Income production in an over priced market

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Income production in an over priced market

Danni Catambay
Member since 2019 · 35 posts · 8 votes

Hi all,

New investor here looking to house hack a first investment property. I'm in western North Carolina which is a "hip" vacation and arts destination for many. Medium incomes are the low $30Ks, but median home prices are closer to $300k -- so a big disparity in income and home prices. Rents are also pretty high with centrally located one bedrooms going for $1000/mo and immediate suburbs going for around $650/room/month. 

My job is low income so I'm looking for properties that I can mortgage for under $800/mo (could stretch to $1000 if I had solid rental potential, but that's scary), but here's the deal: most properties for sale under $150K need massive structural repair that would kill the 1% rule.

So I'm wondering if anyone else has a good rule or advice for how to evaluate a property for its income generating potential in these circumstances. I'm ok with not hitting the 1% rule if I can house hack my way out of an apartment and generate some extra income. My concern is that with a low paying job, I don't want to cut things too close because then I will never be able to save enough for the next property. 

Thoughts? Advice? Links to relevant blog articles?

Thanks a bunch!

-Danni




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Brent Paul
Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
7y

Unfortunately you may have to pick up some side hussle with another job.  That's what I did along with not going out to eat and way more ramen noodles than I ever want to eat again.  There are ways to save money if you really look.  Think about how many people go out to lunch every day or have to get that starbucks every morning.  Those things really add up.  I worked 2 full time jobs for almost 2 years to get my finances sorted out.  Did it suck?  Yeah, but I did it because I needed to.  In a world of I can'ts turn that around to I can and this is how I can do this.  You can do this.  I also had an infant during this time.  I still woke up with him every morning, picked him up from daycare, made supper, etc.  

The other mistake I see a ton of people do is charge up their credit cards and buy a brand new car. Don't do that if you don't have to. Keep your cards at a little to no balance. If you have to get a car buy used. If your DTI is too high you won't qualify at all. I was less than 1% from not qualifying for a conventional loan. I had 1k left on my car that I paid off which allowed me to qualify for a 5% down conventional loan.

Properties come and go all the time.  Just concentrate on getting your savings up for a down payment.  Don't sweat the small stuff or you will drive yourself nuts.

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  • Aaron K.
    Specialist · Riverside, CA · Member since 2015 · 6k+ posts · 3k+ votes
    7y

    @Danni Catambay the more you save for the down payment the less close you will cut your budget it may pay to be patient if your risk tolerance doesn't give you nerves of steel and that's okay, also consider taking on a roommate where you are now and see if renting by the room in an SFR is something you'd even enjoy before you fully commit, it will also help you save more aggressively.

    1Reply
  • Danni Catambay
    OP
    Member since 2019 · 35 posts · 8 votes
    7y

    Hi Aaron!

    Thanks a bunch for the reply! I'm currently in a dorm that is $50/mo below what my hourly job can support as "affordable" (according to the "experts"). It took three weeks of searching and it's the best I could find. Getting into a property that I own and getting roommates is my strategy, but the market out here isn't giving me anything close to the 1% rule on MLS.

    Basically, I'm trying to identify properties that are within what I can qualify for on a homeowner's mortgage (bank told me $170K) that will give me enough cash flow to have wiggle room to save up to buy another. 

    My concern is that waiting for a 1% property in the market that I'm in will leave me waiting forever. And in the meantime my budget is so tight I worry that my savings could erode to the point that nothing is in my reach (irrational worry? Please tell me it is!)

    0Reply
  • Bryan Devitt
    Contractor · Oxford, MA · Member since 2018 · 807 posts · 745 votes
    7y

    Markets move in waves, if your market is at a peak right now, it will come down. How much is anyone's guess but nothing stays at it's peak forever. With that said the only way to be successful is to sacrifice. If you can only get low wage jobs right now, get two of them. Eat Ramen for a year straight, don't go out, don't buy alcohol, don't buy anything for a year. If it isn't life or death, don't spend money on it. If your job doesn't have big upside, find a place that does. Many jobs start out at minimum wage or close but a few of those are large companies where you can go from minimum wage to $50k in a handful of years where most will always be low wage. With the right combination of sacrifice, planning and the right decisions you can overcome anything and get to where you want to be 

    0Reply
  • Brent Paul
    Rental Property Investor · Shakopee, MN · Member since 2015 · 985 posts · 374 votes
    7y

    Unfortunately you may have to pick up some side hussle with another job.  That's what I did along with not going out to eat and way more ramen noodles than I ever want to eat again.  There are ways to save money if you really look.  Think about how many people go out to lunch every day or have to get that starbucks every morning.  Those things really add up.  I worked 2 full time jobs for almost 2 years to get my finances sorted out.  Did it suck?  Yeah, but I did it because I needed to.  In a world of I can'ts turn that around to I can and this is how I can do this.  You can do this.  I also had an infant during this time.  I still woke up with him every morning, picked him up from daycare, made supper, etc.  

