Life of a Landlord

NEW -> Contingent Buyer Assistance Program
stepping_up,



I'm late to the discussion because I spent the last week touring the devastation in the Las Vegas housing market. I've read all your posts and you seem to be pretty smart. I'm not an ultra-bear and I am not going to jump on the bandwagon telling you that buying now is a mistake because it isn't *always* a mistake. That being said, the 53% decline you insist is unrealistic seems based on the appraised value of $722k, or more precisely the combination of a first and second given in an appreciating market. But that kind decline does seem realistic if the appraisals themselves were the product of a financial system bent on inflating values to justify loans that generated fees. If the appraisal was artificially inflated to enable the second loan, then a 53% decline from a imaginary value certaily seems realistic. Even if the bank is now willing to provide a line of credit that indicates some higher value than what you owe on the mortgage, the real value of the house is either what it pays you as a rental or what you can sell it for on the open market. What seems to be missing in all the back and forth since your initial post is a closer scrutiny of the value assumptions that underlie your calculations.



My suggestion is to forget what the house appraised for, sold for, or was mortgaged for in the past and rerun the numbers based on your $430k purchase price midway through a declining market. Will it still pencil out as a rental? Will it be possible to sell for a breakeven price when you've loaded up your HELOC with repairs for both homes? Can you be positive that the tax breaks you assume in your calculations will exist post-election? Again, I am not against buying a home, even for investment purposes, but I'm not certain your assumptions are valid and that is where I would direct any due diligence before closing. At this point, you are only risking $4500 on an option so I would quadruple check your arithmetic and the basis for the numbers before pulling the trigger on something you already admit is going to cost you money every month. At the very least, take an objective look at the deal and divorce yourself from the emotional side of things; does this make sense from a business angle?
 
Nude, thank you very much for your thoughtful response. Divorcing myself from the emotional side and looking at as pure investment, I'm not ecstatic about my $430K purchase price. $400K, yes, $415K, maybe, but $430K, no. I've told my husband this several times and he thinks I am just getting anxious and believes it is wise. My gut tells me that we would have to stay living in it for 5 years before converting it to a rental and the only option in 5 years would be to turn it into a rental or else we have to lose money or maybe break even if we're lucky.



I know a lot of you say in 5 years it will still be a loser, but I'm not convinced of that. I can see where the Irvine's and Coto's have a ways to go for affordability, particularly because of the mello roos and HOA fees. However when you look at a $417K mortgage for an SFR, you have a bigger pool of people who can afford it. OC is a high cost of living area, it always will be and people know that they have to pay a bigger percentage of their income for housing here than they do in Tulsa, OK or San Antonio, TX. Your 3500 sq/ft home in Irvine on a 4,700 sq/ft lot is going to be unaffordable for 80% or more of the people out there.



When I tell my husband we are paying more than we should, he says it's not enough to worry about.



The Paso house is a different story. We walked into so much equity in that house and I don't regret it one bit. It was only afterwards that we learned how well we did on that one and I attribute that to luck more than anything else. My husband on the other hand, thinks that I'm some sort of genius even though I've told him over and over again that Paso was luck as much as research. I don't want to sell Paso and re buy there in 5 years because I will end up having to spend a lot more on another house and am not certain of what interest rates will be in 5 years. It's not worth it to give it up because the profit after everything I've put into it time, energy and money wise after expenses and commission isn't all that much if I price it to sell quickly.



What I do know is that I won't have the HELOC loaded up. The repairs and improvements will come from my commissions and will be pragmatic. Barring any major job loss, we will have a zero balance in two years.



The tax law is always subject to change, but I do think that both parties tend to really like real estate.



I'm going to have one more candid discussion with my husband and if he still really wants to do it, we'll proceed. I do firmly believe that the area is a diamond in the rough and will be gentrified some day. The real question is whether we are we buying it too soon.



