Best way to invest $200,000 in Northern Utah?

21 Replies

I'll try to not make this post too long! Sometimes it is a tough balance getting enough info out and not blabbing on. Hang in there with me please!

A family member of mine unfortunately and unexpectedly passed away. To my surprise I found out $250,000 was left to me. I am 25 years old, married, hold a college degree with a steady job earning $60,000. My wife is also employed part time and brings home an additional $15,000. Other than the home we currently live in we have no debt. The house has about $25,000 equity in it and $110,000 left on the loan.

Our current idea is to purchase 2 town homes, all cash, and rent them out. The units are in the same town but about 5 minutes apart and appeal to slightly different markets. Both units were built within the last 10 years. I've spoke with quite a few realtors and am familiar with the area and don't foresee any issues renting them out to good tenants and maintaining good occupancy.

After running the numbers the CAP rate would be 6% for each property assuming we pay full asking price, closing costs, etc. Looking at comps we shouldn't have to pay full asking price and the CAP rate is closer to 7.5%.

I plan to work full time at my job I currently have and my wife could keep working part-time until our next child is due this winter. I'll manage the properties myself to start, if it gets too much to handle I can hire a property management company in the area, but I don't think it should be too much to manage them with as close as they are to us and the condition they are in.


Is this a stupid approach? I know it is ridiculously conservative, but I don't see me realistically flipping homes or managing multi-family complexes. If all goes well after 5 years we could take equity loans for the 2 town homes and our home and get really serious if needs be.

I'm sorry for your loss. Good for you on planning for the future, it sounds like you're going to make responsible choices with this gift. You'll find that real estate is a fantastic store of value. Single family homes and townhouses are often going to fluctuate in price more than apartment buildings, because they follow the retail market, where apartments are based on how much income they produce. 

There is for sure a middle ground between buying properties for cash and flipping houses. I buy primarily small multifamily homes and do venture in to the single family home realm a bit as well. By breaking up your $250,000 as several down payments on several mortgaged properties, or say a 30% down payment on an $830,000 unit building, you would accelerate the growth of that $250k much more than if you buy a property outright. We have a developer up in Logan that is building townhouse style 4plex buildings in the $620,000 range and I believe that will prove to be a great cash flow and equity investment. 

It sounds like you understand the risks and benefits relating to the different buy and hold strategies, and I highly doubt the two townhouses you've found could be bad investments. You've obviously thought through it, and can see that they will preserve your capital well and generate nice cash flow. If you parlay your down payment into leveraged properties, your money will grow faster, and that $250,000 could be more than enough to last you the rest of your life by the time you decide to retire. No need to flip properties, but I think it's worth looking at repositioning your portfolio every 10 years to maximize your equity and accelerate your wealth.

Just a clarification, you wouldn't want to retire off of $250,000. If you invest it in leveraged real estate (like apartments) your portfolio will likely be valued in the millions before you turn 60. Feel free to message me and I could show you the strategies I'm talking about more in depth.

Originally posted by @Skyler Smith :

I'm sorry for your loss. Good for you on planning for the future, it sounds like you're going to make responsible choices with this gift. You'll find that real estate is a fantastic store of value. Single family homes and townhouses are often going to fluctuate in price more than apartment buildings, because they follow the retail market, where apartments are based on how much income they produce. 

There is for sure a middle ground between buying properties for cash and flipping houses. I buy primarily small multifamily homes and do venture in to the single family home realm a bit as well. By breaking up your $250,000 as several down payments on several mortgaged properties, or say a 30% down payment on an $830,000 unit building, you would accelerate the growth of that $250k much more than if you buy a property outright. We have a developer up in Logan that is building townhouse style 4plex buildings in the $620,000 range and I believe that will prove to be a great cash flow and equity investment. 

It sounds like you understand the risks and benefits relating to the different buy and hold strategies, and I highly doubt the two townhouses you've found could be bad investments. You've obviously thought through it, and can see that they will preserve your capital well and generate nice cash flow. If you parlay your down payment into leveraged properties, your money will grow faster, and that $250,000 could be more than enough to last you the rest of your life by the time you decide to retire. No need to flip properties, but I think it's worth looking at repositioning your portfolio every 10 years to maximize your equity and accelerate your wealth.

