Best way to invest $200,000 in Northern Utah?

[William Govans]

I'll try to not make this post too long! Sometimes it is a tough balance getting enough info out and not blabbing on. Hang in there with me please!

A family member of mine unfortunately and unexpectedly passed away. To my surprise I found out $250,000 was left to me. I am 25 years old, married, hold a college degree with a steady job earning $60,000. My wife is also employed part time and brings home an additional $15,000. Other than the home we currently live in we have no debt. The house has about $25,000 equity in it and $110,000 left on the loan.

Our current idea is to purchase 2 town homes, all cash, and rent them out. The units are in the same town but about 5 minutes apart and appeal to slightly different markets. Both units were built within the last 10 years. I've spoke with quite a few realtors and am familiar with the area and don't foresee any issues renting them out to good tenants and maintaining good occupancy.

After running the numbers the CAP rate would be 6% for each property assuming we pay full asking price, closing costs, etc. Looking at comps we shouldn't have to pay full asking price and the CAP rate is closer to 7.5%.

I plan to work full time at my job I currently have and my wife could keep working part-time until our next child is due this winter. I'll manage the properties myself to start, if it gets too much to handle I can hire a property management company in the area, but I don't think it should be too much to manage them with as close as they are to us and the condition they are in.

Is this a stupid approach? I know it is ridiculously conservative, but I don't see me realistically flipping homes or managing multi-family complexes. If all goes well after 5 years we could take equity loans for the 2 town homes and our home and get really serious if needs be.

[William Hochstedler]

On the townhome vs detached debate there's a lot going on.  Since I have nothing else to do on a Sunday [lie], I'll try to elaborate.

Up in Cache County, we have two major subdivisions of townhouse style condos built in the 1980's and 1990's respectively with a scattering of smaller subdivisions and some major starts in the past 3 years.  The 20 and 30 year old subdivisions have done almost nothing as far as appreciation in this time frame (15-20%) where 25-30 year old single families have almost doubled in value.

I've put together a chart to show what's been happening in your neck of the woods.   Unfortunately I don't have older data, so it doesn't tell as compelling a story as when these buildings hit end-of-lifecycle issues as our 1980's development has.

As you can see the trend lines are separating with the single families appreciating faster even with the recession.  I think that the reason that the separation is not more dramatic is that new construction represents a significantly higher percentage of townhouses than with single family and the rising prices are at least partially attributable to the rise in material costs.

The situation in Salt Lake and Utah counties is quite different as townhouses represent an entry level price point that is becoming rarer and rarer in detached single family houses.  In Weber county, there is no shortage of $150-175K existing construction so there isn't a flight to townhouses for first time home buyers like there is in higher density markets.

End of lifecycle issues present a major problem for townhouse communities and it's a tightrope walk that HOA's constantly battle with. There is a lot of discussion here on BP on how to plan for capital expenditures or capex for investment properties. A new roof that requires a special assessment in an already deteriorating town house community can be devastating. As the 30 year old buildings have not appreciated substantially, there is little equity to tap into for the improvements and no other choice but to raise dues, taking a bite out of cash flow. There is a lot of resistance from HOA communities to plan for capex in the dues, so most don't--at least not adequately.

Furthermore, as townhouses are often entry level properties, the communities are somewhat transient. Particularly in Utah, growing families often move on to larger homes as soon as they can they can afford it. As a result, as these communities age, they do not gain the benefit of becoming "established neighborhoods". To counteract this trend, some HOA by-laws often establish very restrictive rules to limit non-owner occupants (renters). Pay careful attention to this.

I'm not saying that condos/townhouses are bad in all markets.  They can perform very well when they hit a price point that is otherwise unavailable in high density/very expensive areas.  Also, in some markets, townhouse community amenities (like spas and pools) can demand a high rent premium. 

As the tenant market is very price sensitive, the only reason I would ever consider buying a townhouse is if I could not meet the price point with other types of housing. Single family detached, at least in our area, has the benefit of appreciation, and multi-family with no HOA and CC&R's gives you more control.

As far as maintenance goes, you are still responsible for fixing a leaky faucet or a backed up toilet in each of these types of housing.  Maintenance requirements will depend much more on age, quality of construction, and upkeep than property type.  Of course, landscaping and snow removal are issues with multi-family, but can easily be passed on to the tenant in single family.

Hope this helps.