Life of a Landlord

NEW -> Contingent Buyer Assistance Program
Hmmm I don't see why they would ever want somebody out? Unless they are paying customers, then all they have to do us up the rent and KEEP on upping the rent until somebodies cries uncle....



Me, I really don't care, just be clean, be quiet, don't destroy things and pay up on time.... Not much to ask right? Oh well, it just depends.

good luck

-bix
 
[An SFR as an investment property is typically an awful investment. Unless you can pick up an SFR from a scratch and dent lender for $0.40 on the $, then forget about if can't. They are almost never near cash flow positive, and we are still in so far away in the rent to own ratio, that it would be a major wallet drainer. Maybe, you could buy in bulk from a bank's REO collection, but that will take more than a little start up money. SFRs that can be bought cheap, fixed up, and sold for a profit are great. But, with sales volume being as low as the 70s, I wouldn't even think about. If you do not believe me, then go to the foreclosure auction. You will see it has become a spectator sport, and even the players are just watching.




I would like some advice on what my husband and I are doing now and what we are thinking about doing. Two years ago we thought we would never be able to comfortably afford a single family house here in OC and we weren't willing to spend all that money for a condo, so we came up with Plan B. We decided we needed to figure out where we wanted to move that would offer us the lifestyle we were seeking and still be able to afford a house. We decided Paso Robles was perfect and had planned to buy a house there in spring of '08, rent it out until we could make the move in late '09 or early '10. We had the neighborhood narrowed down and found that we would need to spend about $400K for something we would be OK with. The houses that we loved were more than we were comfortable with, but there was one house that we really liked for $469K. It was a bank owned (speculator speculated badly) and they kept lowering the price. At $380K we were tempted, but still weren't prepared to spend that much before our estimated buy time frame. Then, they lowered it to $350K and we submitted our offer that day. 3 other people did as well and we ended up getting it at their asking price. Rents are not very high in that neighborhood compared to the buy prices, so we are cash flow negative about $800/mo when you factor in mortgage, taxes, insurance and property management fees. We had to replace the sewer line in early Feb, so this year we will save about $500/mo in taxes, making the net negative $300. This is with 20% down and a 30 year fixed at 5.75. It appraised for $470K, so the bank gave us an equity line of $96K with an 80/20 LTV.



In Jan I saw prices here finally getting to be affordable and started looking for a condo for some friends. We ended up deciding on seeing about buying ourselves a SFR here in Costa Mesa that we could live in for the next 18-24 mos. We are about to close on a 3 bedroom 1 and a half bath on 6600 sq/ft lot in south west Costa Mesa. We plan on renting it out when we move to the house in Paso. At that point it will be cash flow negative about $400/mo, but save us about $200 or more per month in taxes. That doesn't include vacancy. We have a 90% 30 yr fixed loan at 5.875. We are using the same bank and they appraised it for $611K on a purchase price of $430K and they have offered to open up a pretty signficiant equity line. We used some of the equity line from the Paso house for part of the downpayment on this house. We want to open the equity line so that we can pay the Paso line and have all the debt to this house tied to it.



Our plan is to hold the property for 15 years. If rents appreciate 3% per year, in 2013 it will be cash flow neutral and perhaps even positive with the tax break. We will have been renting it out for 3 years at that point. We figure that 15 years should give it some significant appreciation and we will have built equity with the rent. Is this a bad strategy? Is there something that we overlooked?
 
I think the basic flaw with your reasoning is that you are contemplating buying a negatively cashflowing investment that is declining in value. This is never a good idea. The ability to afford a bad investment does not make it any better. You are far, far better off keeping your money in the bank until prices reach rental parity, then buying.
 