 Interesting, thanks. I need to become a lot more comfortable with leveraging wealth. Rather than seeing it from the point of view that other people's money tied up leaving me with more to invest, I just view it as a huge liability for me to pay them back. I need to figure out how to change that mindset. 

William - 6% cap rate on newer single family homes or condos in Northern Utah sounds about right. If you do end up buying condos, be sure to look into the association that governs them to make sure you're comfortable with them. Most investors, me included, steer clear of HOA's because it is an expense that we can't control. Just increases the risk for us. I own small multi-unit and larger single family homes in Northern Utah and enjoy the conservative returns and above average appreciation on the single families. I too am a very conservative investor.

My biggest piece of advice for you would be to team up with a realtor and a CPA that specialize in working with long-term buy and hold investors. We're a unique breed with unique needs and goals. Also, the market in Utah has gotten very competitive so you'll need someone that has connections to off market deals or pocket listings. 

Feel free to message me if you want any referrals. Best of luck to you. 

@William Govans   

Perhaps you could consider paying off your home's mortgage first. If you're going to have one mortgage and three properties, I'd have your home free and clear and mortgage one of the rental properties. In a worst case scenario your family comes first, and having your home free and clear will maximize your family's safety.

As far as using someone else's money goes, the bank's money would be a good candidate for that risky position. They're paying for ads so that people take out loans from them - It's their business model, and they do a good job of not loaning too much. In case you have to walk from the property, the bank will be able to survive, they know what they're signing up for.

Originally posted by @William Govans:

I am 25 years old, married, hold a college degree with a steady job earning $60,000. My wife is also employed part time and brings home an additional $15,000. Other than the home we currently live in we have no debt. The house has about $25,000 equity in it and $110,000 left on the loan.

I have absolutely no meaningful insight to share on buying properties in Northern Utah however I just had to take a minute to comment because your mentality is refreshing, unique and commendable.  You are 25 years old, make good and steady income, have no debt and just came unexpectedly into a large sum of money.  Rather than trying to find the shiniest and newest toys available, you are choosing to take this windfall and invest it.  And not only that, but you're trying to find a way to invest conservatively and shrewdly.  i don't know you at all but I am certain that you are going to be a huge success.  You have your game face on at a very early age and I'll bet that the family member who left you this money knew this too.  Kudos!

William,

if I can be of assistance, just let me know.

Originally posted by @Blair Poelman :

Have you considered buying trust deeds from hard money lenders?  

 I haven't, and frankly don't even know what that a trust deed is. I'll do a bit of digging.

@William Govans

Certainly get comfortable with leverage.  It is a major component of why real estate is such an attractive investment (along with tax benefits, principal reduction, and appreciation).

Right now, mortgage interest rates are at an all time low.  With cap rates at 6-7% and the ability borrow (and lock in a 30 year fixed rate) at 4%, you would be taking less than full advantage of the timing of your windfall by not seriously considering loans.

During the crash, most of the people who got in trouble were bitten by adjustable rate mortgages and 100+% LTV. Banks are pretty conservative and have developed guidelines that prevent unnecessary risk.

I think you should add talking to a lender in your mix of real estate professionals and do it early.  They will be able to tell you how much you can borrow and educate you about cash reserves and other leverage risk mitigators.

Where are you looking specifically?  One of the reasons I ask, is that townhouses or attached housing in certain markets have experienced almost no appreciation, particularly in comparison to the detached single families.  To add to @Brian H. 's comments, the primary reason that investors favor townhouses is that they are completely turnkey with low maintenance costs provided a good association.  But traditionally, the detached single family has performed much better.

And remember there is no hurry.  Interest rates might tick up a bit this summer.  But continue to educate yourself about risk and the micro markets you are looking in.  Certain areas are a little frenzied right now, but there are plenty of solid conservative investments out there at all price points.

Hope this helps.

@Blair Poelman  Really?  Is this the advice you give all first time investors?

