Housing affordability and investment

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Submitted by kev374 on October 8, 2017 - 7:11pm

A friend was suggesting I buy a $825k townhouse in Irvine (new developments). I have 20% to put down but not sure if this kind of investment is really something I should be doing. My income is around $135k/yr, no dependents, zero debt, 800 FICO. His argument is that I can rent it out and that will pay for the mortgage. He claims that even if a big recession hits rents may soften a little but an area like Irvine will always have strong rental demand so I will only be on the hook for the delta in the worst case scenario. However, I will be building equity on someone else's dime and in addition participate in capital appreciation since he says real estate eventually will always go up.. and he may be right given what has been happening.

What do you guys think? Is this more than I can chew? My other expenses are around $2500/month currently and I net around $6k/month (after taxes/401k etc.).

Submitted by bewildering on October 8, 2017 - 8:12pm.

Do you live in Irvine?

Do you own your own house?

What other investments do you have?

Submitted by kev374 on October 8, 2017 - 8:42pm.

I don't live in Irvine but close, around 6-7 miles away. I don't own a home, I rent. Investments I have some in my 401k, I have a large chunk of change in cash that I kept liquid to use as a 20% down payment to jump on a home in case one popped up but have not been able to find any inventory that I liked in my price range so that has been a huge waste as I kept it out of the market and missed all the huge gains but oh well, whatever.

So, at this stage it is either get back into stocks (which are at all time peaks) or get into real estate investment at a $700-800k price point which is nerve racking.

Submitted by HLS on October 9, 2017 - 10:44pm.

Your friend may not understand exactly what's involved.

Based on your scenario,
You are going to tie up $165,000+
and need a jumbo loan with a monthly obligation of over $4200 PLUS HOA .
How much can you rent it for ?

Based on loan pricing, it makes much more sense to put 25% down on an investment property. I don't think it makes sense to consider this property as a rental.

Also, many stocks are nowhere near "all time peaks"
(The manipulated indexes are at peaks)
Plenty of ways to make money if you think the indexes are going to fall. Plenty of stocks may be cheap today.

You should seek out some competent rational advice with a focus on something other than what the masses are doing.

Submitted by kev374 on October 10, 2017 - 3:24pm.

I countered with the argument that if a recession hits and I lose my job I may be effectively screwed if I am unable to rent it out. He said that is pretty much impossible to lose since if I would give a $1000 discount there would be hordes of people willing to rent particularly in a recession when people are looking for discounts. So $1000 x 12, even a 12 month buffer is just $12,000 that I need to have.

Somehow, I am more uneasy about this, it can't be so simple and risk free or can it?

An $825k home can rent for around $4500? I am guessing but is there that much rental demand in this segment? I think not. Not many people rent such homes, they usually purchase them.. that is what I am thinking.

The type of people that can afford to lay down $4500 a month is slim and even if they could it's more likely they would be buyers not renters. That was my thinking. Now one can always rent individual rooms out but that is also a challenge I guess.

I felt $1500-2500 is the sweet spot to find renters.

Submitted by HLS on October 10, 2017 - 4:00pm.

You will ALWAYS find tenants willing to rent a new townhome in that area; however whether you want to rent to them OR the amount that you can get will vary. There is always a risk of a problem/deadbeat tenant.

You can't rent anything new for anywhere near $1500 in that area,
There are always people who have no interest in buying (for various reasons) and will pay a top price to rent a nice place.

I don't think it makes and sense to consider buying an $825K place that would only rent for $3000 mo.
How much is the HOA that you will pay ?
Don't forget that your property taxes will be $800+ a month.
You will need cash out of pocket every month, in which case your tenant is not paying down your mortgage (you are)

If you're open to the idea, look at other parts of the country where $800,000 will buy you an apartment building (10-20 units or more) that can gross $8,000 a month rent (or more)
.....After expenses and management fees you could have a nice return and greater depreciation than an OC townhome.
There are good property managers out there and you wont be involved in the repairs/maint other than making decisions.

Submitted by FlyerInHi on October 10, 2017 - 6:04pm.

