Bank on appreciation and resell or rental income?

Question

Hi everyone!  I am so thrilled I found this forum because my husband and I can't decide if we should take the risk with a potentially really great investment out of state.  Some more info:

This property is located in the Bay Reach condominium community in West Palm Beach, FL (I live in Va).  It is not on listing as the seller is a for sell by owner, and wants to avoid realtor fees.  I heard about this deal from my coworker who has several units in the same community (he's making great money!  But he also bought his units for $40k-$150k about 3-5 years ago at the housing crash).  Seller is asking $155k, she bought it in 2005 for $250k. HOA fees is $350/month.  Tax: $1400/yr.  Insurance: $900/yr. Listing fee equals one months rent (I don't live in the area so I would need to hire a realtor to rent out the unit).

The condo can be rented for $1300/month.  Highly desirable neighborhood with good renters and little vacancy.

Here's my question:

Do I purchase it in anticipation of the rising market and value appreciation?  My coworker said I should buy now for $155k because the values are increasing since all the foreclosures have been sold and renovated.  A unit similar to this one (same complex) is listed for $170k.  Attached is the photo of the report calculator that I found.  It shows a net loss of $1-2k for the first few years.  Should I purchase this property in spite of the minimal initial loss in anticipation that I can sell it for a huge profit?  My coworker said at the height, the property was valued to $350k.

The seller wants an answer by next week as she urgently needs to sell and if I do not act quickly, she must list it (~$175k).

Please help me!  I am losing sleep over this (it's 2am yikes).

Michaela G. · Answer

I agree with others: This really isn't a good deal .

You don't know what's going to happen in 10 years. You may get a fantastic offer in Bora Bora and never move to FLorida. What may look good for you now, may be completely different down the road.

Also, if the values are going up and you don't want to or can't buy in your area, what keeps you from putting your money into another area that has good deals and then sell in 10 years? If the values have gone up, then you'll have profit and it's not any different from having property in Florida, if you're long distance.

What you're doing is speculating, not investing. You're speculating that the values are going to go up and if not, well, you're out of luck.

Can you carry the additional payments, if you don't have a tenant right away? What if you have to evict and it takes you a few months? What if the HOA decides that they no longer want any condos as rentals, but rather owner-occupied?

If you want to buy it as a 2nd home and have the income to carry it and have some extra income from rent - then go for it. But it's not an investment.

Sorry to be so blunt ;-)

Katharine Chartrand · Answer

I find it is very hard to make good decisions when you mix up your personal plans and goals with your business goals. The house doesn't make sense as an investment, so you are trying to make it add up by including personal goals values.

It's hard enough to make good business decision, but when you bring in personal stuff, you're almost guaranteed to jump off the rails.

Chris Vail · Answer

Account Closed

In both of your scenarios you are counting on appreciation.  This is neither right nor wrong but a gamble that you and your husband need to agree upon.  There is no way to know what the house price will be in ten years, if you could every person on this site would like to talk to you about a potential property :).

If this is an investment you are looking to make you need to balance all facets of it with your expectations and make them realistic.

How would you feel if you purchased this property and in ten years it was in a down cycle and was only worth 40k?  100k?  150k?  Would you still be happy with the investment you made?  Not trying to scare you but want you to think about the downside as well as the upside, your co-worker has much less downside in his properties due to the timing when they were purchased.  It is possible that the property will appreciate to 200k or even 250k but when looking at an investment you need to look at the downside as well and do your best to protect yourself from that risk.

That’s where the cash flow comes into play, if this property was cash flowing $0 to some positive number a month the fluctuations in price would be easier to swallow as the investment would still be cost neutral or making money and it would be less painful to wait for the upswing in the market you would be looking for to sell and make your gains.

Just my two cents

Account Closed · Answer

Update:  Seller has agreed to lower sale price and seller concession of 4.5% closing.  This brings a positive net cash of approx 100-150/mo dependent on higher or lower vacancy rate.  Getting an inspection this weekend, hoping all goes well! :) :) :)

Account Closed · Answer

Thanks everyone for your replies!