OK, hubby came while I was replying and I've run through it with him, emphasized the true costs, risks for worst case, real upside potential for best case and he still wants to do it. He says I worry too much. So at this point, all I can do is keep you guys posted on it through the long haul. Here's hoping we get to deny the schadenfreude's their pleasure....
 
At one point we had a medium sized house in Miami, and a very small cheap house in Brevard

County--the space coast. Long distance marriage--we lived in both houses.



My idea, like yours, was that we would rent the small house, and use it in retirement.



I have never done the rent or buy calculation and probably never will. Too lazy.

And tho the math in those calculations is correct, what happens in real life will

quickly make your calculations moot.



But I will tell you that dealing with tenants is hell.



Mine either couldn't pay the rent--which was very cheap, or didn't take reasonable care

of the house, or both.



The mtg payment was so small that we could fund it out of our own pockets when

necessary. Still, that was money we couldn't spend on eating out, buying books or

having fun.



We sold the Miami house and bought a very nice house in Brevard--in late 96. (My tomatoes

didn't do so well this year, but my turnips are nice and crunchy. The citrus was great,

and next year I'll know what to do with my peach tree.)



We rented the small house finally with an option to buy figuring that person would

at least take good care of the house, and would pay the rent. My hope was he

wouldn't buy, and we could do it again. Not so, he bought. And made a fine profit, even

with the decline--we sold for only 51,000.



I would NEVER deal with tenants again. We used the proceeds to pay a big chunk of

our mtg off.



The IHB renters are an entirely different bunch from regular renters.
 
Thank you LawyerLiz. I'm familiar with your Brevard coast. At one time when we were debating on where to live outside of OC, New Smyrna was a potential. I travel a lot for work and have been all over Florida. I had been to Orlando a few times and knew that wasn't an option, but hubby came out for one trip and we explored the Atlantic coast there and knew immediately it wasn't a fit for us. However I LOVED Miami as a vacation destination and even my husband enjoyed that trip. Florida is interesting as you do have areas that are nice, but then you have large popluations of people that are just not very sophisticated. My brother has a house in Sanford and even that town is divided....he lives on the wrong side and should be there.



One of my biggest things about this house that has me concerned is the quality of tenant it will attract today. The Paso house was easy because it's in the most sought after area, which is quite small compared to the rest of the town. Two days after advertising it we had 3 qualified applicants. We have a nurse with two kids and she keeps the place immaculate. I can make this house more attractive at very reasonable costs and hope that doing so will bring a better quality tenant, but as I was telling my husband, I'm not sure we're going to get the kind of renters we want. Also, Paso is different in the sense that it's a small town, everyone knows everyone. I'm worried about being able to get a property manager here that will be like our manager there.



A family with kids that cares about education will want to put their kids in private. Those kind of people are probably not going to be renters. Maybe we could get a couple starting out who's kids are not in school yet.? I'd rather get less rent from a good quality tenant, than end up with a bad one and I'd rather pay more for a good property manager that is diligent with screenings. However, those things are going to cost more, thus affecting the cash flow. Man, I don't know how this is going to turn out in the first 10 years or whether we will weather the 20 years. We'll see. If we can manage for the next 15-20 years without any major ugliness, it will likely be good for us. We'll see.
 
stepping,

You mentioned that the house is in SW Costa Mesa. I won't pry into the exact location, but unless it is Mesa Verde or the bluff overlooking the ocean and PCH, it's going to take quite a hit. I lived in that area for most of my childhood and anything along the Placentia corridor is never going to recover it's former 'glory', instead morphing into what Santa Ana has become. If it is in Mesa Verde, then I suspect you will do okay in the long term. Either way, I'd still be hesitant to pull the trigger on this deal.
 