HLS wrote:

If you're open to the idea, look at other parts of the country where $800,000 will buy you an apartment building (10-20 units or more) that can gross $8,000 a month rent (or more)
.....After expenses and management fees you could have a nice return and greater depreciation than an OC townhome.
There are good property managers out there and you wont be involved in the repairs/maint other than making decisions.

I agree. But do you think he can quality for loan? Usually 7 years adjustable with balloon payment.

Submitted by carlsbadworker on October 10, 2017 - 10:31pm.

kev374 wrote:
I don't own a home, I rent.

I always think the best rental property is to own your own house. You get the best tenant: yourself, so it is guaranteed occupancy 100% of the time. And you get lower owner-occupied rate.

kev374 wrote:
So, at this stage it is either get back into stocks (which are at all time peaks) or get into real estate investment at a $700-800k price point which is nerve racking.

Yes, savers are screwed as all assets are very pricey at the moment, and I don't see any reason for the liquidity to dry up anytime soon. As GMO says, “Either valuations will revert to historically normal levels and near-term returns will be very bad [purgatory] or valuations will remain elevated relative to history [which means]… near-term returns will be less bad but still insufficient to investors to achieve their goals [hell].”

HLS wrote:
many stocks are nowhere near "all time peaks"(The manipulated indexes are at peaks)
Plenty of ways to make money if you think the indexes are going to fall. Plenty of stocks may be cheap today.

While there're plenty of stocks that may be cheap today, I don't understand the argument that they are cheap because there are nowhere near "all time peaks". Individual stock doesn't follow mean reversion. Bad stock goes to zero and good stock goes close to trillion dollar valuation. Individual stocks at all time peaks do not mean they are bad investment, as long as they are still priced lower than the future discounted cash flow, or grow faster than the market currently predicts.

Submitted by harvey on October 11, 2017 - 8:31am.

carlsbadworker wrote:
While there're plenty of stocks that may be cheap today, I don't understand the argument that they are cheap because there are nowhere near "all time peaks". Individual stock doesn't follow mean reversion. Bad stock goes to zero and good stock goes close to trillion dollar valuation. Individual stocks at all time peaks do not mean they are bad investment, as long as they are still priced lower than the future discounted cash flow, or grow faster than the market currently predicts.

Well said.

The historic high of an individual stock is a useless metric.

Submitted by HLS on October 11, 2017 - 9:11am.

FlyerInHi wrote:
HLS wrote:

If you're open to the idea, look at other parts of the country where $800,000 will buy you an apartment building (10-20 units or more) that can gross $8,000 a month rent (or more)
.....After expenses and management fees you could have a nice return and greater depreciation than an OC townhome.
There are good property managers out there and you wont be involved in the repairs/maint other than making decisions.

I agree. But do you think he can quality for loan? Usually 7 years adjustable with balloon payment.

Qualifying for commercial property is different than 4 units or less. Many different programs. OP has strong income & good credit. There will always be money available at some rate.

The income from the property carries more weight in qualifying.
It's also possible to buy units with partners etc.
Many variables, just general advice.

Conventional loans with 30yr fixed rates are available on 1-4 unit properties. Although not common around here, there are many areas that have 2- 4 unit buildings that can be financed separately.

Not a concept for those who want to be hands on landlord.

Submitted by FlyerInHi on October 11, 2017 - 1:12pm.

Yes, I know about 4 plexes. But you were suggesting 10-20 units before.

Submitted by spdrun on October 11, 2017 - 1:35pm.

carlsbadworker -- it's good to own your own home, but it's better to own a cheaper home AND a rental. So you can have another ATM on the hoof (aka tenant) paying expenses on your own home.

Best way to be is worry-free, and if you create your own controlled environment (someone else paying your housing expense), it can be beautiful.

Submitted by sdsurfer on October 11, 2017 - 2:20pm.

For starters...I'd try to buy a place I can live in that is a little dated that I can upgrade along the way for some sweat equity in addition to your downpayment and your rent never getting jacked on your again.