Just to keep you posted:

- I have to put down 20% $31k which lowers my mortgage and the monthly expenses come out to about $1350.  Lender stated this is required since it's a second home in the state of FL - they have this requirement for FL and Nevada.

- I am negotiating with the seller the following:

155k, all closing costs paid by seller, and extra parking space, close by June 30.

The extra parking currently generates $100/monthly.

Monthly income $1400

Monthly expenses $1350

The cash flow is negligible borderline neutral but I really do want this place for its location on the intracoastal and in such a beautiful neighborhood.

Btw the report states my income to expense ratio is .90% (rule 2%).

How is that calculated and what does that mean?

Account Closed · Answer

Thanks all for your replies. I guess if this was a cash purchase, it would be good. I was so caught up with my coworkers hype that I wanted in on a piece of that.  I probably wouldn't vacation there as I need rental income.

The reason I'm looking at a REI in West Palm Beach FL, is that I hope to move there permanently in 10 years (various reasons, weather/beach/calmer lifestyle and cost of housing).  We figured if we purchase a home that we love, rent it out, pay extra on monthly mortgage we could move there in 10 yrs mortgage free, take time finding jobs etc.

I can neither buy nor let alone REI locally as I live in the DC metro area which is extremely unaffordable in terms of real estate.  Since I commute to DC for work, any homes near or around a metro station costs an arm and a leg.  The townhomes in my neighborhood (22180) sell for $650-700k! I researched and for a good neighborhood close to the metro and TH, I'm looking at $450-550k.

Below are two viewpoint (one is risk taking and one is risk adverse).  Please let me know which one is better in terms of building wealth and also having a nice home.

1.  My viewpoint: Buy something now to build cash flow and ROI later.  Even if cash flow is minimal or awash, bank on ROI and sell when value appreciates.

2.  My husband viewpoint: Save for 10 years and pay for a home in cash.  I worry about this one because with the markets appreciating so much, I'm afraid in 10 years I will not be able to afford any homes with the $300k that I would have saved.

I want to get our foots in real estate so that we are not shell shocked by homes in West Palm Beach selling for double in 10 yrs.  Do you think this is a valid concern or if 1 or 2 makes more sense?

Jared K. · Answer

My opinion may be straight forward and not exactly what you want to hear but its with good intentions either way.

Rule #1 Always have multiple exit strategies--supported by current true #'s and bank on the what if's!!! Have several more what if's than your intended outcome in mind, just in case.

Rule#2 Never bank on only appreciation! Look what happened to the entire economy. I can understand in a HIGHLY appreciating market that could be ONE of your exits but the #'s still need to make sense for your other exits... just in case! Otherwise your gambling, not investing. Ask yourself this...What if the stock market/economy crashed tomorrow? Did you buy safe enough to rent it out competitively lower if you had to and still make money? Would you want to hold that investment for several years from afar if you had to given the costs involved?

Just my blunt honest thoughts but I have good intentions. I wish you the best of luck :) with your endeavors!!

Sean OToole · Answer

I'd just add to be careful not to confuse true appreciation (the value of the house going up) with inflation (the value of the dollar going down) or credit cycle driven price increases (the cost of borrowing going down).

In my opinion the only time you are likely to see true appreciation is when an area goes through economic transformation - small town turns to resort destination, local industry (ie tech or oil and gas) booms, or something of that sort. Historically there is little evidence of other real appreciation, which can not be better explained by inflation or credit terms.

I'm not saying that its not ok to invest in credit cycles, or to use real estate as an inflation hedge. Just please don't bank on price increases to make your deal work when there is little or no economic transformation in your target area, we have historically very cheap credit, and inflation is low (at least officially).

Joel Owens · Answer

I don't like condo's. You generally have no control. The special assessments on top of HOA can eat you alive. What glitters is not always gold.

Have you visited West Palm beach many times?? Take a few trips down for vacations and a real estate expense and see if it's all you think it is. Your hopes about it and reality may be different.

You friend bought when prices were very low. Kind of like a stock just turning around and very risky. Now the stock had gone up very high and everyone is buying in creating more demand. The question becomes when will the stock start going down or will it eek out  a few more dollars.

On a pure appreciation play you do not buy at the top of an investments cycle.

Bank on appreciation and resell or rental income?

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