As everyone else has pointed out, it's nearly impossible to find a house that is going to be cash flow positive. We're buying the Costa Mesa house to live in. I know I'm being a bit emotional about it because I really really really want to live in my own house and my husband is really excited about it. During the time that it is owner occuppied it will be rental parity for us because of the tax deduction. We're paying $430K for the house and the bank has a back up offer for $450K. It would be really stupid on our part to sell it in two years as that would likely result in netting zero or a loss after commissions. If we wait another year, it won't be worth it to us to have a house that we will live in for a year or less. The negative cash flow would only be for three years and it will be minimal. We are not going to find a property that will cash flow positive right away, but long term appreciation on this property would place it at $670K in 15 years assuming 3% per year at the purchase price. This gives us $400K in equity minus commission to sell then. Our investment is approximately a total of $10K for negative cash flow,$10K in improvements, $4K in closing costs and $43K down. The years of positive cash flow will cover repairs and maintenance over the 15 years that we have it. If I put $67K into the market today that supposedly will return me an average of 12% over the next 15 years, I would have $36700K. We aren't doing this to be saavy real estate investors. I know I can't compete with that league. However, when I run very conservative numbers for appreciation and rent increase over a 15 year period, the return is about equivalent to aggressive projections for the stock market. I can't see how our $67K investment could end up averaging much less than 10%. I really don't believe the stock market is going to give me 12% and we already have our retirement accounts and contributions in a blend of stocks, bonds and cash.



This house sold for $675K in aug 06. Is projecting it to be worth $670K 17 years after its peak unrealistic? It is exactly two miles from the coast as the crow flies.
 
The market is likely to decline strongly for at least another 18 months, then it will bounce around at rental parity for about 3-5 years while all the ARMs blow up. Basically, prices will drop another 20%-25% from today's prices and stay there for quite a while. There is very little chance of appreciation while we still have a large overhang of ARMs which will likely end up in foreclosure. Even if all the people with ARMs do not end up in foreclosure, they will need to sell which will add to the inventory. Until all the ARMs are purged from the system, which will take years, prices will not rise. If you buy a house now, when you want to sell it in two or three years, it will probably have a resale value 20% less than today's prices. That makes for an awfully expensive cost of ownership. If you believe you will be able to get out at breakeven 2 years from now, you are engaging in wishful thinking.



I understand the emotional desire to have a house of your own. I have owned before, and I will own again. The financial cost of giving it to that emotional desire now is likely to be very steep.
 
Stepping up...

(First - the return key is your friend... use it, love it, live it...)



I very much understand your desire. I say start lowballing these places. With cash in hand you'll be able to find some good deals, but do it off the beaten path.



Once you have a network up and running you can come up with some VERY good deals, it just a little bit of effort. Don't give into desire, its a very expensive thing to do and

it will quickly bankrupt you if you don't have enough capital in hand..... If you wait a few months things will get better and you'll have a good idea of what's going on.



good luck

-bix
 
"If you buy a house now, when you want to sell it in two or three years, it will probably have a resale value 20% less than today?s prices."



It sold in '06 for $675K and then had a second, bringing the total value to $722K. If it drops another 20% from what I'm paying for it, that would put it at a 53% decline. I'm sorry, but I find the projection of a 53% decline overly pessimistic. I'm buying it today at 40% less than its peak appraisal. I can understand projecting 20% decline in the next two years if you are talking about overall market values that have only declined 20% in the last year.



"If you believe you will be able to get out at breakeven 2 years from now, you are engaging in wishful thinking."



I did say likely a loss, but stating as if it is fact that there will be a 53% decline in values could also be considered wishful thinking. This isn't the IE, it's Costa Mesa. I'm already in escrow on the house and past contingencies, so if I don't buy it, I'm out $4,500 in earnest money.



Blix-



I don't understand the return key??
 
You're paragraphs were nonexistent. Everything was just one long, HUGE block of text. It made reading it a pain.



It seems you've changed your ways in this last post though. As far as the house, congradulations, I do hope you have some cash in pocket just in case your LTV goes a little high.

as mentioned somewhere here. I'm waiting for slightly lower markets. I'm purchasing the home outright so i'm trying to find the best deal out there....

Anyways good luck

-bix
 
<em>If I put $67K into the market today that supposedly will return me an average of 12% over the next 15 years, I would have $36700K.</em>



Just wanted to point out your above statement is total BS marketing material. You will be lucky to get 8%. Safe bet 6%. Through indexing.
 
"I do hope you have some cash in pocket just in case your LTV goes a little high. "



Of course we have assets and emergency fund, but doesn't cash in pocket related to LTV only matter when you go to sell?
 
