Spend $140k to earn $4500/yr?

Question

A new property came on the market in my (expensive) area. We're in the shadow of Vail ski resort, a mix of old ranching, new recreation, trust funders and up-valley commuters. Between the mountains and National Forest, land is scarce so prices are high.

Asking price of $725,000.

The main house was built in 1898. Remodeled in 2000 really nice (little dated, but I expected much worse). Floors aren't creaky, modern plumbing and electric, steel beams stabilizing the ground floor (as viewed from dirt crawlspace). So I think the remodel was extensive and done well.

Carriage house log cabin out back is super cute. About 500 sf plus loft with bedroom. Nearly vertical ladder type stairs, peaked roof does not have a ton of head clearance up top.

Big nice yard. Zoned commercial, so there are options (including maybe a run at Airbnb in carriage house), but highest and best use is likely residential for now. Grand old style home, lots of character and nicer than I thought it would be. My wife loved it.

Current situation: Early 30s, both live and work in town in professional jobs (CPA, real estate appraiser). If eventually one or both of us wanted to start our own business or work from home, it could be done in this commercially zoned property. We currently own 2 properties in town: 1 newer 3 bedroom home plus 1-bedroom carriage house above 3-car garage. Grosses $4360/mo, nets $1450. That helps offset our current primary: older 3 bedroom plus 1-bedroom lockoff, which is rented below market to great neighbors/dog sitters for $975/mo. Our total monthly cash flow is $28 (living for free, plus $28 - this factors vacancy and collection loss, mortgages, reserves for replacement, etc. - I'm the appraiser...).

We have nearly saved up $140,000, which happens to be about 20% for the new listing. By renting our current house at $2400 and the new carriage house at $1500, our monthly cash flow increases to $375 and we'd be living in a great house, but no garage (it snows a lot here, current house has a 2-car garage).

First of all, I must thank this forum, Mr. Money Mustache and the recession for getting us started on our real estate journey, and our gainful employment for saving up a bunch and the stock market (betterment account) for giving us an extra $10k or so for free. It's incredible that 1) we actually have a 20% down pmt saved up for a property that expensive, and 2) that, after running the numbers, it actually is cash flow positive.

However, $140k is a **** ton of cash to earn $4500/yr. That's a 31-year payback... I want to make sure the deal makes sense now, because I have no idea where the future is heading. We would like to accumulate more real property at this age and hopefully start a family soon and hopefully retire early. One thing about this market is that it is somewhat similar to California or NY, with the scarcity and appreciation. Our first house from 2013 has gone from $405k purchase price to about $700k now. Rents have increased about 5%/yr. I don't want to buy on speculation that these circumstances will continue, but it's a stable market and I see no downward forces in the near future.

So is it a good move or a stupid buy?

Ryan K. · Answer

After sleeping on it, this property would not bring us closer to our goals. It would be a vanity play, stoking our egos to move into a nicer house. Running the numbers, this one wouldn't make sense unless the price dropped a bunch, to about $500k.A good friend and former colleague (very smart appraiser) once told me that you make money in your own market because you know it better than anyone else. He sees investors stepping out of their area and losing their butts all the time. So I'm trying to stick to what I know, but I'm priced out of this market.I grew up in a mid-sized Midwestern town. I can buy a house for $30k there, a nice place for $100 and a sweet house on acreage for $250. I found an 8-plex for $250k with $55k profit per year. I've never bought in that market but have family there and still love to visit. This seems like a much better option to build wealth and early retirement.

Ryan K. · Answer

OK stranger on the internet from across the country. Where can I send the check?But really, I need to find better options because its too expensive around here.

Evan Torrens · Answer

Would never have you send a check without showing you a property and structuring a deal first. Come to Philadelphia. See for yourself.

Omar Khan · Answer

@Ryan K. To play Devil's Advocate, many of the areas you've mentioned have minimal, if any, capital appreciation. To my knowledge, Vail, like most richer areas heavily relies on property values going up YoY (not saying it will always happen or it will happen in this case). These properties are also, relatively, more stable in pricing (depending on the area). For instance, many rich folks own homes in Canmore, AB (Canadian Rockies). Even with the prices of oil going from $100 to $40/bbl, the house prices retained their value. Reason: The average home owner wasn't in a cash crunch and could afford to ride out the bad times.Many investors dedicate a portion of their portfolio to higher potential return properties for this exact reason. Focusing on cash flow is super important but it has to be balanced by looking at the potential for total returns. E.g.: real estate in LA, San Fran, Seattle, Boston. Investing in these markets purely looking at cash #s wouldn't make sense. But some of the richest real estate investors in the world are playing in these markets and profiting handsomely.

Roger S. · Answer

It's way out of my comfort zone. Wow. I've got houses I paid 45k for make more a year than that, after accounting for ALL expenses.

Ryan K. · Answer

Too expensive relative to your market? It's the cheapest SFR in my market.

Caleb Heimsoth · Answer

I personally wouldn’t buy this property. It’s too expensive.

Ryan K. · Answer

Our market is so nuts, I'm back to thinking this property is a good investment. There is a huge demand and no supply and prices keep climbing. I ran a stress test at a 10% drop in rents and it was still positive cash flow (barely). Just wary of how frothy things are now...Everyone is a little nervous but (barring nuclear war, which seems like a decreasing risk) I see no reason for the local music to stop.Is it a silly time to buy? Is it ridiculous to buy an expensive property in my area? My other properties in this area have appreciated significantly in value and rents. I've been studying national and local market and wish I had a crystal ball.

Ryan K. · Answer

Thanks for the offer! I didn't mean to single you out. I would prefer something west of the Mississippi though, never been too interested in the East Coast.A colleague of mine moved to the mountains from Florida. He thought people would pay crazy for the beach, until he saw the ridiculous prices to be near a ski lift. I'm about 20-30 minutes down valley, in the "affordable" locals area but the prices are pushing this way from both the resort and the overcrowded CO Front Range.

Evan Torrens · Answer

I would not do that deal my friend.