William Hochstedler

    @William Hochstedler

    I hope you're not interpreting my "have you considered" as "YOU MUST!!!!".

    I'm curious what your experience with buying trust deeds is?  Has it been negative?  Sounds like you've got some opinions about it.

    Personally I've held several trust deeds (more than 50) and if I were to compare the percentage of trust deeds that performed at the expected rate with percentage of rentals or flips that performed at the expected rate, trust deeds wins hands down. 

    Blair Poelman, Broker in Utah (#9299425)

    @Blair Poelman

    I have no problem with notes. It's just an entirely different asset class than the op was asking about. HML notes are, by definition, not a conservative long-term investment.

    And, as you saw in the op's response, not an entry level asset either.

    Just a bit off-topic.  That's all.

    William Hochstedler

      @William Hochstedler true, notes are a different asset class. However for entry level folk, a note is a lot easier to deal with than rehabs, tenants, and toilets. 

      Blair Poelman, Broker in Utah (#9299425)

      Originally posted by @William Hochstedler :

      @William Govans

      Certainly get comfortable with leverage.  It is a major component of why real estate is such an attractive investment (along with tax benefits, principal reduction, and appreciation).

      Right now, mortgage interest rates are at an all time low.  With cap rates at 6-7% and the ability borrow (and lock in a 30 year fixed rate) at 4%, you would be taking less than full advantage of the timing of your windfall by not seriously considering loans.

      During the crash, most of the people who got in trouble were bitten by adjustable rate mortgages and 100+% LTV. Banks are pretty conservative and have developed guidelines that prevent unnecessary risk.

      I think you should add talking to a lender in your mix of real estate professionals and do it early.  They will be able to tell you how much you can borrow and educate you about cash reserves and other leverage risk mitigators.

      Where are you looking specifically?  One of the reasons I ask, is that townhouses or attached housing in certain markets have experienced almost no appreciation, particularly in comparison to the detached single families.  To add to 's comments, the primary reason that investors favor townhouses is that they are completely turnkey with low maintenance costs provided a good association.  But traditionally, the detached single family has performed much better.

      And remember there is no hurry.  Interest rates might tick up a bit this summer.  But continue to educate yourself about risk and the micro markets you are looking in.  Certain areas are a little frenzied right now, but there are plenty of solid conservative investments out there at all price points.

      Hope this helps.

       
      Thanks for the advice. I do plan to meet with a lender and make a strategy, I'm not in a giant rush to invest and want to make sure I do it right. Hopefully narrowing it down to rentals, whether it is townhomes or detached homes, will help.

      I'm specifically looking in Harrisville, just south of 2700 North. The bunch of new townhomes there, then the ones just south across the street off of colonial drive, and some down by Orion junior high. These areas are more expensive, but I don't foresee them declining in value as rapid as some other places.  Sounds like I need to do some homework to see if they have appreciated in value though. Rent is higher in those areas too, but I assume that helps a little bit with quality of tenant.

      I'm not opposed to detached single family homes, my original concern was that maintenance costs would be higher, however all these townhouses have close to a $100 HOA. If the only real monthly cost (other than factoring in repairs and occupancy) is mowing the lawn that could be a better deal. I just worry repairs, maintenance, and upkeep will be higher with a detached single home and won't necessarily bring in a higher cash flow than the townhomes. I need to verify that is truly the case though. I'm assuming the CAP rate is pretty comparable, however appreciation is more likely to be higher with single family residences than townhomes?

      Thanks for all the help and tips from everyone. Kinda clueless at this whole process.

      On the townhome vs detached debate there's a lot going on.  Since I have nothing else to do on a Sunday [lie], I'll try to elaborate.

      Up in Cache County, we have two major subdivisions of townhouse style condos built in the 1980's and 1990's respectively with a scattering of smaller subdivisions and some major starts in the past 3 years.  The 20 and 30 year old subdivisions have done almost nothing as far as appreciation in this time frame (15-20%) where 25-30 year old single families have almost doubled in value.

