Investing to purchase a forever home

JD, CCIM , Real Estate Broker · Tuscaloosa, AL · Member since 2014 · 1k+ posts · 1k+ votes

9y

As a new real estate investor, you should start in your own back yard where you have the advantage of first hand knowledge of the market, the customs, expectations, laws, and a network of friends and acquaintances who can help with advice. If you are going to invest out of state for your first deal, you might as well invest in sure stock tips. You have just as much detailed knowledge, and just as much control over events, in both situations.

3 Reply

Steve B.

Engineer · Portland, OR · Member since 2014 · 1k+ posts · 1k+ votes

9y

Most of what you are assuming is going to change faster than you think. Don't make decisions based on a false sense of permanence.

1 Reply

Andrew Johnson

Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes

9y

Brittany Bauhaus There are some really dicey assumptions in your plan. You pay $300K for a condo to own for 3 years. When you sell you have to make it "sale ready", there's vacancy, and you pay realtors and closing costs. So let's say that costs you $30K. You'll make 36 mortgage payments during that time and since it's towards the start of a loan cycle, less goes to principal pay-down. Maybe an average of $325 per month for those 3 years goes to principal in a $240K loan @ 5%. $325 * 36 payments = $11,700. So future selling costs are $30K but tenants have paid down less than $12K. You probably aren't cash-flowing $500 per month to break even ($500 * 36 = $18K profit + $12K principal pay-down = $30K = selling costs). Even if you get appreciation you can't capture it as the hypothetical $500K condo has appreciated at the same rate. Not to mention that interest rates will likely be higher in 3 years.

1 Reply

Brent Coombs

Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes

9y

@Brittany Bauhaus, welcome to BP. You've come to the right place to ask these questions. You might need to brace yourself for some (more) hard-hitting responses suggesting reality checks.

My own advice is: please do NOT rely on turnkey providers to get you closer to your future goals, for the simple reason that ALL the cream will already have been taken out of any profit, by you buying properties off THEM!

My guess is that your "forever home" will NOT be any easier to buy in 8 years than just saving EVERY extra dollar you can in the meantime. That is, UNLESS you can find under-priced BARGAIN/S, every time!

I reckon 3-5 years is too short a time frame to GUARANTEE continued appreciation that gets you cash flow AND a profit on sale, after taking all expenses into account - if you're paying market value, in an already hot market. My 2c...

0 Reply

Brittany Bauhaus

OP

Santa Barbara, CA · Member since 2017 · 5 posts · 1 vote

9y

Originally posted by @Andrew Johnson:

Brittany Bauhaus There are some really dicey assumptions in your plan. You pay $300K for a condo to own for 3 years. When you sell you have to make it "sale ready", there's vacancy, and you pay realtors and closing costs. So let's say that costs you $30K. You'll make 36 mortgage payments during that time and since it's towards the start of a loan cycle, less goes to principal pay-down. Maybe an average of $325 per month for those 3 years goes to principal in a $240K loan @ 5%. $325 * 36 payments = $11,700. So future selling costs are $30K but tenants have paid down less than $12K. You probably aren't cash-flowing $500 per month to break even ($500 * 36 = $18K profit + $12K principal pay-down = $30K = selling costs). Even if you get appreciation you can't capture it as the hypothetical $500K condo has appreciated at the same rate. Not to mention that interest rates will likely be higher in 3 years.

Thanks Andrew. What if I can sell the condo while the tenant is living in it? I'm not planning on the condo appreciating THAT much, but my goal is to gain some equity here to eventually put it toward a home I can live in. Do you suggest any other plans of attack?

0 Reply

Brittany Bauhaus

OP

Santa Barbara, CA · Member since 2017 · 5 posts · 1 vote

9y

Originally posted by @Brent Coombs:

@Brittany Bauhaus, welcome to BP. You've come to the right place to ask these questions. You might need to brace yourself for some (more) hard-hitting responses suggesting reality checks.

My own advice is: please do NOT rely on turnkey providers to get you closer to your future goals, for the simple reason that ALL the cream will already have been taken out of any profit, by you buying properties off THEM!

My guess is that your "forever home" will NOT be any easier to buy in 8 years than just saving EVERY extra dollar you can in the meantime. That is, UNLESS you can find under-priced BARGAIN/S, every time!

I reckon 3-5 years is too short a time frame to GUARANTEE continued appreciation that gets you cash flow AND a profit on sale, after taking all expenses into account - if you're paying market value, in an already hot market. My 2c...

Thanks Brent. I was considering turnkey properties because they're lower maintenance on the landlord's part, as I'd live in another state and have a prop mgmt company handle the prop. I currently do not have any home equity and so I'd gain that equity by starting with an investment rental. Doesn't that make more sense than hoping I save up enough of a down payment on my own in 8 years? Suggestions welcome!

