthly rent divided by price of the home.  So a $750k house should generate $7500 in rents per month.
Should I include the fair market rent of my unit though since it'll be owner occupied? That would bring the total up to $6500/month.

Yes, include all units when running the numbers. As others have said this doesn't look like a good deal, but doesn't mean you can't make it one if the seller is motivated. You could see if the seller is willing to lower the price + Seller finance the property at good terms. The 1% rule is not great for multi unit properties as they usually fetch 2%, but I do not know the CA market where this may be more standard.

hexdexorex

  • Stubble
  • **
  • Posts: 159
Should I buy the property I'm renting?
« Reply #13 on: July 20, 2014, 10:26:22 PM »
Most of what I have seen living in the Bay Area is people willing to pay a lot more in mortgage payments than they would while renting. They are still assuming...so far correctly that houses will appreciate much faster here that the rest of the nation. So currently it's a meh deal....but if in 5 to 10 years the building is worth way more than its worth it. Isn't Oakland rent controlled? Would your building count? I wouldn't even deal with it if so. It's also a big bet on one asset.....
« Last Edit: July 20, 2014, 10:28:46 PM by hexdexorex »

Daleth

  • Handlebar Stache
  • *****
  • Posts: 1201
Re: Should I buy the property I'm renting?
« Reply #14 on: July 21, 2014, 08:08:14 AM »
I believe its total monthly rent divided by price of the home.  So a $750k house should generate $7500 in rents per month.
Should I include the fair market rent of my unit though since it'll be owner occupied? That would bring the total up to $6500/month.

Yes, include all units when running the numbers. As others have said this doesn't look like a good deal, but doesn't mean you can't make it one if the seller is motivated. You could see if the seller is willing to lower the price + Seller finance the property at good terms. The 1% rule is not great for multi unit properties as they usually fetch 2%, but I do not know the CA market where this may be more standard.

I would definitely consider buying this, especially if I was hoping/planning to stay in the Bay Area long term. The 1% rule does not work in high COL places like the Bay Area, LA, NYC etc. (and by the same token the 2% rule doesn't even remotely exist there). Not to say you should throw all rules out the window, but this is a place that currently brings in about $6500/mo and will cost less than that per month once you factor in mortgage, property tax and insurance (and even PMI but I agree PMI should be avoided if even remotely possible). So in other words the OP, if she bought this, would be living in the Bay Area for free.

The whole "living in [high COL area] for free" thing is also, IMHO, why the 1% rule should not be something to worry about. Even setting aside the fact that the 1% rule doesn't work in high COL areas, the rule applies to pure investment properties. But this isn't a pure investment property--it's also a place to live.

hexdexorex

  • Stubble
  • **
  • Posts: 159
Re: Should I buy the property I'm renting?
« Reply #15 on: July 21, 2014, 09:39:36 AM »
I believe its total monthly rent divided by price of the home.  So a $750k house should generate $7500 in rents per month.
Should I include the fair market rent of my unit though since it'll be owner occupied? That would bring the total up to $6500/month.

Yes, include all units when running the numbers. As others have said this doesn't look like a good deal, but doesn't mean you can't make it one if the seller is motivated. You could see if the seller is willing to lower the price + Seller finance the property at good terms. The 1% rule is not great for multi unit properties as they usually fetch 2%, but I do not know the CA market where this may be more standard.

I would definitely consider buying this, especially if I was hoping/planning to stay in the Bay Area long term. The 1% rule does not work in high COL places like the Bay Area, LA, NYC etc. (and by the same token the 2% rule doesn't even remotely exist there). Not to say you should throw all rules out the window, but this is a place that currently brings in about $6500/mo and will cost less than that per month once you factor in mortgage, property tax and insurance (and even PMI but I agree PMI should be avoided if even remotely possible). So in other words the OP, if she bought this, would be living in the Bay Area for free.

The whole "living in [high COL area] for free" thing is also, IMHO, why the 1% rule should not be something to worry about. Even setting aside the fact that the 1% rule doesn't work in high COL areas, the rule applies to pure investment properties. But this isn't a pure investment property--it's also a place to live.

6500 thats pre taxed.....CA tax on income is around 10% plus the poster seems to have high income...at least for his age. I would do this calculation taking out 35%. This is one reason I stay away from most rentals. The ability to compound tax free in the stock market for 30 years is a huge upside. One benefit (probably unfair) is prop 13...so if you own this place for 20+ years your taxes shouldnt go up by much at all.

I would do more calculations....factor in the PMI...the income tax savings from the interest on your mortgage loan...etc.

When I said your putting a lot of money in one asset I see it as akin to putting 750k on one stock....and not even a index/etf fund.
« Last Edit: July 21, 2014, 09:45:00 AM by hexdexorex »

Daleth

  • Handlebar Stache
  • *****
  • Posts: 1201
Re: Should I buy the property I'm renting?
« Reply #16 on: July 21, 2014, 10:07:04 AM »
6500 thats pre taxed.....CA tax on income is around 10% plus the poster seems to have high income...

