First Time Buyer - Investment Advice

First Time Buyer - Investment Advice

Member since 2020 · 3 posts · 0 votes

First time home buyer, looking to buy an investment property in New Orleans. Looking to buy a double, long term rent one side & Airbnb the other side (due to laws in New Orleans, doubles make the most sense for Airbnb purposes). 

Background: I have been pre-approved for up to $500k but am looking to buy in the $250k-$300k range. There are places to be bought at this price, I have an Airbnb income model to help me calculate cash flow (I am open to other models you may have). My rate is 4.625% on a 30 year FHA (could also do conventional if needed).

My Dilemma: Cash to cover 1) closing costs 2) down payment 3) furnish the Airbnb side of the double would be around $30k on an FHA and $85k on conventional at $300k purchase price. Monthly expenses project to be around $2,300 and I am estimating that I can bring in at least $3,000 in rental income ($1,300 on the long term side and $1,700 on Airbnb). Rental income is a conservative estimate.

The two options in mind (feel free to enlighten me to other options) revolve around the FHA $30k cash. I can sell 11 shares of Amazon stock to cover the cash needed and buy the property now or I can save up $30k over the next 12 months (definitely do-able for me) and put a down-payment on a property with saved cash.

Pros/Cons that have come to mind in no particular order: 

If I wait to pay initial costs with saved cash and kept my Amazon shares:

-I would avoid paying long term capital gains from selling 11 Amazon shares, estimated $5,000 in taxes (pro)

-Interest rates could rise in the next 12 months requiring me to need more than $30k in cash for the FHA/buy a more expensive property (con)

-Housing market could keep inflating over the next 12 months requiring me to need more than $30k in cash for the FHA/buy a more expensive property (con)

If I sold Amazon shares now and purchased the property:

-I could lock in an interest rate and refinance in the future if rates go down (pro)

-I would start gaining at least $700 per month in cash flow over the next 10-11 months (pro)

-Amazon stock could appreciate over the next 12 months while the real estate market could depreciate  (con)

-I would incur about $5k in long term capital gains from selling my Amazon shares and I would also miss out on any future appreciate of those 11 shares (con)

I tried to keep this as short as possible while including relevant info and things on my mind. I am prepared to hold this rental property long term. I would love to hear advice/pro-tips and lookouts for things I may not be considering.

Initially it seems it really boils down to performance of the housing market vs performance of Amazon stock but maybe I am oversimplifying it - I will greatly appreciate any and all feedback!

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Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
4y

Talk to your lender about raising your interest rate in exchange for a closing cost credit. That way the lender pays part of your closing costs.

The other option is to find properties that have been sitting on the market and negotiate. I did that for a client where we raised the price in exchange for the Seller to pay all of the closing costs. Seller nets the same and the buyers put less out of pocket.

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  • Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    4y

    Talk to your lender about raising your interest rate in exchange for a closing cost credit. That way the lender pays part of your closing costs.

    The other option is to find properties that have been sitting on the market and negotiate. I did that for a client where we raised the price in exchange for the Seller to pay all of the closing costs. Seller nets the same and the buyers put less out of pocket.

  • Real Estate Agent · Montgomery, AL · Member since 2022 · 8 posts · 3 votes
    4y

    What I recommend is doing a cost-benefit analysis, essentially what you're trying to find is will you be able to make enough from the appreciation of amazon to offset any change in cost that would happen between now and the time you buy. You'll want to find a few projections for amazon and take the average appreciation of the projections, and compare that to the average appreciation of the potential purchase added to the rental income. If you find that amazon won't be able to appreciate at the same rate as any changes in the property then you will want to buy now. If they appreciate around the same rate, and you decide not to buy now then it should offset any extra costs associated with waiting. If amazon has a much better rate of appreciation then you will most likely want to wait because that appreciation will be greater than any costs you would have with waiting. I want to warn you that I have not done this in practice, but in theory it should be a great starting point for cost comparison. 

  • Member since 2020 · 3 posts · 0 votes
    4y
    Quote from @Rick Albert:

    Talk to your lender about raising your interest rate in exchange for a closing cost credit. That way the lender pays part of your closing costs.


     Thanks Rick, if I go this route - is this something that is easily able to be re-financed let's say 1 year from now (if interest rates drop) without the lender wanting the credit back?