0 Reply

Andrew Johnson

Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes

9y

@Brittany Bauhaus If the tenant is in it you can really only sell to rent investors. If it's a nice condo you'll at least want the option of selling to an owner-occupant. Owner-occupants, however, won't likely be able to qualify for two simultaneous mortgages while waiting for the lease to expire. And cash-for-keys is expensive :)

The primary issues are going to be your short window of time as well as just plain being a condo where association dues can cannibalize cash-flow.

1 Reply

James Wise

Real Estate Broker · Cleveland Dayton Cincinnati Toledo Columbus & Akron, OH · Member since 2013 · 30k+ posts · 20k+ votes

9y

Originally posted by @Brittany Bauhaus:

Hi all, I'm new to the BiggerPockets community.

I've been researching real estate investing for a little while now, and I feel ready to take the plunge. I'd like to explain my particular situation: I'm not here to make big money. I'm fairly certain that makes me an outlier in this community, but please hear me out: I currently live in Santa Barbara, CA. Everything is way too expensive here and it's not my favorite town, but I have to live (and rent) here for the next 8 years. My end goal is to buy a home in Ventura, CA (my favorite place on earth) with an ADU on the property. I currently can't afford to purchase such a property, so I need to work up to that point. My girlfriend has land in Costa Rica, so we'll eventually split our time between Ventura and CR. I'd like to rent out the ADU consistently, and also the main house when we're out of the country. Of course, eventually it'd be nice to live off some passive income via real estate investments, but I actually love my job and am not concerned with needing to quit or put all my eggs into the RE investment basket right now. But my definite short(ish) term goal is to buy this home within 8 years. Now, my respective investment scenarios:

1. I can purchase a roughly $300k condo in Ventura or Oxnard as an investment property and rent out the condo for a fairly small ROI. Keep in mind, my main goal isn't to purchase numerous properties right now. The plan would be to sell this condo in 3 years, buy a new one, rent it out for a higher rate, sell in 5 years, buy a forever home w/ADU.

2. I can purchase 2 homes in Ohio or Alabama for roughly $100k each, rent each of those out for a small ROI, sell in 3 years, buy a multi-unit property, sell in 5 years, buy a forever home w/ADU.

*Number 1 seems more appealing to me, as I'll be the private landlord (and can save on costs there), and I know those cities so I feel comfortable choosing the right property.

*Number 2 seems like it will possibly bring in more cashflow (once all the numbers have been sufficiently crunched), but again making huge amounts of cash isn't my immediate goal. I also don't feel as comfortable purchasing a property I've never seen, even though it's turnkey. I'm researching turnkey properties all over the US via realwealthnetwork.com and am now focusing on Ohio and Alabama.

I want to make sure I'm building up the most equity in the shortest amount of time. I have $40k-$60k ready to invest. I want to make sure I've covered all my bases and choose the path that's the surer route to reaching my goal.

Any/all advice is welcome, and thank you for your time!

bb

Welcome aboard Brittany

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Sandra B.

Orange County, CA · Member since 2017 · 36 posts · 24 votes

9y

Transaction costs in both your strategies will eat you alive. The time horizon sounds long but is actually short. No one knows where the market will be in 3 years or 8 years. It could double, it could tank. You're trying to fast track equity/savings by letting others pay down your debt. The best way to do this through real estate on a relatively short time horizon is to go for a 15 year mortgage. If you put 20% down on a 300,000 property, assuming a 3% interest rate and 4% annual appreciation (which is simply throwing a dart but based on historical appreciation rates), in 8 years you will sell for $410,000. Subtract 6% for transaction costs and $125,000 for the remaining mortgage debt, that leaves you with $260,000 in equity on your $60,000 down payment + call it another 10k in closing costs. That's close to a 17% annual return. Not bad.

BUT, again, these are a lot of assumptions. Can you actually break even on a unit with a 15 year mortgage, association fees, and maintenance? (Yes, its a condo, but water heaters still break, assessments are real, etc.) Can you carry the unit if there is a vacancy? Will you have the money to fix it if a tenant trashes the place? Also, you truly do not know where the market will be. If there is no appreciation whatsoever and you sell for $300,000, you still walk away from closing with $156,000, but that 4.7% annual return doesn't look nearly as appealing for the amount of work and risk. And there is always the possibility, as many learned a decade ago, that you could have to sell for less than you bought it for.

Look at Mr. Money Mustache, Dough Roller, Money for the Rest of Us. Take a hard look at your spending habits. Create a savings goal, enact painful budget cuts, and if you still cant hit the number you need 8 years after these calculations, then maybe real estate is worth the calculated risk.