[quote author="Nude" date=1209954944]stepping,

You mentioned that the house is in SW Costa Mesa. I won't pry into the exact location, but unless it is Mesa Verde or the bluff overlooking the ocean and PCH, it's going to take quite a hit. I lived in that area for most of my childhood and anything along the Placentia corridor is never going to recover it's former 'glory', instead morphing into what Santa Ana has become. If it is in Mesa Verde, then I suspect you will do okay in the long term. Either way, I'd still be hesitant to pull the trigger on this deal.</blockquote>


I think that this is a pretty realistic view in the short-medium term, the area between Placentia and Harbor is problematic, especially with regards to the schools. But Santa Ana? not by a long shot (depending on whether you are talking about the stereotype or a more neighborhood based comparison).



But long term, and by this I mean 20 years, Costa Mesa, even the "interior" is a winner. During the past 5 years, there has been some really nice infill housing. I suspect that is over for 4-8 years, but it will start up again. Coast close, good climate, and walkable with good freeway access are all winners.



The question is what happens now that many of the striving working/middle class latinos who bought a lot of the houses in the area confront the effects of the bubble. If they can hold on, or are replaced by other middle class folks, its all good. If it really tanks, then the timeline might be impacted.
 
When calculating your possible depreciation decuction, remember to only calculate based on the value of improvements, and exclude the land value. Land is not depreciable.
 
Nude,



Have you seen the redevelopment plan for the area?



www.ci.costa-mesa.ca.us/departments/planning/Urban-Plans/Mesa West Residential Owner



Awgee,



I am basing depreciation strictly on the value of buildings and improvements.
 
I read through the plans. All of them are predicated on the idea of consolidation of existing lots into larger lots that can sustain high density housing. That works as long as there is a high demand for that kind of housing at a price high enough to make a profit. I don't doubt that the plan seemed feasible when it was adopted in 2006 but 2 years later the economy no longer favors that kind of planning. The area was lower income when I lived there in the 80's, it's lower income now, and it's going to be lower income in another 20 years. The neighborhoods are pockets of illegal immigrants in apartments mixed with original homeowners and those who recently purchased. I drove through the area last October with my wife and it hasn't changed much since I was in high school, except that the bluff areas have become more run down. The redevelopment plan fails to address the biggest problem with Costa Mesa and that is the lack of any industry that both employs thousands of workers and pays them a higher-end wage. Without that kind of employment base, there is nothing to drive demand for the higher-end high density plan they have in mind. Even assuming the fall in home prices doesn't hammer Costa Mesa's city budget and force them to cut costs, by the time the housing market recovers there will be other areas that have more pressing needs.



I'd love to see that area revamped and revitalized, truly. But the CMCC waited too long to jump on the gravy train and missed the window on the building boom. By the time the next one hits, that area will be 90% 1st generation immigrant renters. Until the CMCC does something about local employment, they are dooming everything west of the 55 and south of Wilson St to a downward spiral.
 
[quote author="stepping_up" date=1210127195]Nude,



Have you seen the redevelopment plan for the area?



www.ci.costa-mesa.ca.us/departments/planning/Urban-Plans/Mesa West Residential Owner



Awgee,



I am basing depreciation strictly on the value of buildings and improvements.</blockquote>


Okay, I just read the last page of this thread, so I will admit I do not know the full details. However, so many of the redevelopment projects in "westside" Costa Mesa have been delayed, or walked away from altogether. While it looks good on paper, there are so many projects we will finally see in maybe 20 years, or never see at all. Just go look for the thread about the [strike]investor[/strike] bagholder for the condo conversion on Admiral Way, and that is on the "eastside". He isn't the only one who had grand plans to make a buck in CM.



The foreclosures in the "westside" are through the roof. In fact, there was at least one of the "redevelopment" projects on that list. This will only bring rents down. I had really high hopes for the "westside", but the poor planning and greed will only screw this area up.



Personally, as an owner on the "eastside", the rental market is not the best in CM. Way, way too many rentals. Luckily for me, and many long time owners of the area, can rent their places for less than market value and have positive cash flow. I feel sorry for the newbies, as there are more long timers to get the tenants, which is more important than having a vacant unit.
 
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