    The other mistake I see a ton of people do is charge up their credit cards and buy a brand new car. Don't do that if you don't have to. Keep your cards at a little to no balance. If you have to get a car buy used. If your DTI is too high you won't qualify at all. I was less than 1% from not qualifying for a conventional loan. I had 1k left on my car that I paid off which allowed me to qualify for a 5% down conventional loan.

    Properties come and go all the time.  Just concentrate on getting your savings up for a down payment.  Don't sweat the small stuff or you will drive yourself nuts.

    3Reply
  • Carrie K.
    New to Real Estate · Sacramento, CA · Member since 2015 · 104 posts · 33 votes
    7y

    A second job might help. Like others, I worked a full time office day job and also bartended at night to afford my first property.

    I'm a little unclear on what exactly you're trying to buy. Does it have other bedrooms so that you can have roommates? I think that'd help. It sounds like you already thought of that, so here are a few other ideas: could you find a place that has non-bedroom space that you could nevertheless rent out as a bedroom to increase the number of rooms rented? (E.g., a dining room that nobody needs. Podcast 329 discusses converting garages to bedrooms.) Instead of renting each bedroom out for say, $500, could you put two beds in there and rent it to two people for $350 apiece? Could you earn more putting the rooms on AirBnB? Could you go camping one weekend every month and put your own room on AirBnB then? Could you buy on a larger lot and split the lot to sell half? Could you rent the garage or a storage shed out for parking or boat storage or something? Could you get enough land with the house that you could set up a yurt or trailer or tent space and market it to tourists as "glamping?" 

    I agree it might be a tough challenge in today's market -- I'm dealing with the same thing. The other podcast I like on this topic is #338, James Dainard. They talk about how you can't find deals these days -- you have to create deals by finding value other people aren't seeing.

    Good luck!

    2Reply
  • Justin Ellis
    Property Manager · Scottsdale, AZ · Member since 2015 · 113 posts · 77 votes
    7y

    @Danni Catambay I would start with diving deep into a podcast by a guy named Chris Guillebeau, it's called side hustle school. There are so many great ideas here that it's almost overwhelming, but it gets you thinking what your skills are and how you can leverage them to create imcome outside your day job.

    Also, a WRITTEN budget is mandatory. Although I don't agree with everything Dave Ramsey says in regard to finance, he's got the fundemantals down. If you don't have a written budget, get one now!

    Lastly, keep looking, but I would make that a secondary activity to setting a savings goal and hitting it by budgeting and hustling! The right place will come along and you'll be ready at that point.

    1Reply
  • Meir Greenblatt
    Rental Property Investor · Houston TX / Tacoma WA. · Member since 2019 · 166 posts · 89 votes
    7y

    @Danni Catambay

    If you can rent a 3 bedroom, and then have 2 roommates or airbnb it, then you van house hack with out all the debt, if you don't qualify you can have someone close co sign with you.

    I just want to make the 1% and 2% rules clear,

    2%: if you buy a house that the monthly income is 2% from the purchase price, then its likely to be a GOOD deal, but NOT necessarily!

    1%: if you buy a house that the monthly income Is BELLOW 1% from the purchase price, then its likely to NOT be a good deal, but not necessarily.

    For example my condo rents for 1.7% of the purchase price, but I cash flow $300 a month before management fee, capital expenditures, and vacancy, if I do Count them all then my cash flow is $0. Hoa is 1 problem I have, and I bought 500 ft. From the ocean so I have HIGHER insurance.

    I did buy the property before I had any RE education, but I would have not done the deal if I knew it all.