I would rather earn $6500/mo extra and get taxed on it than NOT earn $6500/mo extra.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3441
Re: Should I buy the property I'm renting?
« Reply #17 on: July 21, 2014, 10:24:00 AM »
The fact that no 1% rule properties exist in SF is NOT a reason to ignore the rule and buy a property! Jeebus! That $750k could be returning WAY more money invested in any number of other things (properties elsewhere, stocks, whatever).

The bottom line is that if there's lots of appreciation, this is a win. But that is a big gamble. With PMI, property taxes, maintenance, etc, the OP will NOT be "living for free". Far from it. It will most likely be quite a bit more expensive than renting. I could see this *maybe* making sense if the OP had a substantial cash reserve on hand, was sure s/he was staying in the area long term, and had prior landlording/RE experience. But in this situation? F no.

-W

hexdexorex

  • Stubble
  • **
  • Posts: 159
Re: Should I buy the property I'm renting?
« Reply #18 on: July 21, 2014, 10:36:13 AM »
6500 thats pre taxed.....CA tax on income is around 10% plus the poster seems to have high income...

I would rather earn $6500/mo extra and get taxed on it than NOT earn $6500/mo extra.

This 6500 income comes with 710k of leverage. Of which there probably is a 5% transaction fee when bought and a 5% transaction fee when sold (on 750k) so around 75k in fees (when you buy its the loan fees and when you sell is the realtor fees).  Also for the first 5 years the income is probably outweighed by the interest/repairs etc.

I would just think of it as another asset and not as a house. If someone was to offer to loan you 710 thousand at 4% to buy stocks would you take it? Yes there is a chance the market could rise and everything will work out fine...but there is also a chance it wont.
« Last Edit: July 21, 2014, 10:38:16 AM by hexdexorex »

Daleth

  • Handlebar Stache
  • *****
  • Posts: 1201
Re: Should I buy the property I'm renting?
« Reply #19 on: July 21, 2014, 12:37:19 PM »
6500 thats pre taxed.....CA tax on income is around 10% plus the poster seems to have high income...

I would rather earn $6500/mo extra and get taxed on it than NOT earn $6500/mo extra.

This 6500 income comes with 710k of leverage. Of which there probably is a 5% transaction fee when bought and a 5% transaction fee when sold (on 750k) so around 75k in fees (when you buy its the loan fees and when you sell is the realtor fees).  Also for the first 5 years the income is probably outweighed by the interest/repairs etc.

I would just think of it as another asset and not as a house. If someone was to offer to loan you 710 thousand at 4% to buy stocks would you take it? Yes there is a chance the market could rise and everything will work out fine...but there is also a chance it wont.

The difference between a multi-unit house and stocks is... well, there are two huge differences:
(1) you can live there, and far more cheaply (once you factor in rents received) than you could elsewhere; and
(2) when the housing market tanks, rents do NOT as a rule go down. More people foreclosed on or unable to buy means more people looking for rentals. IOW you have a major hedge against economic downturns: as long as you are fine staying in that area for X years rather than selling, you should be able to make it. The only way you could lose during a downturn is if for some reason you feel compelled to sell the place.

waltworks

  • Magnum Stache
  • ******
  • Posts: 3441
Re: Should I buy the property I'm renting?
« Reply #20 on: July 21, 2014, 12:54:49 PM »
Rents can, and do go down. They don't *usually* go down but if there was a big crash in tech or something, it's certainly plausible that rents in the Bay area would drop significantly. I don't think that's likely but saying rents always go up and never go down is ridiculous.

-W

hexdexorex

  • Stubble
  • **
  • Posts: 159
Re: Should I buy the property I'm renting?
« Reply #21 on: July 21, 2014, 03:31:52 PM »
6500 thats pre taxed.....CA tax on income is around 10% plus the poster seems to have high income...

I would rather earn $6500/mo extra and get taxed on it than NOT earn $6500/mo extra.

This 6500 income comes with 710k of leverage. Of which there probably is a 5% transaction fee when bought and a 5% transaction fee when sold (on 750k) so around 75k in fees (when you buy its the loan fees and when you sell is the realtor fees).  Also for the first 5 years the income is probably outweighed by the interest/repairs etc.

I would just think of it as another asset and not as a house. If someone was to offer to loan you 710 thousand at 4% to buy stocks would you take it? Yes there is a chance the market could rise and everything will work out fine...but there is also a chance it wont.