      I've put together a chart to show what's been happening in your neck of the woods.   Unfortunately I don't have older data, so it doesn't tell as compelling a story as when these buildings hit end-of-lifecycle issues as our 1980's development has.

      As you can see the trend lines are separating with the single families appreciating faster even with the recession.  I think that the reason that the separation is not more dramatic is that new construction represents a significantly higher percentage of townhouses than with single family and the rising prices are at least partially attributable to the rise in material costs.

      The situation in Salt Lake and Utah counties is quite different as townhouses represent an entry level price point that is becoming rarer and rarer in detached single family houses.  In Weber county, there is no shortage of $150-175K existing construction so there isn't a flight to townhouses for first time home buyers like there is in higher density markets.

      End of lifecycle issues present a major problem for townhouse communities and it's a tightrope walk that HOA's constantly battle with. There is a lot of discussion here on BP on how to plan for capital expenditures or capex for investment properties. A new roof that requires a special assessment in an already deteriorating town house community can be devastating. As the 30 year old buildings have not appreciated substantially, there is little equity to tap into for the improvements and no other choice but to raise dues, taking a bite out of cash flow. There is a lot of resistance from HOA communities to plan for capex in the dues, so most don't--at least not adequately.

      Furthermore, as townhouses are often entry level properties, the communities are somewhat transient. Particularly in Utah, growing families often move on to larger homes as soon as they can they can afford it. As a result, as these communities age, they do not gain the benefit of becoming "established neighborhoods". To counteract this trend, some HOA by-laws often establish very restrictive rules to limit non-owner occupants (renters). Pay careful attention to this.

      I'm not saying that condos/townhouses are bad in all markets.  They can perform very well when they hit a price point that is otherwise unavailable in high density/very expensive areas.  Also, in some markets, townhouse community amenities (like spas and pools) can demand a high rent premium. 

      As the tenant market is very price sensitive, the only reason I would ever consider buying a townhouse is if I could not meet the price point with other types of housing. Single family detached, at least in our area, has the benefit of appreciation, and multi-family with no HOA and CC&R's gives you more control.

      As far as maintenance goes, you are still responsible for fixing a leaky faucet or a backed up toilet in each of these types of housing.  Maintenance requirements will depend much more on age, quality of construction, and upkeep than property type.  Of course, landscaping and snow removal are issues with multi-family, but can easily be passed on to the tenant in single family.

      Hope this helps.

      William Hochstedler

        Originally posted by @William Hochstedler :

        On the townhome vs detached debate there's a lot going on.  Since I have nothing else to do on a Sunday [lie], I'll try to elaborate.

        Up in Cache County, we have two major subdivisions of townhouse style condos built in the 1980's and 1990's respectively with a scattering of smaller subdivisions and some major starts in the past 3 years.  The 20 and 30 year old subdivisions have done almost nothing as far as appreciation in this time frame (15-20%) where 25-30 year old single families have almost doubled in value.

        I've put together a chart to show what's been happening in your neck of the woods.   Unfortunately I don't have older data, so it doesn't tell as compelling a story as when these buildings hit end-of-lifecycle issues as our 1980's development has.

        As you can see the trend lines are separating with the single families appreciating faster even with the recession.  I think that the reason that the separation is not more dramatic is that new construction represents a significantly higher percentage of townhouses than with single family and the rising prices are at least partially attributable to the rise in material costs.

        The situation in Salt Lake and Utah counties is quite different as townhouses represent an entry level price point that is becoming rarer and rarer in detached single family houses.  In Weber county, there is no shortage of $150-175K existing construction so there isn't a flight to townhouses for first time home buyers like there is in higher density markets.

        End of lifecycle issues present a major problem for townhouse communities and it's a tightrope walk that HOA's constantly battle with. There is a lot of discussion here on BP on how to plan for capital expenditures or capex for investment properties. A new roof that requires a special assessment in an already deteriorating town house community can be devastating. As the 30 year old buildings have not appreciated substantially, there is little equity to tap into for the improvements and no other choice but to raise dues, taking a bite out of cash flow. There is a lot of resistance from HOA communities to plan for capex in the dues, so most don't--at least not adequately.

