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!

[Ranjit Sandhu]

Your friend can be right or wrong which no one knows. It's hard to predict the real estate market. I'm sole broker from Rocklin area and I would suggest you to keep looking and when you find a good deal just grab it. Just because your friend suggested that market will downturn in 12-18 month don't just keep waiting. All the best!!! Let me know if I can be any help as I'm from that area. Also CA tenant laws are pretty strict and find out how's their lease going. If they have long term lease you can't evict them.

[Scott Scoville]

Quote from @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?

Hey Cole, congrat's on starting your journey. I dollar cost average my investment purchases. It's not about "timing" the market, but "time in" the market. If you buy good deals, in good locations, hold the property, and maintain cash reserves, you will rarely lose. I'm an investor and real estate agent. Be happy to chat anytime. We also have an investors meetup every month if you're interested in attending.

[Ben Howard]

Hi Cole, as Ranjit stated you may find that there are tenant protection laws which make your stated plan to ask the seller to evict the tenants challenging. You may be better served searching for an alternative property. Also, one of these days your friend who predicted a future market downturn will be right. However if you are focused on long term investing, market fluctuations may not impact you as much as mortgage interest rates will. Mortgage News Daily is showing a substantial increase today after this morning's inflation data. It's a widely held belief that you can mitigate this risk by making a purchase while a rate is known and then if rates go up you are locked in, if they go down and you are able to still qualify, refinance to a lower rate.

[Garrett Woodroof]

Hi Cole, 

Looking for a single family home with multifamily potential is a great strategy. Last week I helped a client close on a property just like that in Placer County. SFH home with room and pre-permission from the county to build 2 additional units! He (an experienced investor) has a plan to turn it from a 4+% cap rate property to an 8+% cap rate.

I'm always looking for these for clients. Let me know if you want to hear about the next one. 

Otherwise, I mostly agree with the other comments. Real estate is local, and Placer County is doing pretty well. Affordability is an issue right now, but if/when rates go down later this year, that'll put upward pressure on prices. And next year's affordability issues will put upward pressure on rents. Buy and hold. 

[Noah Laker]

What's up Cole! Great to see you guys jumping in. I'm a local broker and investor with over 100 investment properties under management, mostly STR. If you're concerned about the state of the market, I might consider some creative finance deals. These require lower cash invested and you might be able to access lower interest rates that way, so short-term value fluctuations won't matter so much.