    1Reply
  • Danni Catambay
    OP
    Member since 2019 · 35 posts · 8 votes
    7y

    Thanks everyone for the replies. What I'm gleaning is that creative renting to "force" a 1% rent is going to be my best bet. Luckily, I'm in an area full of hippies who would happily go for that kind of stuff. Unluckily, rent estimators don't give me those numbers, so I'd be on my own figuring them out. 

    Re: the "work more/save more" responses. I understand that for most people that is a solution they haven't employed and that they come from a place of good intention. Without going into great detail:

    A. I'm disabled and can't work full time+

    B. I'm already at rock bottom spending -- house hacking is my only hope right now to lower my costs

    So maybe a related question here (can post to a new thread if that's better): What kinds of deals that HAVEN'T made the 1% rule have people nonetheless made work?

    0Reply
  • Paulina Lagudi
    Member since 2019 · 10 posts · 1 vote
    7y

    Would an FHA 203K loan be something for you to look at @Danni Catambay? It's the FHA loan for homes that need rehab. It wraps renovation and purchase or renovation and refinancing costs into one mortgage. Is this something that might help you with the homes in your budget that need major fixing up?

    0Reply
  • Danni Catambay
    OP
    Member since 2019 · 35 posts · 8 votes
    7y

    @Paulina Lagudi

    It's something I'm considering. How do you get the loan to cover rehab costs? Do I need to talk to an FHA specialist?

    I've got a solid down payment, but with home prices so out of sync with incomes (my own included) in my area, my biggest obstacle is knowing what would be a good investment given the circumstances. There are lots of cottages (<900sqft, 1 or 2 beds) that just don't seem viable as rental investments, and a lot of decent homes (2-4 beds, 1000+sqft) that are $50K above what I can qualify for with a mortgage -- and that would only rent for .06-.08 of their purchase price. 

    I'm willing to be *really* flexible with location, quality, whether or not I van-hack in my driveway -- I just don't wanna sit forever on my cash and never pull the trigger >.<*

    0Reply
  • Carrie K.
    New to Real Estate · Sacramento, CA · Member since 2015 · 104 posts · 33 votes
    7y

    The 1 percent rule is just a rough estimate. If your city has high/low taxes or utility costs, and if you're going to self-manage the property, it might be higher or lower. Have you tried the BP rental property calculator (under "tools" above)?

    Maybe you could find someone like-minded to sit down with you, look at the numbers, and then get creative -- maybe your realtor? I don't know NC or where you are, but just to throw out an example, what about this one near Asheville (in Woodfin)? $235k for 4 BR. At 5 percent down, you're owing maybe $1400 / month in PITI, but if you can rent 3 of those bedrooms for, say, $400 / month (or more?), and then get everyone to split the utilities with you, you could still save something like $500-800/mo for future maintenance, capital expenditures, and vacancies. It's not the 1 percent rule. But if you're finding the tenants yourself (instead of paying ten percent to a property manager), getting your housemates to share the cost of utilities with you, shoveling the snow and mowing the lawn yourselves, etc., it might not need to hit that mark. I'm just throwing that out as an example for the sake of conversation; I'm not saying it's the perfect house or location.

    Anyway, good luck!

    0Reply
  • Danni Catambay
    OP
    Member since 2019 · 35 posts · 8 votes
    7y

    @Carrie K. -- That's about the game plan I have been considering. Although, with your example I'm a little confused 400/mo x3 rooms = 1200 income and 1400 outflow in PITI only. Am I missing something?

    What I'm understanding from reading yours and other people's examples is that the 1% rule is a rough guide to get you to a point of positive cash flow, but that the amount of net income you take home at the end of the month (year) is really a personal choice. If the markets offer you 1% -- whoopie! because it means you're beating the stock market in returns. If the market doesn't offer you 1%, but you're still taking home something decent, you could still beat the stock market or achieve some other goal, such as matching the stock market but with less volatility, and be ok.

    Thanks to everyone for their comments! I'm feeling a little more positive about my options now. Off too see a house this morning!

    0Reply
  • Carrie K.
    New to Real Estate · Sacramento, CA · Member since 2015 · 104 posts · 33 votes
    7y
    Originally posted by @Danni Catambay:

    @Carrie K. -- That's about the game plan I have been considering. Although, with your example I'm a little confused 400/mo x3 rooms = 1200 income and 1400 outflow in PITI only. Am I missing something?

