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Updated almost 9 years ago on . Most recent reply
Having a hard time with this decision.
I am in escrow for a Triplex in Redondo Beach California. We are contingent on the sale of our current property ( Which we have an over ask offer for.) The Triplex needs a new roof (which we have asked for a credit for) , two bath remodels, new flooring in one unit, and some other updating. The roof could wait for up to two years. There is also some minimal terminate damage that needs to be fixed.
Triplex purchase price 1.1M
Procedes form current Property 218000 almost exactly 20%. Which would be our down.
We will be living in this property, but the unit we will live in will be 60 sqft smaller than our current living space.
What we would pay out of pocket for mortgage would decrease by about $200.
We like where we live know, but think this would be a good move for our future.
I am very conflicted.
Any advice would be very appreciated.
Ken
Most Popular Reply
@David Varvaro You are right, you can not really compare the South Bay market to other parts of the country.
We are buying it for a couple of reasons. Our current place doesn't have much outdoor space, we would gain that with this property. Schools are a big factor. We live in Playa Del Rey now, and the schools are horrible. As you know the South Bay has great schools.
I don't know that I would say that I am banking on appreciation, but more feel that in doing the updates and work need to the house that we can force some appreciation. Looking at the forces that are affecting this market, I do expect the property to continue to gain value.
The property in West of Aviation, and South of MB Blvd.
Thanks for your input,
Ken
@Ken Cooper The important part is that you are starting the journey. It starts with this first step which is buying your first property. I'd imagine it is a somewhat uncomfortable situation especially since you enjoy where you currently live. However, your alternatives are to wait until you have more money and cancel all deals or find partners to help with the purchase of the triplex. If the deal makes financial sense, I think it makes sense to go through with it. If you aren't uncomfortable you aren't growing or living. Take the uncharted path.
I always advocate going sooner rather than later particularly in real estate because it really is a long game compared to other industries. Real estate and technology investments aren't synonymous. Wealth creation takes time to build up to considerable amounts. If REI is something you want for your future, I think you are on the right path.
I am unsure what your concerns are from the post? Is the payment being calculated lower than current mortgage because of rents collected? Have you considered that now you will be sharing a roof with your tenants? 60 sq ft is minimal, I think my cubicle at work is close to that, you won't miss it. $1.1 million for a tri-plex is mind blowing to me. What does it rent for?
Thanks Ian,
REI is defiantly my end game. I have one other investment property, but this is a big leap. I think that it could set us up well for the future, but it is a big step to take monetarily.
Jake,
California real estate is crazy. In this area 1.1 is ( i think) a good deal. Yes, the payment is being calculated because of rents collected. Yes we have considered that we will now be sharing roofs, walls, etc. with tenants. Yes, 60 sq ft is minimal. However, to my wife that means a closet. If you are married, you know what that means.
We would live in one unit, unit two rents for 1800, unit three for 1200.
Ken
Yikes, $3000/month in rent and purchase price is $1.1M? And it needs all that work, what is that unleveraged, like a 2 cap before taxes, insurance, maintenance, etc?
I would look at this as more of a residence and not an investment, the numbers are pretty bad. I guess I'm biased though, here in Florida you could buy 11 terrific SFH for that price. Unless you're banking on future appreciation?
Hi Ken, I work with investors in the South Bay and as I'm sure you are aware of you are paying for the dirt in Redondo Beach, Hermosa Beach, and Manhattan Beach so you can't really compare the numbers compared to other areas, especially other parts of the country.
With that said, it really depends on what your goal is with this property. Are you buying it because you are banking on appreciation and will use the equity to buy more properties in a few years? What's the strategy behind purchasing this property and selling your current one?
What part of RB is it in?
South Bay is a pricey area, and to get in on an investment in the area is probably a good idea! I am no investor, of course, but I haven't met anyone who regretted a deal in your area.
(I'd love to help you on your future deals, too!)
I used to work in Manhattan Beach and Lisa, who runs South Bay REIA, is a friend. :)
@David Varvaro You are right, you can not really compare the South Bay market to other parts of the country.
We are buying it for a couple of reasons. Our current place doesn't have much outdoor space, we would gain that with this property. Schools are a big factor. We live in Playa Del Rey now, and the schools are horrible. As you know the South Bay has great schools.
I don't know that I would say that I am banking on appreciation, but more feel that in doing the updates and work need to the house that we can force some appreciation. Looking at the forces that are affecting this market, I do expect the property to continue to gain value.
The property in West of Aviation, and South of MB Blvd.
Thanks for your input,
Ken
@Shannon Wright Thanks for your input Shannon.
I own a few out of state income properties that generate healthy monthly revenue. I'd love to buy in LA where I live and have spent the last year or so in search of a property. In general, I look at it as, elsewhere, you get to find monthly income properties. While my goals are long term hold on those, their appreciation will be slow and low. LA is kind of the opposite, low and slow monthly revenue with a more generous reward of appreciation down the road. I'm not a SouthBay expert but I would say its hard to go wrong there. If the monthly net revenue is on the skinnier side, I'd go for it. Its going to pay off in the long run. A neutral or small positive number is really more based on geography. In So Cal? totally. If you're in a situation where the building is self sufficient/funding itself, I'd do it. I would also consider the value of the education you're getting through the experience. The added bonus is you'll be working with contractors and vendors and building those contacts and relationships that set you up for properties down the road. :)
Since it's such a high demand area I would try to drive down the purchase price deducting repairs and maximise rent making the units "luxury" rentals, also who will be paying for utilities are the units metered separately?
At the current rents I suspect this has a cap rate <3% which would rule me out as an investor unless there is rental upside which there could be as ~750sqft units are being advertised at over $1500pm. As a homeowner if you like the place and have the reserves to weather vacancies/repairs then why not?
