Should I buy in this crazy housing market?

Question

I want to house hack to decrease my living expenses with my ultimate goal being financial independence.  I was under contract for a duplex - I was planning on living on a 2 bed 1 bath side and rent out the 3 bed 1 bath other side.  Asking price was $219,000, I offered $210,000 but the counteroffer was $214,000.  I got a FHA loan for 3.5% down with 2.7% interest no points and closing cost $11,000.  The duplex appraised for $188,000 and report basically stated that for rent around the area would be $800 for the 2 bed/1 bath side and $950-$1000 for the 3 bed/1 bath side.  This duplex is the only duplex I have found in a single family home neighborhood sandwiched between a nice public park and an elementary school.  Since I was planning to house hack, safety and location is important.  The other duplex on the market currently are not in desirable neighborhoods.  This is my first time trying to step into real estate and was a rude awakening of how terrible I am at analyzing a property.  Due to the large difference between asking price and appraisal price, I have told my realtor that I am only willing to purchase based on the appraisal, which is based on the comps for duplex within 3 miles.  The seller is not willing to come down, so I believe we will have to terminate the contract unless the seller re-considers.  My realtor stated the reason it got appraised so much lower is because it is a duplex and not a single family home.  The proposal was to put a door between the 2 units so it could I get appraised higher to the original $214,000.  I felt that this would be a bad deal to try to appraise a duplex as a single family home.  My question is, is it worth it buying a home in today's market?  Are the prices being driven up due to low inventory and low interest rates and it is expected to have lower appreciation compared to today's prices?  Should I just invest my money?

Account Closed · Answer

It looks like your payments with interest and insurance will be about $1200 to $1300 per month and the total income is $1800 leaving you with a $500 positive cash flow minus utilities, repairs, rehabbing when a tenant moves, plumbing e.g. water heaters, furnace repairs, gardening, etc.

If the roof, plumbing and overall property is in good and clean condition the property looks good with today's high prices, but it won't put you on Easy Street. After all expenses you will probably come out ahead by $200 per month for the first few years, but to really see how much money you can make you need to stretch your projections to 10, 15, and 20 years for when you increase rents every year by no less than 6% and then look at how much you will profit from both increased rental income and appreciation.

Last year, I sold about 24 homes in Las Vegas just before this current huge increase in prices. I was getting super tired of renting 1600 to 2700 sq ft homes for as low as $1300 and when a tenant moved it was costing me $6,000 to $8,000 to clean and carpet almost every home. That sort of thinking was the wrong way to think because while I was not making big money from rental income every house I owned almost tripled in value in the past 11 years because I purchased them at auctions for 30 cents on the dollar.

I bought my son 5 homes in Las Vegas 3 years ago and he had the same problem making money with low rents, but the appreciation made up the difference. We just sold all 5 of his homes and he made $50,000 to $80,000 on each home in a 3-year period plus he had $150,000 in the bank he made from rental income after all expenses. I invested $1.2 million in cash for the 5 homes and sold them for $1,750,000 leaving us with a 530,000 profit + $150,000 for rental income = $680,000 profit = 57% ROI in 3 years.

Don't look at the numbers for today when you purchase the property. Stretch them out over a 10, 20and 15-year period.

The way I look at the numbers for your property is; your total investment is $225,000 and your positive cashflow after all expenses is $300 per month. You are investing only $3,000 of your money to get into the property. $300 x 12 month = $3600 per year. $3600 divided by $11,000 = 33% ROI on your money every year. Where can you invest $11,000 and get an ROI of 33% every year. Plus, over the next 10 years, you increase rents and your property increases. Now, you have to do the math and lets guess that your property increases every year including rent increases by only 3%. That starts to turn into some huge ROI. Especially, when considering you invested only $11,000.

I will guess that your property with rent increases increases by only $2,000 per year. So, at the end of the 2md years your $11,000 investment earned $3600 1st year, plus $3600 2nd year plus $2,000 increase due to a rent increase + appreciation = $9,200.  $9,200 divided by $11,000 invested = 84% ROI in 2 years, or an average ROI of 42% per year.

Do this math for 10 and 15 years and this is a great deal for today's market with high prices.

I think one of the biggest problems I ever had when looking at real estate was owning property and never did the math to figure out my ROI at the end of every year because when you don't do the math you don't realize how much you are actually earning and when you think you are not earning as much as you are you start to hate owning real estate and you sell it.

Bill B. · Answer

Yes. Way better if I had sold two years ago and had a Million less in equity, then I would have “made money when I sold” good point. I assume you tell people who invest their retirement accounts in stocks the same thing. (They should be getting worse returns by selling stocks for cash whenever they go up.)

Ps. You can spend appreciation by just taking a cash out refi. i purchased all my properties with 20% down. I now own 4 million in real estate with NEGATIVE $200k invested. Appreciation is waaaay more important than cashflow. People who understand how money and markets work know that the compounding of returns is where wealth is made, not the cashflow.

Jay Hinrichs · Answer

WEll maybe you cant spend appreciation but you sure as hell sleep well  !!!

Billy Daniel · Answer

Sounds a good opportunity to walk away to me.  Sounds like that one will be on the market for a while if its appraising so low and the seller is so stubborn about it.  Maybe they will reconsider in a few months?

Putting a door between the units is a bad idea.  Buying in todays market is still a good idea, you just have to make sure you are getting a good deal (like always).  This doesn't seem like one to me.