    What I'm understanding from reading yours and other people's examples is that the 1% rule is a rough guide to get you to a point of positive cash flow, but that the amount of net income you take home at the end of the month (year) is really a personal choice. If the markets offer you 1% -- whoopie! because it means you're beating the stock market in returns. If the market doesn't offer you 1%, but you're still taking home something decent, you could still beat the stock market or achieve some other goal, such as matching the stock market but with less volatility, and be ok.

    Thanks to everyone for their comments! I'm feeling a little more positive about my options now. Off too see a house this morning!

    I might be the one who is confused, but to explain, my logic is $1400 that you'd need to pay minus $1200 from others means you'd personally pay $200 to PITI yourself. I assumed (rightly or wrongly, I don't know) that you all could split utilities 4 ways for about $100 each? If so, then out of your $800-1000 monthly budget, you've spent $300, leaving you $500-700 to save for maintenance or repairs or a down payment on your next property. The nice thing about house hacking is that you don't exactly have to hit the 1 percent rule to come out ahead of where you would be if you were paying rent somewhere. But if you want to move out in a year, this might not work (unless rents are going up quickly).

    Anyway, hope you find something good!

    0Reply
  • Danni Catambay
    OP
    Member since 2019 · 35 posts · 8 votes
    7y

    I see where you were going with this. And I agree -- house hacking has slightly different cost/benefit analysis than a straight up rental. Basically you have to compare what your cash flow is in your current rental situation vs. in a hack. For example:

    Current: Renting a tiny apartment for $150/wk utilities included

    -> Current cash flow = -640/mo

    VS.

    House hack @170K purchase price, (say) 1000/mo rental income. PITI = $850. Utilities 150. Maintenance etc est = 150 (for easy math) vacancy = 0% (for easy math)

    -> Alternative cash flow = 1000 - 850 - 150 - 150 = -$150/mo

    So in this set up I'd still be negative cash flowing, just way better than if I was in a rental.

    Now, the only part of this comparison that I haven't quite gotten my head around is the ROI -- the rental purchase requires an outlay of several thousand in cash down payment that the rental doesn't. This is where I'm not sure how far to deviate from the 1% because as long as I'm net positive for the month with all my other expenses (food, gas, general living etc), it could be a better use of my funds to wait in the rental until I have a larger down payment/better ROI deal. Just not sure how that math works out.

    0Reply
  • Jon A.
    Asheville, NC · Member since 2017 · 385 posts · 274 votes
    7y

    @Danni Catambay, I would look outside of town if I were you. Out in the county, possibly down in Old Fort. There are still deals to be had but you have to look further out of city limits. Have you considered a USDA loan? 

    0Reply
  • Danni Catambay
    OP
    Member since 2019 · 35 posts · 8 votes
    7y

    Since I'm trying to house hack I'm restricted to where I can reasonably commute to. I've got a search parameter set for 30min from my job. It includes some countryside, but the market here is just out of sync with the economics. Too many retirees and vacation home owners

    What's the benefit of a USDA in this situation?

    0Reply
  • Jon A.
    Asheville, NC · Member since 2017 · 385 posts · 274 votes
    7y

    @Danni Catambay a USDA loan is %100 financed but it must be in the county. I believe it is to get people to buy in rural areas. 

    0Reply
  • Jon A.
    Asheville, NC · Member since 2017 · 385 posts · 274 votes
    7y

    One last thing, in our market the homes are obviously over priced to cash flow. Specifically, smaller single family homes. There is absolutely nothing wrong with making low offers. Look for homes that have been on the market for a long time for whatever reason. Those have become stale listings in my opinion and the owners may be willing to take less. That is how I found my duplex downtown. It had been on the market for at least 6 months. It was winter and the house was empty. The owners lived out of state and I watched them drop their price several times over many months. Eventually, I offered them tax value and they accepted. So in the end, I bought it for roughly half of their asking price when they started out. If I remember correctly they started at about $350k and I ended up offering them $211k and this was at the height of the market in 2006. 

    2Reply
  • Danni Catambay
    OP
    Member since 2019 · 35 posts · 8 votes
    7y

    @Jon A. Thanks for the anecdote! I know winter is when a lot of prices come down and the market cools, so I'm trying to be patient. My realtor said he's ok with passing along low ball offers on my behalf, so I'm working on a strategy of just offering what I can make work and moving on if it's not accepted. There's just nothing good out right now... everything is either one-step-above-condemned, or out of my price range -- or both sometimes!!

    1Reply
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