        Furthermore, as townhouses are often entry level properties, the communities are somewhat transient. Particularly in Utah, growing families often move on to larger homes as soon as they can they can afford it. As a result, as these communities age, they do not gain the benefit of becoming "established neighborhoods". To counteract this trend, some HOA by-laws often establish very restrictive rules to limit non-owner occupants (renters). Pay careful attention to this.

        I'm not saying that condos/townhouses are bad in all markets.  They can perform very well when they hit a price point that is otherwise unavailable in high density/very expensive areas.  Also, in some markets, townhouse community amenities (like spas and pools) can demand a high rent premium. 

        As the tenant market is very price sensitive, the only reason I would ever consider buying a townhouse is if I could not meet the price point with other types of housing. Single family detached, at least in our area, has the benefit of appreciation, and multi-family with no HOA and CC&R's gives you more control.

        As far as maintenance goes, you are still responsible for fixing a leaky faucet or a backed up toilet in each of these types of housing.  Maintenance requirements will depend much more on age, quality of construction, and upkeep than property type.  Of course, landscaping and snow removal are issues with multi-family, but can easily be passed on to the tenant in single family.

        Hope this helps.

        Wow, thanks for the detailed explanation. I've got some more thinking and research to do.

        @William Govans

        I would recommend getting mortgages with how low rates are today. You could put 25% down and ask the seller to pay up to 2% towards closing costs. You than can either have some cash in the bank or you could use all this money to purchase up to ten properties as long as you have enough money for reserves as well as down payments. 

        Five years from now rates could be much higher and they may no longer allow cash out refinancing.

        Jerry Padilla, Lender in NY (#NMLS 1084877)

        Why do we have to invest the $200k all at once? Make a 20% down payment on one SFH property with a solid cap rate. See how it goes for a few months or even for a few years ago. If it works, you like the property management and you are comfortable with the leverage, rinse and repeat.

        Excellent post by William Hochstedler. I Have 16 units (9 properties) in the Provo area which I started purchasing in 2005. (All are on what I consider unique lots that are not currently highest and best use.; i.e. two on the Provo River, one zoned commercial, one on an acre lot ) What I always tell people is to invest in "Lot and Location" and not "Cabinets and Countertops" Drive around townhome/condo complexes that are 25-30 years old in Utah, and you will usually see properties that no long term investor would want any part of. A simple way to look at this in Utah is to analyze your typical recently built 160k TH in Utah County. The "land" is worth about 30k and the improvements are worth 130k. In a 160k 1000 sf SFR the lot is worth 90k, and the depreciated 1000 sq ft of improvements (usually old brick) is worth 70k. Now fast forward 20 years on those two properties. That Townhome is now going to have 20-30 year old cabinets and countertops. (structure value of 160k ) and the 30k land value will increase to 60k in value. The land on the brick SFR will increase to 190k, and the brick structure should have a value of 105k.

        This puts the TownHome at a value of 220k and the brick SFR at $295.

        There is a simple way to back check this. Look at current listings of 1000 sf townhomes built in the 80-90's vs a 1000 sf SFR built in the 50's or 60's. In 1988, when the realtor was driving around their Pontiac Fiero listening to GnR, they could have bought either property for around 70k. Now, in 2015, which was the better investment?

        I would try to find an excellent deal on a 800-1500 sf structurally sfr sound house (or bigger duplex) with good lot/location. (quiet street, bigger lot, view, next park, etc)  Put 50% down and see if you like being a landlord.   Remember to always leave yourself plenty of cash.  If anything happens to your properties, (Eathquake, water damage, 2nd recession, sleeper cell compound, etc.) you are always better off holding some cash.  Good Luck

        Oh man, I HATE it when sleeper cell compound!

        love the analysis, @Randy Scott  

        @William Govans , take your time learning.  Don't jump into anything too quickly but, understand the different types of options out there and then make a well informed decision.  

        To Skylar's point there is often a lot of value in utilizing good debt, especially in today's environment.  

        Best of luck,

        Josh

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