Dr. David Schumacher owned a lot of real estate in that general area. He had two houses side by side in Palos Verdes. (Locations and prices are subject to my very bad memory.) He told a story to another investor who was visiting him at his house (one of those properties.) He asked the other investor, "Do you know what I paid for these properties?
Of course the other investor had no idea. He continued, "$100,000 each. (Or something close to that.) And when I bought them, everyone thought I was crazy. They all said I was paying way too much. Do you know what they are worth now?"
The price was somewhere north of $1M. Each.
So, if you can make it work, can afford it and you're in it for the long haul, some day you'll be standing in front of that property with some young relative telling a very similar story. If you're thinking it is a short term play (10 years or less), you're probably gambling quite a bit and being speculative at the very least.
So you lose a closet and you don't have to get in a car to deal with tenant issues. Take advantage of this absurdly stupid low interest rates, lock it up for 30 years fixed at sub 5%, and some day you'll be able to move out live somewhere you want to actually live. Of course, Redondo Beach is no night in the ghetto regardless of your living situation. And I'm sure rents aren't projected to go down there anytime over the next 20 years.
Oh, and Dr. Schumacher has an investing book that has been on the market a while. He's dead these days. The book is titled, Buy and Hold. I think there is an updated version Buy and Hold Forever by Steve Dexter who used to live in Laguna Beach. I have both copies, but never read Steve's updated version. I mean with title like Buy & Hold, what really needs to be updated?
@Ken Cooper I totally agree with @Steve Karp. The South Bay is a strong buy. The demand is extremely high in the beach areas and you are buying in a great location. We used to live on the West Side in Marina del Rey but fell in love with the laid back beach vibe and the tight knit communities of the South Bay. And as you mentioned, found it to be a great place to raise kids because it is one of the few areas in the LA that has great public schools. Many of our clients are moving to the South Bay from the West Side for the very same reasons.
Because you will be living in your property and are moving to RB for these same reasons, I think it's a great investment especially with the forced appreciation. If you were buying it only as an income investment property and were not planning to live there, then you could definitely do better elsewhere but that's not the case. Buying the property you are going to live in is very different than purchasing purely as an investment.
Ian well said
Alex
I guess it boils down to your evaluation of the continuing appreciation in the California markets.
If you are right maybe you have 20% more upside before the next downturn.
Can you sustain the property with a long vacancy in one of the other units?
See this thread from a California Land Lord
I left the CA market because the values did not make sense to me, but long term investors have done great over the past decades. My opinion only is that eventually properties out price the ability of tenants to rent and the appreciation you are hoping for slows or stops.
@Steve KarpThanks Steve,
We will be in small positive number, without taking in to account capex, vacancy...etc. However we will be living there, and have to factor in those advantages.
The education I am sure will be useful down the road, and the relationships that we build will be invaluable.
Ken
@Account Closed We have asked for credits for the roof, and some other issues that have come up in the home inspection. I believe that the units are metered separately. Good point I will have to double check on that.
Ken
@Richard Dunlop I believe that the market forces that are driving the Southern California market are strong , and will continue to be for...... well, as it turns out I don't have a crystal ball.
I have lived in this area for 10 years, and have not seen any properties have to deal with long term vacancies.
Thanks for your input,
Ken
@Aaron Mazzrillo Thanks, Aaron, I hope that one day I can stand in front of this property and have as great of a story.
Ill look up Dr. Schumacher"s book.
BTW, I got a lot of inspiration from your podcast.
Thank you,
Ken
I don't think the Southern CA market is a bad market I just could not have made a living there if I were to rely on REI.
The link I posted was a CA investor's line by line account of the 5 years it took him to get the squatters out of his CA house. I asked if you could survive the downturn? We can hope it is still 5 years away. Or a vacancy/nonpaying tenant/eviction?
Your margins are small. (I get criticized every time I point this out but) The $218,000 you are putting down would provide a better than $10,000 PER MONTH positive cash flow in Detroit and Detroit suburbs without taking on new debt.
You are counting on your savings of $200 per month (if everything goes perfectly) and getting in debt to the tune of almost ONE MILLION DOLLARS.
I don't want to oversimplify and/or make unsubstantiated claims, but I'm of the personal belief that you can't go wrong on the West Coast buying into the best school districts (THE best that is, not kind of close to the best). There is a lot of money flowing in from China presently and that money looks for best schools first, new/remodeled condition second, and everything else third (I know how that money thinks very well, I've done business in China for years).
I just made a similar purchase (an SFH) in a Bellevue, WA community that has the best elementary, middle, and high school. I plan to carve out the basement of that $1M SFH (30% down) for myself and rent out the rest for "only" $2750 or so. To me it's a no brainer even if it just breaks even or loses a tiny bit, but then I'm into this property for the long haul.
I agree, if I were relying on REI, this would not work. My wife and I both work in the Film Industry. This is where we have to be to do what we do. Yes the margins are small, but I am also going to be living in the property. I could not invest the 218k in Detroit, because then I would not have a place to live. I am aware, and a bit scared the, yes, I will be on the hook for 1 million dollars. I still think it is a good move.
Ken
Update,
After the home inspection we are asking for 15K in credits form the seller. This will cover the roof and a few other issues. If they say no and are not willing to negotiate, then we let it go.
Will it be worth more than it is today at some point in the next 20 years? YES
Are we at the TOP of this run? NO
How much higher will it go before it drops? ??????
Can you survive the 10 years out of the next 20 that it could well be worth less than you are paying?
If the decline starts in 1 year? (It won't)
If the decline starts in 3 years?
If the decline starts in 5 years?
I think the California market is good for the long term