WOULD YOU BUY 7BEDROOM/5BATH HOME for 1M?

Question

HELLO ALL<

Would you buy or pass?

We are looking at a 7bedroom 5bath home in ORANGE COUNTY CA.

OFF-market for 1M ARV is about 1.2M.repair estimate is about 50k.

mortgage (PITI),utilities,cap-ex is around $7,500/month

down-payment with closing costs is about $180K..

home is in a Corner lot parking is not an issue.

5bedrooms has sliding door access to the patio.

3-car garage with potential to convert to ADU..

if all bedrooms according to projections are rented we are looking around $9,200/month

What would you do?

Thank you so much.

Peter Mckernan · Answer

@Ehlen Baylon what are you thinking the tenants occupation will be and their income looks like since they are not close to really any schools, what's the turnover for room there and what are any other Capex you are thinking about on this one. The cashflow seems good, but need to make sure that the turnover stays a little lower and the potential clients/tenants. Mission Viejo is great for sure and the rent is there along with longevity; however, the area also is a reduced area for co-living. Also check the city guidelines on Co-living, some you have to permit it, some you cannot do it at all in OC and you want to be on the up and up with neighbors around that may call. We just got the city called on us for one of our projects cost us an extra $6K.

Also, ADU is going to be pricey, even if it's just converting one garage or two. Most likely it will be about 100Kish for that, or more. If you are adding SF onto that garage anywhere that will be a lot more.

Angela Venger · Answer

The cash on cash return is about 11%, it's not too bad. But I think you can do better if you are planning to spend $180k. However, this property is in California, so it has lots of potential in the future. If you only want to invest in orange county area, I think this is a good project!

Bruce Woodruff · Answer

I got ya, I was just wanting the OP to realize that sometimes things go down, just like sometimes they go up... :-)

Or in other words, 'what goes up must come down'...

Carey Edmund · Answer

Sounds like a great opportunity but there are a few things to consider…

- Do you want that level of responsibility that comes with managing that many “room renters”

- You are on a corner lot with lots of parking but are you taking driveway parking or street parking? If street, are you allowed to have that many cars parking there

- Is this your first house hack? If so, consider your reasons for starting with such a large undertaking. If this was your third, or even you second, you would have an immense amount of knowledge that you won’t have on your first

- Your cash on cash sounds good but there will be a high level of ongoing maintenance when you have that many people living in that size house. Do you have the reserves to manage those expenses?

- Do you have the reserve to manage multiple vacant rooms when it happens?

Hope these questions help you get to the answer that fits your needs. Best of luck regardless of which direction you go!!

Mark Welch · Answer

Your numbers are tight!

Dan White · Answer

We bought a similar STR home for 860k in Northern VA. ARV of 1.15M.

9 bedroom 5 bath. 100k in reno. It has three separate entrances so we rent it by floor and it cash flows pretty nicely.

Our goal is to hold for at least a few years and cash out when the time is right.

If the numbers work based on conservative vacancy and income, I would do it.

Note: We only allow 30 day stays. The neighbors are all cool with us since we don't have daily/weekly turnover.

Drew Sygit · Answer

?@Ehlen Baylon what is the ROI?

Brad S. · Answer

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I assume you are talking about average annual appreciation over that 40 yr time period. And while that may be true, that works for a 40 yr goal plan, but might not work for a shorter plan or unforeseen circumstances. It's kinda like what I tell some of my Seller clients - their house may be worth what they want it to be, but it just might take a little longer than they hope. In other words, their house value is partially a function of time and if they want to sell it soon, they should pay more attention to current sales prices, and adjust accordingly, but if they need to get a higher amount, it may take a while, even many years, so they can change their game plan or their goals.

I personally have been in 2 major real estate downturns in my area, over the past 30+ yrs. I lost money in 1 of them and purposefully outran the other one. The first one, I bought at the precipice of the market, and was forced into a position having to sell, 7 years later, for a loss (28%+ value drop in that time frame). It took me years to get whole again after that.

I have also owned houses where both the rents and values did not rise to any significant levels over the 17 years I owned them. I sold those for a loss, after paying for repair costs to get them in condition to sell. These were my first ltr's I bought and now, I know I should've done more research prior to purchasing them. My point is, the real estate market cycles and it would be wise to adjust your underwriting to your goals and the current part of the cycle.

That said, the OP's cashflow #'s do appear to be ok, but it's not clear if they account for vacancy/collections and maintenance/repairs. I personally, would also account for property management, even if I was managing the property. It is still a cost of business and someone has to do it. I may put less emphasis on my own property management expense, but I'd still want to see it in my spreadsheet. Those #'s start looking pretty skinny after that, especially taking into account the riskiness of the current place in the market cycle. For me, the risk/reward analysis doesn't seem worth it, at least for my goals. But, you'd also assess the potential "bonuses," like the ADU potential (cost to build/convert vs rental value).

Generally, in CA, we are now at an affordability bottom (or below), meaning, there will be pressure on normalizing the affordability equation, which is a function of price vs interest rate vs income. As the rate goes up, so does downward pressure on prices, which is also influenced by income. As rates go up-If income stays steady = downward price pressure, if income drops = additional downward pressure on prices. And, incomes are not likely to rise in the near future. Even Meta just warned of a hiring freeze and possible upcoming layoffs. So, I would adjust any buying underwriting more conservatively.

Nicholas Coulter · Answer

@Bruce Woodruff Could be. From what I see here there is potential to see the market correct but rents will support the cash flow until the properties are back to where they need to be for a positive sell. I like buy and hold for the math. Over 40 years which included 08 crash California has seen over 3% annual in those years :) I wouldnt suggest anyone get into a short term hold right now but buy and holds are still working!

Bruce Woodruff · Answer

Also I would think about buying at the wrong time and watching negative appreciation ruin you....

WOULD YOU BUY 7BEDROOM/5BATH HOME for 1M?

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