Buy a house or a co-op?

Question

Ok, obviously I should buy the house, right? Why would anybody buy a co-op?

Well…. the situation is not so black and white.

My wife and I recently had our first baby! She’s a one year old girl now 😃

We’ve been living with family for the past two years and it SUCKS to live with family with a new baby. We need a place of our own… but rents are through the roof.

We are running a startup and have no real personal income but have $150k in savings.

We found a crappy house in Child’s Park, St Petersburg (next to Gulfport). The ask was $125k. With $10k of work it could have been worth $180k. We bid $140k. Somehow we got out-bid and lost the deal 😔

In our disappointment, we put a $140k offer on a $145k co-op in Sarasota. 15min drive from Siesta Beach… best beach in the USA! It’s a beautiful co-op. Turn-key. If it was a condo in that location it would sell for $200k+

And… we have an accepted offer 😳 🤩 🤯

I would be excited but… then I remembered about the BRRRR. I could BRRRR a house. I don't think I can BRRRR this co-op.

For one thing, there’s nothing to RRenovate.

Worse… the co-op building (44 units with a pool and everything) was built on a 99-year land lease. So banks can't lend on the units. That's why it's so cheap… that's why we can afford such a nice apartment in such a nice area (similar units in the building rent for $1600/mo)… but it also means we can't RRefinance and RRepeat 🫤 There goes my dream of a 100-unit BRRRR empire 🤦‍♂️

So… we have a "bird in the hand" … an accepted offer on a place we would love to live… but it doesn't seem like a great investment property, and it doesn't seem to lead toward my real estate BRRRR career goals.

So… should we back out of this co-op deal and wait for another deal to pop up in Gulfport instead?? I actually just hired a lead generation guy on Fiverr (like 5min ago) to find the contact info for every homeowner in Gulfport… I’m gonna cold call them all over the weekend before our due diligence period ends on Monday, to see if I can find any off market deals 😂

And another confounding factor here: the co-op board is now negotiating with the landowner to try to buy the land and turn the co-op into a condo! If that happens, the co-op goes from $140k to $200k overnight… this could foreseeably happen in a year or two from now!

So… it seems to me that the co-op is a bird-in-hand, a place where we would like to live, and potentially a lottery ticket if it goes condo… but really not a good option for my favorite real estate strategy (BRRRR)

On the other hand, if we find a house in Gulfport (my favorite neighborhood), we can BRRRR it (my favorite strategy)…. But we might lose our "bird-in-hand."

So what do you think??? Should we buy the Sarasota co-op? Or roll the dice and try to find an off market deal on a house in Gulfport?

Melissa Blair · Answer

Hi Kevin,Maybe you can have the best of both worlds! If you can rent out the co-op like you said - or do shortd-term rentals with it - that's amazing cash flow, and sounds like a great stepping stone toward your BRRRR goals - use that money to invest in your future investment properties. From what I'm understanding in your post, you don't yet have a primary residence....so you could possibly purchase a primary residence with a FHA loan, or even the one that includes money for renovations, FHA 203(k), live in it for a year while you do the rehab, and then refinance, move out to another primary residence, rent out the first one, and now you're on repeat. David Green recommends this method as the simplest strategy to build rental property portfolios. Now I know you want to have at least 100 of them for your empire, so you won't be able to live long enough to get to that number just by doing this, but after your first 2 or 3 you (plus the 2 or 3 years of cash flow from the co-op) you should have enough to start buying them in addition to your primary residence.

Josef Hardi · Answer

hi Kevin, Wow, you have a lot going on. First of all congrats on the baby girl and sounds like your start up is growing nicely. It sounds there is pressure to leave and find a place asap. Is it possible to alleviate this pressure? I find that I don't make the best decision when time is limited. Is there any possible way you can discuss extending your stay another 6 months comfortably, or is that out of the option? You are about to make one of the biggest purchase of your life, I think you need to strategize well and not be carried away with emotion. Easier said than done, I feel like I've been on a roller coaster trying to secure a duplex this past couple of months. Another point to think about is exit strategy. How much is the appreciation rate of a coop in that area? If you were to sell that property in 5-10 years, what would be the best / worst case scenario? Can you do short term rentals on the co-op? Are you allowed to rent it out? To me i need a solid 1-2 exit strategies in case my deal was a mistake and I need to get out of it within the next year or so.In regards of the lottery scenario, I heard from one of the BP podcast to be focused on the current numbers. Don't let future scenario influenced you too much, because it may not play out.I personally try to avoid any investment that introduces an increasing cost (such as coop fees or HOA fees). And I try to remind myself not to settle for less.All the best!Hope that helps!