If you decide to go the investment property route I'd spend as little as possible so you have less skin in the game and get a feel for being a landlord (or working with a management company) without as much risk man. Why go so huge on the first one? Some might mention leverage and cheap money right now, but it works both ways and nobody is certain what the market will do.

I agree on rents in a recession based on personal logic, but I honestly wish I could find more data on that. I've always wanted to find a graph/chart that goes back 30 years showing rents. I've searched quite a bit and the closest thing I've found is this (Rich actually found it and shared it with me a while back...thanks Rich!).

https://fred.stlouisfed.org/series/CUUSA...

The chart is quite compelling since it shows the past 3 recessions (shaded in), but I've always wanted to find something that says what North County SD has done in my lifetime since that is where I live and like to invest because I like managing my own properties. My guess is that it's even more "up and to the right" as they say, but I've been unsuccessful in finding solid data.

Lastly, I'd say meet up with someone who has done what you are looking to do and can share real insight. Is your friend recommending you to do something with your money that they have not even done? I'd find someone that has done it to share the good and the bad to help you with your decision. Feel free to send me a message with any specific questions I might be able to help with too.

Good luck whatever you do!

Submitted by dumbrenter on October 15, 2017 - 10:01am.

HLS wrote:

If you're open to the idea, look at other parts of the country where $800,000 will buy you an apartment building (10-20 units or more) that can gross $8,000 a month rent (or more)
.....After expenses and management fees you could have a nice return and greater depreciation than an OC townhome.
There are good property managers out there and you wont be involved in the repairs/maint other than making decisions.

Are these on Redfin?

Submitted by HLS on October 16, 2017 - 8:03am.

YES.
Redfin is just a feed of the MLS system nationwide.
Pick a city, then go to 'More Filters' then 'Multi Family'
You can also use Realtor.com or Zillow etc etc

As an example:
Here is a 12 unit apartment bldg for $425,000 in Oklahoma City.

https://www.redfin.com/OK/Oklahoma-City/...

Poor listing info, doesn't mention the rent.
up to 4 unit properties can be financed with 30 year mortgages.
5 units and above have various options for financing.

Owning property from a distance isn't for everyone. It comes with added risks, but has worked well for many people.

Submitted by FlyerInHi on October 16, 2017 - 12:19pm.

HLS wrote:
YES.
Redfin is just a feed of the MLS system nationwide.
Pick a city, then go to 'More Filters' then 'Multi Family'
You can also use Realtor.com or Zillow etc etc

As an example:
Here is a 12 unit apartment bldg for $425,000 in Oklahoma City.

https://www.redfin.com/OK/Oklahoma-City/...

Poor listing info, doesn't mention the rent.
up to 4 unit properties can be financed with 30 year mortgages.
5 units and above have various options for financing.

Owning property from a distance isn't for everyone. It comes with added risks, but has worked well for many people.

That's what my cousin's wife's family does in a small college town. Dad is a farmer outside of town and mom manages hundreds of apartments/condos. They built their own houses on their own land. They do well.

Submitted by HLS on October 16, 2017 - 1:31pm.

I have been involved in this for many years.

My general advice to anyone considering it is to look at areas that are growing (vs areas that are stagnating/shrinking)
and IF possible look at areas that are reasonable commuting distance from either an airport, major medical center OR college/technical school etc. These 3 rarely close down.

There are many parts of the country that property isn't worth much more than it was 10 years ago, (and there was no bubble)
The trade-off is that the cash flow & depreciation should be much better than an area with appreciation (on paper) but poor cash flow.

From a So Cal perspective, it's hard to grasp that a property hasn't gone up in 10 years, but there are plenty of areas that it's true. Rents don't rise quickly.

Nobody knows if property values will continue to rise anywhere, although most people expect it to.

In the long run, the expected benefit of alternate areas should be cash flow/income VS. equity increase, although both can happen.

I've had some very astute investors tell me that in hindsight they may have done better on paper with appreciation, however they have had a very nice stream of cash income and that you can't spend appreciation. No regrets.

Different strokes for different folks.

