$250,000 House or $60,000 House?

Question

Hello everyone -

I am new to this website as well as new to real estate investing.  I was considering getting a house in Southern California currently selling for $250,000 as an investment.  I am ready to put 20% down payment on this house.

Having read most of your posts I am second guessing my decision.  It seems that majority of the post I have read talk about monthly/yearly cashflow.  I understand current economic conditions and possible future risks associated with my potential purchase.

Rent charged would cover my mortgage but I would obviously not be even close to the 50% rule.  Price of this house at its peek was about $480,000 couple of years ago.  I understand that it might take more then a decade for prices to get where they once were.  I am ready to wait it out.

My question to you all is : "Am I completely off by considering to purchase this house as an investment?

Any advice would be helpful.

Thanks

Jon Holdman · Answer

My estimate is this house won't be worth anywhere near $480K a decade from now.  That's equivalent to 7% annual price appreciation and that's just not going to happen unless there is some specific, local driver.

Even two decades from now it MIGHT be worth $480K.  That's roughly 3.5% annual appreciation.  That's in the realm of possibilities.

If the rent just covers the PITI payment, you MUST, MUST, MUST plan on coming out of pocket to stay in the property.  You WILL have vacancies.  You WILL have expenses like roofs, AC units, painting, carpets.

To truly be break even, you need $3000 a month in rent on this property.  If you manage it yourself and are willing to work for free (this WILL get old after a while), you might get buy with $2500 in rent.

If the rent's less than that, what's the point?

If you can swing the down payments (25%, not 20%), but cheap house with a decent rent/price ratio.

Mike McKinzie · Answer

Purely on a "Cash Flow Basis", this investment is right there with Enron and World Com Stock.  As an appreciation investment, it could be a Microsoft Stock or a Lottery Ticket.  Having worked in the Orange County Real Estate Market for two decades, I can tell you about the wild swings, the lows of the 1970s to the highs of the late 1980s, the lows of the early 90s to the highs around 2006, and now back to the lows again.  Unlike Jon, I believe there is a 50/50 chance the house will sell for over $400,000 by 2020.  I have seen it happen, twice.  There is probably a 10% chance it will be worth LESS in 2020 than you pay and a 40% chance it will be worth between what you pay today and $400,000.

I have an investor friend buying homes in Riverside, CA for $50,000 to $60,000 and renting them out for $1,200 a month.  They are requiring around $10,000 in rehab, but the cash flow is good.  These homes used to sell for $250,000 at the top of the market.

Instead of Orange County, where investor competition is extremely strong, go out a little ways, Riverside, Hesperia, Yucca Valley, Moreno Valley, Redlands, and see if you can pick up a $50K-$60K house that will rent for $1,000 to $1,200 a month.

Marcus LaGrone · Answer

Sasa,
I think the other members made some very valid points so I won't keep beating a dead dog.

Have you considered purchasing outside of your local area in order to reach the goals that you have set?

It always amazes me how "investors" will stay local and try to force a mediocre deal as opposed to finding an area that they can familiarize themselves with that will reap the benefits they are looking for.

Ted Harris · Answer

Yes ... see above.  Couldn't have said it any better than Jon.

Josh Keys · Answer

I have found that there are better oppurtunities to make money from buy and holds at the lower end of the market.  
                              
                              At a price of 250k, the rent needs to be fairly high for you to be cash flow positive.   (this is why the returns are so low where I live in Australia, or in places like SoCal, San Fran NYC etc).  Rents havent kept place with property prices, and although this is likely to be a signal that prices in that area will rise, hard to see them almost doubling in the medium term.  
                              
                              Really depends on your strategy here.  Are you looking for a mix of regular income and capital gains or just straight cap gains?  If straight cap gains, you are probably in the right area of the country for SOME growth.  If you believe you will make 5 years of $5-10k per year loss but realise a $100k cap gain upon disposal in 5 years, its probably worth some risk.  Others would say forget it, and buy in an area with growth AND cash flow.  
                    
                    If looking solely for immediate cash flow, you should be considering the areas with higher cap rates (eg, sun belt, mid west etc).  Im sure others can recommend areas in SoCal that positive cash flow though.  Im not familiar with it.

These are probably all obvious points but I think they are worth raising.

$250,000 House or $60,000 House?

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