Kevin Ellerton · Answer

If they buy the land, the coop would get a bank loan and distribute the payments across the 44 units. It would be added to the (already $350/mo) HOA. You said it has all the downsides of renting, but I’m not seeing that. The downside of renting is throwing $1500/mo away with nothing to show for it. Here we would be throwing away $350/mo HOA (maybe similar to cap-ex on a house), but would hopefully be able to sell the coop in a few years, for around what we bought it for, or maybe more (or maybe a bit less). During that time we can make $1700/mo renting out the coop while traveling… deduct $350 HOA and it’s still $1350/mo profit… still $16k per year. So it would pay itself back in around 9yrs. I don’t see how that’s the same downsides as renting… sounds like a slightly crappier version of owning a condo

Jason Lee · Answer

Land leases often have all the down sides of renting and none of the up side of owning, and converting to condo is probably not going to be the goldmine you think it will be. Where do you think the money to buy the land comes from?

Kevin Ellerton · Answer

Thanks @Shane H.!>> Im not sure how you BRRRR the house youre living in.Our plan is to live there first for a while and then rent it out later (for the rest of the BRRRR) 😃 As far as Meditation Magazine… we are in 1000s of stores in 20+ countries, with 7000+ paying subscribers. Decent revenue. ALMOST break even. I don’t know when we will be profitable. Hopefully soon 😂 and yes, it’s a passion business, but I hope it will also be a profit businessmy question is more along the lines of:is the house a much better investment than the coop? Is it worth risking the “bird in hand” to try to catch a better bird?

Shane H. · Answer

@Kevin EllertonIm slightly confused. Do you want a home to live in or one to invest in? Im not sure how you BRRRR the house youre living in. Maybe BRRB? LOL Buy Rehab Refinance Buy... If theres opportunity in the coop you can always buy your home later. The whole pool thing is probably more about you than your kid. Entertaining a child under 3 hardly requires a pool. But parents love to do those types of things with their children. I would be weighing whether having a pool as an infant is more beneficial than having financially fit parents for an entire childhood. Basing this next comment on the little information you gave so hold back the urge to be offended, none intended! You said you have a startup meditation business with no income. As a business owner myself who has struggled through hard times of low income, I would absolutely not purchase for lifestyle over profit right now. Im not even sure if i would purchase. I did it. It was rough. Not sure i would again. And i bought a 40k forclosure with $200/month payments. Is your meditation business ready to take off? Would that money better serve your business. It seems you may be losing focus. Or is the meditation business currently serving more as a hobby causing your desire to invest in real estate? That happens to often unfortunately. Its why I run a business that i have 0 "passion" for the work. The "passion" businesses didnt do well. Fortunately i had a needed skillset to build a business whether i wanted to do that work or not. I believe the answer to ypur questions is in the answer to these. In my case it was build this business. Use this income to buy real estate. (Current phase) then use real estate income to get out of doing something i dont care much about. Also, im not sure thats a hard line against lending on the coop. I think ive seen that discussed in the forumns before, but i have no first hand experience with it.

Kevin Ellerton · Answer

I forgot to mention, the houses in Gulfport have nice backyards. We could put in a swing set and a kiddie pool and the baby would have a great quality of life.The co-op has a nice pool but doesn’t allow kids under 3yrs old to use it.The houses in Gulfport are also in a quieter area (the co-op is next to a major road and has some street noise)… this would be great for me to be able to record video/audio for my meditation business.So overall I think the houses are better quality of life and better investment. I just don’t know if we will be able to find one, and don’t want to lose the great opportunity we have in hand in Sarasota 🤷‍♂️