[quote author="stepping_up" date=1209518675]I did say likely a loss, but stating as if it is fact that there will be a 53% decline in values could also be considered wishful thinking. This isn't the IE, it's Costa Mesa. I'm already in escrow on the house and past contingencies, so if I don't buy it, I'm out $4,500 in earnest money.</blockquote>


Here is a 53% decline in Costa Mesa...



http://www.redfin.com/stingray/do/printable-property?external_id=4603001
 
Never buy investment property with negative cash flow. Never. Not for two days or two years. Not with a plan on buying something else later. Never. Investment property is all about positive cash flow.
 
I'm actually looking at the same area, and am envious of your purchase as I would really like to be in my own SFR now instead of renting. But I'm still waiting and accumulating...



It sounds as if you have thought carefully through the plan. My only worry would be if the plan doesn't project out quite right.



First, I hope that you are in the Victoria elementary district, that is the only area that is going to hold value over the medium term. There are a whole lot of foreclosures to come all over SW CM, and Victoria is the only one that will attract buyers who have both cash and kids.



Second, I hope that your new house was highly, highly upgraded from the original Freedom Home plan (see my handle?!). If not, the $650k-$750k (and which is it?), was super-bubble speculation. You will be competing for buyers with people who have seriously upgraded (PerGranTeel, if not big additions) when you eventually want to sell. And also when you want to rent, you will still be competing.



Third, are you calculating your 3% appreciation from the present price, or from 25% off the present price, or from the historical data?



below is my analysis of SW Costa Mesa from historical data, with a projection of 3.5% (the linear curve fit is actually 3.6%)

(I don't know how to get it to embed visibly--can anyone?)
<fieldset class="gc-fieldset">
<legend> Attached files </legend> <a href="http://www.talkirvine.com/converted_files/images/forum_attachments/41_zuuSyq8j87Gqz0nRx5tR.pdf" target="_blank" class="gc-files">freedomprojection.pdf</a> <span class="gc-filesize">(26 B)</span> </fieldset>
 
[quote author="awgee" date=1209525269]Never buy investment property with negative cash flow. Never. Not for two days or two years. Not with a plan on buying something else later. Never. Investment property is all about positive cash flow.</blockquote>


laughable... you're forgetting about APPRECIATION. 15% annualized! and in irvine or newport beach, persian princes and wealthy chinese business men will pay 50% above current listing prices so their children can go to uni high. stop trolling.



;-)
 
[quote author="stepping_up" date=1209523492]"I do hope you have some cash in pocket just in case your LTV goes a little high. "



Of course we have assets and emergency fund, but doesn't cash in pocket related to LTV only matter when you go to sell?</blockquote>


Yes and if/when your LTV goes too high and the bank forces you to acquite a second at a much higher value. Also when you LTV goes UP past 80% and you have to get PMI.



All in all, if you have to really devalue the property, its nice to have cash in hand to negotiate your way out of trouble. Or just outright BUY your way out of trouble.



Good luck

-bix
 
"Yes and if/when your LTV goes too high and the bank forces you to acquite a second at a much higher value. Also when you LTV goes UP past 80% and you have to get PMI. "



My bank is financing 90% of the purchase price with no PMI at 5.875 fixed for 30 years and offering to open up an equity line on it. Are you really telling me that my bank is going to come after me next year and force me to take out a second? Everyone was screaming about their equity lines being decreased. My bank hasn't decreased the line on my other house and my bank did a much better job of assessing risk than the others.



"It sounds as if you have thought carefully through the plan. My only worry would be if the plan doesn?t project out quite right."



That's my worry as well, but if you can't accept some kind of risk, then you are forced to live with the returns that low risk investments deliver. I think what a lot of the advisors have neglected to consider is that I'm not selling for at least 15 years, maybe never. I'm basing the 3% appreciation on my purchase price today. I agree that the appraisal of $722K that gave this house a 2nd in Sept 2006 was absolutely bubble pricing, but everthing during that time was bubble pricing. It's why we didn't buy then. I'm projecting that 17 years from then, it would be worth less than that and still a decent return. I'm not going to project 3% appreciation on it being 25% lower than today's purchase price, especially when there is a back up offer as we speak for $20K more than my purchase price.