1 Reply

Brittany Bauhaus

OP

Santa Barbara, CA · Member since 2017 · 5 posts · 1 vote

9y

Originally posted by @Sandra B.:

Transaction costs in both your strategies will eat you alive. The time horizon sounds long but is actually short. No one knows where the market will be in 3 years or 8 years. It could double, it could tank. You're trying to fast track equity/savings by letting others pay down your debt. The best way to do this through real estate on a relatively short time horizon is to go for a 15 year mortgage. If you put 20% down on a 300,000 property, assuming a 3% interest rate and 4% annual appreciation (which is simply throwing a dart but based on historical appreciation rates), in 8 years you will sell for $410,000. Subtract 6% for transaction costs and $125,000 for the remaining mortgage debt, that leaves you with $260,000 in equity on your $60,000 down payment + call it another 10k in closing costs. That's close to a 17% annual return. Not bad.

BUT, again, these are a lot of assumptions. Can you actually break even on a unit with a 15 year mortgage, association fees, and maintenance? (Yes, its a condo, but water heaters still break, assessments are real, etc.) Can you carry the unit if there is a vacancy? Will you have the money to fix it if a tenant trashes the place? Also, you truly do not know where the market will be. If there is no appreciation whatsoever and you sell for $300,000, you still walk away from closing with $156,000, but that 4.7% annual return doesn't look nearly as appealing for the amount of work and risk. And there is always the possibility, as many learned a decade ago, that you could have to sell for less than you bought it for.

Look at Mr. Money Mustache, Dough Roller, Money for the Rest of Us. Take a hard look at your spending habits. Create a savings goal, enact painful budget cuts, and if you still cant hit the number you need 8 years after these calculations, then maybe real estate is worth the calculated risk.

Thanks Sandra. By your calculations, the final annual return still sounds way higher than if I used mutual funds or a money market account to save. The condo complex I'm looking to invest in has historically performed very well for investors and provided some sort of monthly cash flow. But, my understanding is that, most importantly, I'd have built up home equity with this purchase and will be in a better spot financially to purchase a home for myself, once I'm ready. Is that correct, or do you suggest something different?

0 Reply

Sandra B.

Orange County, CA · Member since 2017 · 36 posts · 24 votes

9y

You need to reverse engineer the plan. To buy a property for $800k with 20% down, you need $160k for down payment, $20k for closing costs, and for a jumbo many lenders want to see 12 months liquid reserves, which for a 30 year at 4.25% presuming 1.1% property tax and 1000 insurance, is about 4K per month or another 48k. So you need to save $228k in 8 years. That's $28,500 per year. Knowing nothing about your current financial position except that you think you can buy a 300k property, I'm going to presume you have 70k liquid and making 78k per year (.35 dti ratio for 2000 mortgage, taxes, insurance and 250 association fee). After taxes, that is 52k per year in CA, which means you need to save an additional 20k annually over the 70 you have. Living off 32k in Santa Barbara sounds improbable. But I'm sure you can cut expenses (cut cable and go to streaming service, cancel gym and invest in a set of free weights/go on more hikes, minimize dining out, stop buying expensive coffees, etc). Once you have a budget and an idea of what you can realistically save annually, then weigh your options in rei. Please remember, the market doesn't care about your timeline. Be prepared to pivot and make adjustments. A lot can happen in 8 years. Also remember, the monthly payment on this supposed no lose investment condo is $2000 per month for a 15 year plus association fee. $250 is just a number I plugged in. I have seen CA condos with $600 per month association fees. To be conservative, plan another 10% for maintenance and 10% for vacancy. That monthly nut is $2650. Is that a realistic rent in the community? If not, is it even a realistic blended average rent over the next 8 years and can you afford to carry a loss on it for a few years?

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Jose Guevarra

Real Estate Agent · Mira Mesa, CA · Member since 2014 · 218 posts · 49 votes

9y

@Brittany Bauhaus Welcome and it's nice to see a fellow Central Coaster!

1) have you considered commuting from North of Santa Barbara? I worked at UCSB and lived in Guadalupe. Yes, I had to spend 3 hours commuting by van but I saved a sh*t ton of money.

2) Prices in Santa Maria and Lompoc are below $300K range. Flipping a SFR there would be more profitable than buying a $300K condo in Ventura. There's also more inventory on both of those cities.

If you ever want to chat about real estate investing community in Santa Barbara and the Central Coast just reach out to me anytime.

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Anthony GaydenPro Member

Rental Property Investor · Omaha, NE · Member since 2014 · 2k+ posts · 3k+ votes

9y

Sandra B. You can only cut expenses so much. The problem isn't expenses, it's income. At $70,000 a year you will have to live like a hermit for 5+ years to buy that house. Let's look at other options. First of all why do you have to live in that specific location? Second of all why do you have to move to another very specific location? You said you have to live there for work, but what kind of job requires you to live in a certain city limits? Open your mind to different possibilities. The limiting factor in this scenario is you.

