I'm looking at purchasing my first piece of real estate, a fourplex (which I will not live in). Would this be a good long term investment even though prices are high now and I'd have a negative cash flow for the first 3 years? Or, should I continue to invest in the stock market and wait for prices to go down?
@Kristy Boone It depends on your strategy and what it is you're looking for. Are you holding out for appreciation? If you are buying in the Bay Area, I would imagine so in today's market...
I think the fact that you say it would cash flow negatively for the first few years is a sign that it's not a good investment, at least from a cash flow perspective. But it's hard to give advice because you haven't given us much information. What's the purchase price? Monthly rents? What type of area is the property in?
Thank you for the responses! I'm looking to purchase in the Orange County area. I have about $300K to put toward down payment. My budget is about $900K and the properties that I've been looking at have an annual rent income of about $52K per year but are not in great shape and are not in great areas. I've found that in order to get a place in a better location (Huntington, Costa Mesa, San Clemente), I'd have to pay more and get less rent, which would be a larger negative cash flow. I plan on keeping the property for 20 years and hope that the appreciation and eventually cash flow (after raising rents) will make this a better investment then putting money into the stock market (and allow for diversification).
I know that this is a long winded answer, but any suggestions based on this? Thanks!!
@Kristy Boone I've lived in Orange County... yeah, that area isn't very cheap ;)
You mentioned that the locations are not great (and the properties themselves which means even more $$$), so my first thought would be, why not find a better cash flow property in a good location that isn't as expensive?
You can still do that in California, maybe you'd have to search more inland... For $300k downpayment (that's a lot of change), you can probably find a $1MM commercial apartment building that has 15+ units.
Let's say you can locate 8% return, that would be $24k/year, or $2000/month in cash flow. To me, that sounds way better than negative cash flow! Especially for such a large downpayment...
The appreciation angle can work... but I would only consider that in a fantastic location (Class A) where I felt 100% assured it would come to fruition.
For $300k, I'd take the cash flow and try and get in to a good (but cheaper) location. If the appreciation were to still happen in the future, that would just be gravy.
@Kristy Boone We can't tell you if you should buy stocks or real estate, that's something you need to decide for yourself. There are trade offs, when it comes to cash flow or appreciation.
In areas such as Orange County, there is always going to be high demand for properties, meaning higher prices. In fact, I wrote a blog post on investing in higher priced areas.Investing in Higher Priced Areas You can also check out podcasts on the subject. If you plan on holding that long, you might also consider new construction. Less maintenance, and longer life.
@Kristy Boone that sounds like a horrible deal to me. However I don't have enough details to judge. It is not close enough to my criteria to even bother with a closer look. However comparing a poor deal to the stock market is not a fair analysis.
Or, should I continue to invest in the stock market and wait for prices to go down?
Or a third option - find better deals. It takes work to find better deals but they are out there.
Thank you all for the feedback. It sounds like I need to expand my area of focus and potentially look at a larger unit building. I was originally looking at OC because my family lives there and could keep tabs on the place (I live in San Francisco). I am planning on hiring a property management company and my hope is that they could handle requests locally since I'll be remote. I was looking at a fourplex because I wanted to lock in the low interest rates as well.
I'm in a very demanding job and it's tough for me to invest the time to do the research on my own. Do any of you work with a business manager who helps you with making decisions on stocks and real estate investments?
Thanks again for the help and great suggestions!
@Kristy Boone I'd stay away from a negative cash flowing building unless you're renovating it and that's the reason it's negative. Perhaps look in another market for properties or find another property in your market that cash flows.
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