Ready to buy my first investment property

[Cole Stamer]

My wife and I started saving and building our credit a year and a half ago after talking to a lender to figure out our trajectory to buying our first property.

With our credit score in the high 700s and our savings just over 35K we reached back out to our lender and got a rough estimate of where we stood as far as borrowing power. She estimated we could loan up to 500K on a mortgage with 5% down at a 6.8% interest rate. 

We decided to take 2 weeks to study the market to see if there were multi family properties or single family properties with multi family potential even available in our price range.

We found a duplex in the roseville area that we are very excited about. It currently has 2 tenants that are severely under paying in rent. Our plan would be to have the seller evict them, take out a short term loan to remodel the first side quickly and live in the 2nd side for a year all the while slowly remodeling the 2nd side as well. 

However, after meeting with a friend who has real estate experience he mentioned that he predicts in about 12-18 months there will be a downturn of the market and an influx of foreclosures due to the pandemic forebearance.

I now feel like our momentum and excitement has come to a screeching halt and I am unsure of whether or not to invest in this market.

I understand long term the market works itself out, however, if I bought this multifamily unit on my current income, I cannot afford for the rental market to depreciate as well which is my fear.

The mortgage would be about 4K. After renovations our plan would be to rent out one side for 2K which leaves us paying 2K as well. We are a single family income bringing in almost 100K per year.

Any thoughts?

[Jake Andronico]

@Cole Stamer

Great question, and welcome to BP! In Reno, NV, there was already a downturn that nobody noticed...

We're just over the hill with somewhat similar dynamics but obviously a different market. 

In Q1 of 2023, prices had come down almost 10%, but nobody noticed because interest rates were so high. Now, we're back to the peak pricing of early 2022. 

Here is some data that I've looked at that makes me say this: 

Here are some key differences of 2008/9 vs today:
1. There are far fewer ARM's (Adjustable Rate Mortgages) than there were in 2007/2008. Almost 35% in 2006 to below 5% in 2022.

2. Lending has become a lot more strict. "NINJA" (No Income No Job Applicants) loans are a thing of the past. Have you tried to get a loan recently? It's not exactly the easiest thing in the world. Borrowers with higher credit scores are given better rates and more funds from lenders nationwide.

3. Equity. If you've owned a home since 2019 or even 2020, you're probably sitting on some equity. If you've owned before that, you're probably sitting on some serious equity.

Also, with the amount of people hunting pre-foreclosures (wholesalers, agents, individuals, funds, etc.) and scooping them up to flip them, I don't see how the supply could outweigh the demand in the near future. Wall Street has proven their model of stability in the residential RE market post-crash, and if there is another black swan event like 2008/09 there will be a ridiculous amount of competition from large institutions. 

It sounds like you guys make a great income but I would never recommend buying a property you cannot afford. 

Depreciation in price only really hurts you if you HAVE to sell. If you don't have to sell and wait it out, you will more than likely be OK. 

Just my two cents, and best of luck to you!