The difference between a multi-unit house and stocks is... well, there are two huge differences:
(1) you can live there, and far more cheaply (once you factor in rents received) than you could elsewhere; and
(2) when the housing market tanks, rents do NOT as a rule go down. More people foreclosed on or unable to buy means more people looking for rentals. IOW you have a major hedge against economic downturns: as long as you are fine staying in that area for X years rather than selling, you should be able to make it. The only way you could lose during a downturn is if for some reason you feel compelled to sell the place.

The bay area is a very different market. When the tech bubble popped housing tanked and the rental market tanked. When this last recession happened both tanked as well (although the rental market less so). I called my building and got a 10% cut in rent in 2009 when they were having trouble filling those units. Now they get 50+ applications very every apartment....and rents are going up.

From growing up in South Florida to now living in the Bay area both house prices and rental prices are pretty volatile and a couple years after rents skyrocket tons of new housing pops up or condos start to transform magically into rental units. (although there are rules within SF that artificially supply low....home developers really have a hard time building new units here)

I would not expect high returns from renting a place unless the initial price you pay for the place is significantly below market and/or you have the time for some sweat equity. Overall american companies have outperformed american real estate by a large margin over large periods of time. So basically the bet you are making is the bay area will continue to see price % increases that they have seen in the past....and the more you go below the 1% rule the more risky that bet becomes.

With all this being said a house purchase is often sentimental, and can be worth it if you only really want to live there.

escolegrove

  • Stubble
  • **
  • Posts: 164
    • Reluctant Landlord
Re: Should I buy the property I'm renting?
« Reply #22 on: July 21, 2014, 09:46:20 PM »
i would not buy a house based on zillow's prediction. On the other hand does the rent cover you mortgage, vacancy, maintenance and other expenses. We have NEVER followed the 50%, 1% or 2% rules and have done very well. At the age of 26 I own 5 houses with my husband. We have bought 3 of them as personal properties putting either 0% down or 5% (we split the Va loan on the first two).

I follow the southwest airlines rule. We have great houses that have tight margins who's rent and house values appreciate over time. We also put as little into them as possible so someone else is paying our mortgage. Personally if we could find a house as you described where it is breaking even I would go for it. Yes your numbers are tight but you are living there free! You have to live somewhere.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28245
  • Age: -999
  • Location: Seattle, WA
Re: Should I buy the property I'm renting?
« Reply #23 on: August 12, 2014, 09:46:54 PM »
6500 thats pre taxed.....CA tax on income is around 10% plus the poster seems to have high income...

I would rather earn $6500/mo extra and get taxed on it than NOT earn $6500/mo extra.

He isn't actually earning that.. that'd be the gross rents, if he rented out all 4 units.  Then you'd pay taxes, expenses, mortgage, etc.  And be cash flow negative several thousand a month.  Would you rather that?
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 three 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.

Daleth

  • Handlebar Stache
  • *****
  • Posts: 1201
Re: Should I buy the property I'm renting?
« Reply #24 on: August 13, 2014, 05:05:59 PM »
6500 thats pre taxed.....CA tax on income is around 10% plus the poster seems to have high income...

I would rather earn $6500/mo extra and get taxed on it than NOT earn $6500/mo extra.

He isn't actually earning that.. that'd be the gross rents, if he rented out all 4 units.  Then you'd pay taxes, expenses, mortgage, etc.  And be cash flow negative several thousand a month.  Would you rather that?

Renting out all 4 units shouldn't be a problem in any semi-decent Bay Area neighborhood. Assuming he finds a 30-yr fixed jumbo mortgage at about the national average rate and has $$ for closing beyond the $40k he mentioned such that the down payment is 5%, the mortgage would be about 4.7% or $3682/mo. On gross rents of $4850 ($6500 minus the $1650 he currently pays for his apartment), that's doable, though I agree just barely once you factor in PMI, property taxes and insurance. That said, the rent would go up every year while the mortgage, PMI and taxes would stay the same; the insurance might also stay the same for a while though it would eventually go up a bit. My only concern would be whether there's money for any repairs that may need to be made, but since the OP is being Mustachian and socking money away, there probably would be unless a major repair came up in the first year or two of ownership.

There are major risks there, for sure, but I don't evaluate rental properties that you're going to live in by the same scale I use to evaluate pure rentals--especially not if they're in a high-COL area. The reason I don't is that rent goes up every year or two as a general rule, so if you're renting the place you live, you're already pissing money out the window every month and can count on pissing away more and more as time goes by--but if you can own a place AND rent it out, you can steadily increase your rental income and thus steadily decrease your own cost of living. Of course, a rental that is only barely doable like this one is much higher risk than one you can easily afford, but it's nearly impossible to find properties that meet the 1% or 2% rules in high-COL areas, and one advantage of most if not all high-COL areas is that they are usually high-tourism areas too. So if you're without a tenant for a month or two, you can make ends meet by putting the vacant rental on Air BNB.

If he's currently paying $1650