  • Member since 2020 · 3 posts · 0 votes
    4y
    Quote from @Zachary Ellis:

    What I recommend is doing a cost-benefit analysis, essentially what you're trying to find is will you be able to make enough from the appreciation of amazon to offset any change in cost that would happen between now and the time you buy. You'll want to find a few projections for amazon and take the average appreciation of the projections, and compare that to the average appreciation of the potential purchase added to the rental income. If you find that amazon won't be able to appreciate at the same rate as any changes in the property then you will want to buy now. If they appreciate around the same rate, and you decide not to buy now then it should offset any extra costs associated with waiting. If amazon has a much better rate of appreciation then you will most likely want to wait because that appreciation will be greater than any costs you would have with waiting. I want to warn you that I have not done this in practice, but in theory it should be a great starting point for cost comparison. 


     Makes sense Zachary, my concern is finding housing market/property appreciation estimates that are reliable enough (I understand nothing is perfect). I can probably find estimates for Amazon stock but where would I look to find reliable estimates for a potential property?

  • Investor · New Orleans, LA · Member since 2012 · 969 posts · 747 votes
    4y

    I am both an investor and a licensed broker in New Orleans. I have a couple of clients looking for doubles now. There isn't much out there under 300k that is in a decent area. I just took a look on the MLS, there are 53 doubles/duplexes that are active listings, but they are pretty much all in sketchy areas. See map below:

  • Real Estate Agent · Montgomery, AL · Member since 2022 · 8 posts · 3 votes
    4y
    Quote from @Anthony Borge:
    Quote from @Zachary Ellis:

    What I recommend is doing a cost-benefit analysis, essentially what you're trying to find is will you be able to make enough from the appreciation of amazon to offset any change in cost that would happen between now and the time you buy. You'll want to find a few projections for amazon and take the average appreciation of the projections, and compare that to the average appreciation of the potential purchase added to the rental income. If you find that amazon won't be able to appreciate at the same rate as any changes in the property then you will want to buy now. If they appreciate around the same rate, and you decide not to buy now then it should offset any extra costs associated with waiting. If amazon has a much better rate of appreciation then you will most likely want to wait because that appreciation will be greater than any costs you would have with waiting. I want to warn you that I have not done this in practice, but in theory it should be a great starting point for cost comparison. 


     Makes sense Zachary, my concern is finding housing market/property appreciation estimates that are reliable enough (I understand nothing is perfect). I can probably find estimates for Amazon stock but where would I look to find reliable estimates for a potential property?


     Corelogic keeps a national home price index   that they use to project future appreciation so I’ll put the link below. It’s fairly accurate projections as they have a 95% statistical confidence which means they have a 5% chance of being wrong. Also, it’s worthy noting the appreciation rate margin of error is 2%, so you can tailor yearly projections up to 2% below or above based on your risk profile. It’s also a national average so if you want to get more specific I’ll attach a link to the federal housing finance agency page that keeps historical data that’s sorted by state and national levels. It would be a lot more time consuming to go through that data to scale the projections relative to the state you’re in, but it will definitely give you a more complete estimate. 

    https://www.corelogic.com/inte...
    https://www.fhfa.gov/DataTools...

  • Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes
    4y
    Quote from @Anthony Borge:
    Quote from @Rick Albert:

    Talk to your lender about raising your interest rate in exchange for a closing cost credit. That way the lender pays part of your closing costs.


     Thanks Rick, if I go this route - is this something that is easily able to be re-financed let's say 1 year from now (if interest rates drop) without the lender wanting the credit back?

    No because you raised your interest rate to compensate. Once the loan funds and the escrow period closes, it is what it is for the lender. I did it on my property. I raised the interest rate, got the credit, and then refinanced later on. Keep in mind I also did it with a different lender.

    Of course mortgage guidelines are subject to change. 
  • Real Estate Agent · Annapolis, MD · Member since 2017 · 110 posts · 82 votes
    4y

    I would think that your net income from Airbnb will be significantly more than market (long term, unfurnished) rent. Not sure I understood the numbers properly. Perhaps one side is significantly smaller? If you are somewhat close to the property and can manage it yourself (but still get help with cleaning etc) and the STR license gets approved I'd suggest the STR route for both sides.
    Best of success to you! 

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