Make Money on the Buy or Save Money?

Question

We are relocating to Cedar City, UT where my husband has a new job at the college. We already have a few properties there so the move makes sense. We have been looking for a small-ish property we could snatch up to live in while we decide on a house for our family. We found two we really like and here's the question. Prop #1: comps are at 225k, we can get it for 196k, cash buy, Rents at 1200/month, zero fix ups needed. Prop #2: Smaller townhome, comps at 139k, we can get it at 137 (owners won't go lower) cash buy, rents 1000/month zero fix ups, has HOA $75.

So the question is should we make nearly 30k on the buy or should we save 50k and get a smaller (just as nice) property?

Thanks for any ideas/ suggestions!!

So the question is should we make nearly 30k on the buy or should we save 50k and get a smaller (just as nice) property?

Thanks for any ideas/ suggestions!!

Steven Bond · Answer

@Alison Kovac and @Shaun Hunt you two are awesome.  I love your practical approach to getting it done.  Good luck in the Cedar Market. Sounds like you're doing awesome things.  If they don't already have one, you should start a local Real Estate Investors Association to start opening up new opportunities and networking for your local market.  Take care!

Shaun Hunt · Answer

That's awesome that you can pick up both places.  I am stuck for a few months or years.  I was able to pick up four houses and a duplex over the past four years. I now owe $700K on a school teacher's salary.  It's tempting to buy another, but I'd better pay down some of that debt.

We were also able to pick up these homes at a great discount.  The last one we picked up was out of our comfort range, but the numbers were able to work out just enough for us to pull the trigger on it.

Do you manage your own properties?  We do.  We take care of all maintenance, including yard work.  It gives us the opportunity to pay our kids and teach them how to work.

I think it would be a good idea to swap ideas and stories.  The only mentors that I have had are books and bigger pockets podcasts.

Wes Brand · Answer

@Alison Kovac If it would assess at 225k you should be able to cash out refi it after 6 months and pull at least 157k(being conservative and leaving 30%/67k in the property; you can probably do 20 or 25%) back out -- using the same 30% down on the smaller townhome means you pull out 97k(leaving 41k in the property) so your actual out of pocket cost difference between the two is only ~25k. Mortgage payment on the more expensive property would be ~740/mo, on the cheaper one ~460+75, or ~535, though that doesn't matter as much -- where it comes into play is "what are the financials of the HOA like?" If the HOA has a million in reserves, you probably don't need to worry much about rates going up or special assessments. If they have $10 in reserves there's probably a special assessment or rate hike coming up.

Second, and far more importantly: What is the market for condos and SFH like in Cedar City? Which is more in demand? Which will appreciate more? (or will one depreciate?) Which one is in the better part of town? Which will be easier to rent? Keep your exit in mind even if you don't plan to sell -- if the appraisal is higher you can cash out refi as much $ as the rents will support.

James Steele · Answer

I would think it might depend on your goals for the house. If you're wanting to sell it when you move, or use it for equity leverage later, the first choice sounds better. If you want to rent it out, the ROI seems to be slightly better with the second one, even counting the HOA fees. If the taxes and insurance are cheaper as well, that's another point in its favor, assuming the HOA fees don't go up substantially. Not to mention keeping the extra $59k more liquid.

Take my opinion with a grain of salt, I'm inexperienced, and what seems to make sense on the surface, may not in the long run.

Alison Kovac · Answer

SWAT team?? Thanks so much for the responses!! We are closing on the 196 today and we're also getting the townhome!! We love Cedar, it has been a great place for us to invest (partly because the big UT investors tend to stay in SLC or Provo, and to the south is ST George/ Vegas so the bigger investors don't come to Cedar as much).  Prices are going up though. A couple of years ago we were able to snatch up foreclosures in mint condition, but now it's a bit more difficult. Still, the rents are great and the home prices are lower than in other areas. @Shaun Hunt, feel like meeting up in Cedar, swap ideas about the area? We haven't had any problems keeping our places in cedar full. Haven't missed more than one week of rents.

Shaun Hunt · Answer

Cedar City is a wonderful place.

As of now, rentals can be hard to find. SUU students were/are having a hard time finding a place to rent.

The helicopter school has added a lot as far as taking up apartments and adding to the economy. I rented to students from Upper Limit Aviation for two years.

I have six units here. I am been lucky enough to have my places full right now.

I have had a few set backs. The biggest is when a tenant had a SWAT team standoff and burned my home in the process. $65,000 in damage.

A local family is investing millions of dollars into new student housing. The latest is a huge complex at 200 N 300 W.

If you can't buy both sides of the town home for $136, the $196 home sounds better.

There is a shortage for homes in the 100-200 range. One Realtor had nineteen homes in December and had no problem unloading each of them.

Is there any give on the $196?

Have you had any trouble keeping your other properties filled with tenants?

Make Money on the Buy or Save Money?

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