Podcast Guest on Show #21

1 Reply

Jason Francia

Specialist · Santa Maria, CA · Member since 2014 · 13 posts · 2 votes

9y

Brittany Bauhaus I use to live in SB during college and I loved it there, I also understand the amount of money needed to purchase there. Have you considered buying in Lompoc or Santa Maria/Orcutt . Maybe something to consider if you're looking to grow your money. I've invested in Santa Maria and Orcutt and have made out pretty well, now I'm looking in Lompoc and Orcutt/SM again. If I can help please let me know. I got my real estate lic so that I can go through the MLS and help out other savvy investors as well

0 Reply

Brent Coombs

Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes

9y

Originally posted by @Brittany Bauhaus:

Originally posted by @Brent Coombs:

@Brittany Bauhaus, welcome to BP. You've come to the right place to ask these questions. You might need to brace yourself for some (more) hard-hitting responses suggesting reality checks.

My own advice is: please do NOT rely on turnkey providers to get you closer to your future goals, for the simple reason that ALL the cream will already have been taken out of any profit, by you buying properties off THEM!

My guess is that your "forever home" will NOT be any easier to buy in 8 years than just saving EVERY extra dollar you can in the meantime. That is, UNLESS you can find under-priced BARGAIN/S, every time!

I reckon 3-5 years is too short a time frame to GUARANTEE continued appreciation that gets you cash flow AND a profit on sale, after taking all expenses into account - if you're paying market value, in an already hot market. My 2c...

Thanks Brent. I was considering turnkey properties because they're lower maintenance on the landlord's part, as I'd live in another state and have a prop mgmt company handle the prop. I currently do not have any home equity and so I'd gain that equity by starting with an investment rental. Doesn't that make more sense than hoping I save up enough of a down payment on my own in 8 years? Suggestions welcome!

Why can't your do-able $300k Condo investment ALSO be your "forever home" later? If you reckon that you NEED an added unit to rent out, do you really think that the cost of buying your forever-duplex will be EASIER in 8 years time, even given your planned "low ROI" interim investments that are aimed at starting your equity-ball rolling?

ie. If the cost of a duplex is already cheaper per unit than the cost of 2x SFRs (but, still currently out of your reach), do you think the ratio will go further in your favor, in 8 years?

(ie. As if that's some sort of secret-sauce recipe that no-one will have thought of by then?)

Personally, I doubt it. I reckon there's ALREADY a Duplex where you want to live, BUT, it's in TERRIBLE condition, so the Seller would sell it at a severe discount (say, $350k) to avoid those rehab costs, and their circumstances are such that it doesn't matter to them about the Buyer potentially being able to turn it into a $600k Duplex once rehabbed.

I reckon: Look for your forever home (but one in pre-rehab condition) - NOW! All the best...

0 Reply

Nick G.

Investor · Moorpark, CA · Member since 2016 · 248 posts · 191 votes

9y

@Brittany Bauhaus Hey there, I live, work and invest in this area and have a few thoughts.

1. You should probably be buying buy that home within 0 - 5 years, not 8. Five years from now, we should be in the midst of a market correction, which would make it more effective to buy 1. in the correction, where prices may be a bit lower, or 2. now, when interest rates are still very low. 8 years from now, we may already be going up again from that market correction. As @Andrew Johnson wisely pointed out, interest rates are also very likely to be higher.

2. You shouldn't be buying anything right now to sell in three years. Based on history, our area experiences market corrections every 10-15 years. Assuming that 70-year-old trend continues, that means our market will be lower than it is now in 3-5 years' time.

3. I don't necessarily think buying now is a bad plan, but if you do, you need to hang onto it for at least ten years - in ten to 15 years, the value will probably double again, as it has done many times over the past ~70 years. Investing for appreciation is definitely not the BP way, but it's why most investors buy here and do extremely well in our area, we are not a cash flow area.

4. Personally, I'm not comfortable investing out of state at this time, so I can't speak to that other than believing that it's a very risky move for a newer investor and a very easy way to lose your hat.

0 Reply

Brittany Bauhaus

OP

Santa Barbara, CA · Member since 2017 · 5 posts · 1 vote

9y

Thank you all so much for responding! A little more about my situation. My partner has children, and she can't leave Santa Barbara until they turn 18. That's not for another 8 years. So, I can TRY to save and buy something here in SB before then, and later sell and buy in Ventura. But that's seems close to impossible. Everything here is SO expensive. And I haven't run all the numbers yet, but I think renting in SB will save me more money in the long run than buying property. It sounds like the general consensus is to simply save, save, save until it's time for me to buy.

I did think of another option for buying in SB: Purchasing a foreclosure or off-market property for a deal and renovating it. I'll have to look into this further, as I'm not sure how to go about this yet. Thoughts?

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Investing to purchase a forever home

Investing to purchase a forever home

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