Rookie, HCOL area, cash buyer, thoughts?

Question

Hello and thank you. Rookie here. I am in Newton MA and not in a rush.

Looking to slowly (cash buyer) diversify into real estate. I live in MA and it is a high cost of living area (Newton).

I prefer the following: 1. buying near my home (I was a long distance landlord and had a bad experience) 2. I prefer to pay cash. I know I could take more risk with leverage and improve my returns but I am a small business owner and I have a lot invested in the stock market so I think I have enough risk.

My questions:

1. For condos: what is the max HOA you will consider? How do you figure the HOA into your investigation

2. How do you personally value properties? For example. I am looking online now at a property that is for sale in my area.

With the simple 1% rule if I paid 450k cash for this property it would need to rent for about 4500/month. Other than asking for similar properties in the area and for how much they are currently renting what else do you look for?

Here is the link:

https://www.redfin.com/MA/Ches...

3. I am in no rush. I know no one has a crystal ball, but as a cash buyer as interest rates rise do you expect the market to cool off a little?

Thanks for the help.

Tom Wagner · Answer

Hi Tommy (nice name!) -- some good questions that I'll take one by one.

1) For HOA, I would just consider that an expense on your income statement that will affect the property's cash flow. If you get HOA benefits that increase rent (pool access, parking, etc.) make sure to factor that into your analysis as well.

2) Everyone values properties differently. Some investors invest for cash flow, while others focus on appreciation. In Newton it will be virtually impossible to meet the 1% rule, and I would instead focus on whether the properties are cash-flow positive (ideal), cash-flow neutral (acceptable) or cash-flow negative (not good). Of course this changes with 100% down, so I think the best way to compare properties would be by calculating Net Operating Income (using the Bigger Pockets calculator or similar) and then calculating the properties cap rate (NOI / purchase price). Some somewhat-complex terminology in here so feel free to ask follow up questions, or hit up the Bigger Pockets youtube page.

3) The interest rates question is top of mind for everyone right now and it is impossible to know how they will impact the market. Personally, with supply still at or near all-time lows I don't think rates will affect the market unless they push past 5% (which seems possible). If more supply comes online while interest rates are >= 5% that's when I think we will see a modest correction, but it is impossible to know for sure and I don't foresee significantly more supply coming this year. As rates push higher sellers also become disincentivized to sell because they'd be going from 2.X% or 3.X% interest up to 4.7% (or whatever rates are tomorrow, since they seem to fluctuate 20bps per day these days)

Hope this helps and happy to chat further!

Conner Olsen · Answer

@Tommy Burch In many markets the 1% hasn't worked in years, especially after the insane appreciation the past 3 years. I would analyze some deals to find out what the rent/price ratio is in your area that would make a deal for you a 'good deal'. For me, I know that duplexes in my area are listed from 0.65%-0.8% for the rent/price ratio. From there I can quickly tell if the rents are good enough and if the area is good to analyze it further.

For condo HOA's I don't think the price of the HOA matters as much as the HOA rules. They can be restrictive at times and can kill your cashflow with special assessments and tank your property values.

Joe Facenda · Answer

So many questions.

What was the issue owning long distance? Why couldn't you just buy elsewhere and do it differently so as to avoid that issue you had before.

Why o why do you want to want to buy a 1 bedroom hi rise condo as your only rental property?  Now I know nothing about your market but that particular type of housing is often the hardest to rent and hardest to sell.  Even more so now when folks work at home.  2 at home professionals trying to zoom in a 1 bedroom?  Pretty tight!

You are afraid of risk?  Diversify geographically by buying 3 detached homes in less expensive markets vs going all in on hi rise condo?

The amount of the condo fee as a stand alone data point is irrelevant.  Factoring in the condo fee, does the property give you a decent return?  Whether $100 or $700 makes no difference.

1% rule?  Pretty much forget about it.  Again, I know nothing about your market but I would be shocked....shocked.... if that 1 bedroom condo rented for $5700.

The $150,000 detached homes in other market will rent for about $1200-$1300.  Pretty decent for B neighborhoods.

Last, why wait to save $575,000 when you can buy for much less elsewhere?  Get started now.

And last, last, never try to time the market.  Stuff happens.

Ever hear of Covid in 2019?  And when you did in 2020, you probably thought it would kill the market.  It didn't (Well early on there was one category it did kill - downtown hi rises. People didn't like elevators, closed amenities and who needed to be close to commuting routes?)

Were you thinking Ukraine in 2021?  The horror and tragedy that country is experiencing in the most important thing to think and pray about - obviously more important than rental returns.  But that said, there will an economic impact form the war. Can you project the impact of the sanctions being imposed on Russia?  How will that impact our economy 6 months from now?

When a property is right, buy it.  Does it cash flow and meet your metrics?  If yes, buy.  Don't try and time it.

Will the market slow?  Who the heck knows?  If you see inventory levels tripling in the next little bit, yes it will slow.  But even a drop off in buyer demand won't change the inventory problem.   When homes get 8 to 12 contracts, demand could drop off 50% and we would still be hot.

Don't over analyze.  Find the right home and do it.

One guys' thoughts.