"There are a whole lot of foreclosures to come all over SW CM, and Victoria is the only one that will attract buyers who have both cash and kids."



How do you define a lot? Every one of them that I have seen that were OK houses that were priced under $470K went into escrow within a week. The school district is not the best for this, which is why I have the rental value projected to be quite less than other areas. We don't have kids. We are making some improvements for ourselves that we also expect will be attractive to a renter in a few years. There's a part of me that is skeptical that we will even move up to the Paso house in two years. We may be here for longer. This is where we both have our incomes guaranteed, but my husband is eager to get out of here as soon as we can.



The point is that we are buying this a primary residence first and foremost and it is rental parity for us. It will only become an investment after we move out of it. We're not Jeff buying 14 houses with ridiculous appreciation expectations. I would really appreciate someone to comment on it for the long long long run.
 
<blockquote> author="stepping_up" date="1209549673



"There are a whole lot of foreclosures to come all over SW CM, and Victoria is the only one that will attract buyers who have both cash and kids."



How do you define a lot? Every one of them that I have seen that were OK houses that were priced under $470K went into escrow within a week. </blockquote>


well, I think that you are exaggerating. Depends on what your boundaries are. West of Placentia, this is pretty much true, though i have 9 properties on my list north of Victoria street that have been REO'd and not yet on the market. take a look at 934 Darrell for a nice listing at $415k. south of victoria, the market is holding up better and this seems to be true.



of course, once you leave the Victoria elementary district, this is not true at all. there are a ton of sub$500k SFRs east of Placentia and I suspect that there will be many many more.



Anyway, good luck. I'd love to see a picture once it is yours!
 
[quote author="stepping_up" date=1209549673]"Yes and if/when your LTV goes too high and the bank forces you to acquite a second at a much higher value. Also when you LTV goes UP past 80% and you have to get PMI. "



My bank is financing 90% of the purchase price with no PMI at 5.875 fixed for 30 years and offering to open up an equity line on it. Are you really telling me that my bank is going to come after me next year and force me to take out a second? Everyone was screaming about their equity lines being decreased. My bank hasn't decreased the line on my other house and my bank did a much better job of assessing risk than the others.



</blockquote>


I don't know too much about homes, I've only been dealing with commercial purchases (apartments and condos).



But then again commercial is completely different ball game than regular home purchases. The last house I did purchase (and only one since 2005) was in Woodbridge and the rate was something like 5.9% (put 48ish % down).



Anyways good luck in your decision.

-bix
 
" take a look at 934 Darrell for a nice listing at $415k"



I've had my eye on that one for a while. It's absolutely adorable, but a short sale. It will be very interesting to see what it ends up selling for. Have you inquired about making an offer it? If you could buy it today for $415K, would you? My hunch is that it won't sell for much less than $475K.



"there are a ton of sub$500k SFRs east of Placentia"



Yes, there are a lot of $499 and then a few $490, but even most of those are short sales. In the next tier down there isn't anything that isn't a dump that is not a short sale. That being said, it looks like the banks are finally starting to wake up and actually sell some of the shorts. As I'm sure you already know, these are a real pain and the asking price has no connection to what the bank is willing to take. Are you considering trying to negotiate a short sale?



We are South of Victoria and just a bit east of Placentia. We talked to our next door neighbor quite a bit about the neighborhood. They bought theirs as a fixer 10 years ago and weren't sure which direction the neighborhood was going to go. They opted to send their son to private school, but have been really pleased with the neighborhood. Everyone has said that it's quiet and the only trouble is that the teenagers a few houses up have thrown some parties. Most of the homes are owner occuppied. On our street there is one rental, but the landlord lives in the corner house three homes down.



I'll post a picture when we get in.
 
Irvine Renter-



Someone pulled up the story on your 53% decline example



The original lot at 1986 Orange was 15,150 Sq. Ft. The property was then subdivided, this year. The SFR on a 7,600 sq. ft. lot, sold for $849K and the remaining 7,500 sq. ft. lot sold for $430K. The total sale was for $1.279M and escrow closed on 2/6/2008. This was not an REO transaction.



35-40% decline from peaks is reasonable, but I'm standing behind 53% as unrealistic.
 
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