Not to be a negative Nancy, but it also sounds like someone isn't doing the best job they can.  To me either the appraiser didn't know how to analyze a multi-family, or your realtor isn't trying to get you the best deal possible.  Check your local property managers website for vacant rentals and see what they are charging.  That will give you a good idea what the rent should be.

Bill B. · Answer

Don’t get hung up on cashflow. You’re making money with appreciation, depreciation and loan pay down. With just a dozen homes I made maybe $100k in rental cashflow and another $50k in loan pay down. But I made more than $500k in appreciation in 2019 and 202 and with depreciation this is all tax free. (Ps I bet it’s up another $300-$400k this year alone.

You get to where the previous poster was with 24 homes you’re making at least a million a year in tax free appreciation. Rents are climbing insanely fast and you get a dozen applicants per day so you might be vacant a week every 4-5 years. The highest I’ve paid for a turnover above the tenants security deposit is less than $2,000 over a dozen properties and 20 years. We’re slowly removing carpet (which I prefer.) because it’s usually the biggest expense.

It’s fun getting the open door/offerpad/Zillow offers for a property every couple weeks for an extra $10-$20k each time.

Account Closed · Answer

The profits I showed do not include the money you earn from depreciation and while I've been investing in real estate for more than 50 years I don't really know how that works because that is what I pay my CPA to take care of, but I think the money earned is significant and increases your ROI.

As for selling my homes in Las Vegas, I did not make a mistake because I used the money to pay off mortgages with 5% to 6% interest rates for large apartment buildings and I am saving $16,000 every month in just interest. So, even though the properties increased in value I am saving $192,000 every year for mortgage interest I was paying in Los Angeles.

Now, I am getting a $2 million line of credit for about 3.5% and I still won't pay interest unless I use some of the money. Since rental unit prices are too high in Los Angeles I am going to buy properties at auctions and flip 2 or 3 properties every year. Hopefully? If not, I am still saving $16,000 per month for interest payments and I am saving $20,000 to $30,000 every year by not owning out-of-state properties where my management and repair costs were killing me. My total savings every year for selling my Las Vegas properties is no less than $192,000 + $20,000 = $212,000 per year. My 28 Las Vegas homes were increasing by more than $212,000 per year, but I am 71-years old and getting too old to deal with cleaning the homes because it costs me $6,000 to $8,000 to clean each house and I personally do the work with 3 employees.

Jody Sperling · Answer

You're in a complex situation, and it sounds like there's a miscommunication between all parties and the appraiser. You might want to contest the appraised value and provide your own comps. It could be a long process, but probably worth it. @Billy Daniel is right that someone's not doing their job.

I also agree that a door between the units is a bad idea. But to your broader question, there's almost no time that is a bad time to buy real estate. There are only harder times and easier times. Right now I don't know anywhere in the country where it's easy to buy housing. Keep up the good fight. House hacking will change your life in a the best way. Don't give up!

Joseph Schommer · Answer

@Evina Nonato. It's important to look at your financial position before making an appreciation play. These guys on this thread are all coming from a super secure place where they can foot a huge emergency cap ex bill while they wait for appreciation. Can you? If so go for it... If not, build up that cash flow/reserve first.  Don't be convinced by half a million dollars in appreciation on someone else's deal.  Be careful to not become a distressed seller.

Account Closed · Answer

I did my first 1031 Exchange in my lifetime last month for one of my son's homes in Las Vegas and never had a clue regarding how they work. I am a buy-and-hold investor and never plan to sell my properties, but my management company in Las Vegas was doing a horrible job taking care of maintenance and after paying the management company more than 9% of the gross income for a poor job and after spending $6,000 to $8,000 to clean every home and after having to travel to Las Vegas for up to 10 days at a time to clean as many as 2 to 4 homes at a time I did the math and decided I can make far more money in Los Angeles and I won't have to work because I have very good crews already working for me. That was a long sentence???

I did not do last year's taxes and expect to pay about $350k to $450k for capital gains taxes, but I am also used the proceeds from the properties to pay off some large mortgages and I am not saving $16,000 per month or $192,000 per year plus I am sure I am saving about $40,000 per year by not having a management company in Las Vegas. So, I should recover the money I am paying for capital gains in less than 2 years and even though I lost the future appreciation from the Las Vegas properties I will still come out even or doo better since I am getting a $2 million line of credit I will use to purchase properties at auctions and hope to make about $500k per year flipping house without working too hard.

I am definitely not the smartest investor when it comes to leveraging my money and I know I could have made several million dollars more if I did a 1031 and purchased an apartment building in Los Angeles, but I don't function well when I am pressured when I put myself in a risky position.

I always feel that when investors leverage their money their empire can come crashing down like dominoes when one property goes south.

Steve Vaughan · Answer

Thank you for sharing with us, Jack.  Not many 50yr investors on here!

I am hoping you can share how to sell so many homes in the same calendar year without getting creamed at tax time?

Maybe at a certain level it doesn't matter, but I've been selling max 2 per year and often exchanging one to stay tax efficient.

I accidentally input one as a sale on my tax software that I exchanged and my tax bill alone would have been $62k.  I corrected it to relinquished vs sold, but 24 properties? Or your son selling 5?

Any insight into selling many in a tax-efficient manner is appreciated!

Should I buy in this crazy housing market?

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