Going back to OP, I would not consider an $825K property with $800 a month property taxes + HOA ($ ??) that would only rent for $3000-$3500 a month after down payment. Huge negative every month, hoping/praying/wishing/dreaming for appreciation;
but in the long run it might work out! Who knows.

Submitted by CA renter on October 24, 2017 - 2:22pm.

I know that this is an unpopular sentiment right now, but having a "friend" recommend that a person with ~$135K annual income buy an "investment" condo for $825K sounds an awful lot like a bubble to me.

Just my 2 cents, but I would not be jumping into any new "investments" at this point in time. If you want to focus on genuinely safe stocks, etc., that's pretty reasonable, but I think that we are in an even bigger credit bubble today than we were in 2008, thanks to central banks around the world.

A bubble doesn't require NINJA loans. All you need is loose credit (which is what happens when rates are held at artificial lows/ZIRP for an extended amount of time), and speculation. There is plenty of both right now, and I don't see how this will end in a benign way.

Submitted by HLS on October 24, 2017 - 3:16pm.

General statements are confusing.

Saying one shouldn't buy at $825K because income is $135K has nothing to do with whether it is worth buying.
...... If it were worth $1M+ you should do whatever you can to buy it and flip it or keep it.... (It DOES happen)

I don't think there are ANY 'genuinely safe stocks'
There are fortunes to be made in the right "new investments"

We ARE in a huge credit bubble, but there is more wealth around today than ever before with many people chasing yield.

Interest creates even more wealth. This bubble could last 50 years, or just a few more months. Rates could be kep artificially low for decades.
Carry trade keeps markets in check.

The average Joe's & Jane's that contribute to a 401K
on a regular basis are part of a potential problem, not a solution.

You can be right in the short term and wrong in the long run.
You can be wrong in the short term and right in the long run.

Back to the OP, it doesn't make sense to me because the numbers don't work out. It has nothing to do with what his income is nor the fact that a 'friend' recommended it.

One needs to understand the risks associated with any investment and how to analyze them, as well as carrying costs associated with real estate that don't exist with stocks.

Most people get hurt when the market falls, a small group will make a fortune.

Submitted by CA renter on October 24, 2017 - 11:14pm.

You are correct, HLS, of course. But I think that a $825K condo in Irvine being marketed to those making $135K (assuming this is their target market) is indicative of a bubble. I was also going along with the assumption that there are precious few bargains to be found in Orange County right now. Speculators are combing over every piece of property that gets listed, and people are throwing cash around as though it has no value. I would have more confidence in the market it we didn't have so many speculators (with many coming from overseas) just looking for a place to park their money because they're unable to get any kind of a yield in any "safe" investments.

Though it looks like today's buyers are highly qualified, we don't know where all this cash is coming from. There are too many stories of people using leverage in order to speculate in all of these markets -- it's in the form of non-traditional lending, so it's not visible to those who just track mortgages. How much of this is laundered money? We're seeing stories where people from Russia, China, and Mexico are stashing money in expensive real estate in large, gateway cities around the world.

It's true that this can go on for many decades, in theory, but there are many signs that we're smack in the middle of another credit-driven speculative bubble. It's just a matter of how far it will go, and how long it will last. Admittedly, I'm almost always early in calling bubbles, but this is getting scary, IMHO.

Submitted by HLS on October 27, 2017 - 11:34pm.

Pocatello Idaho- College town.
$1.375,000 listing price
$ 18,000 monthly gross rent

https://www.realtor.com/realestateandhom...

if expenses are 40% of the income, you still get almost 9.5% cap rate
+ probably $35-40K a year depreciation
******************************************
Many of today's residential buyers are NOT 'highly qualified'
they are just qualified.
In many cases one can go up to a 50% debt ratio with a 1% down payment. Many people only bring home 70% of their gross income.

Easy lending does not make housing affordable, it actually makes it unaffordable to many with high prices.

if mortgage rates rise too much, payment amounts will be out of reach for many people. Prices are artificially high because rates are low but rates could stay low for a very long time

Kim Kardashian could be a grandmother and Oprah could be pitching reverse mortgages to supplement her income by then.

Are we in a bubble OR is it just the 'new normal' ??

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