Should I Buy This Property (First Time Buyer)

Question

After sitting on the sidelines trying to get into real estate investing for several years, I have the opportunity to purchase a 1 bed, 1.5 bath home in a desirable part of the California desert.

The purchase price is $299,000 with a 7.3% interest rate and 3% down. My plan would be to live in it for a year and then start renting it out.

The property would rent long-term for $2,500 currently. As a short-term rental, it would make $4,000 a month during the "season" (five months in the winter) and about $2,500–$3,000 in the non-season (the rest of the year).

During year 2, when I would be able to start renting, I would make about $500 per month in profit during the season and lose roughly the same outside of the season. However, this home is located in a market that has enjoyed significant appreciation over the last 20 years and has seen significant investment in recent years to provide strong additional appreciation potential in the future.

With current projections, I could expect to start cash flowing every month, and not just during the season, in about 5 years, in addition to the appreciation the property is expected to gain. My plan is to hold the place long-term and use it to help gain a stable income during retirement.

Do you think this is a good deal, or do you not recommend doing this?

Eric Olsen · Answer

Thanks for your reply! If I buy with 20% down instead of 3% the property would then be cash neutral half the year and cash flow $1,000 per month the other half. Do you think the deal would be more viable under those circumstances?

Benjamin Aaker · Answer

I'm a little hesitant about the profit in year 2. It looks like you are hoping for appreciation, but you don't receive any of that until you sell. Rent appreciation might be what you are mentioning. The risk is that it doesn't appreciate - you have no control over that. Your monthly mortgage will be about 2,000, which won't pay the bills as a long term rental.

I'm all about equity and I think it is OK to not have cash flow, but you need to have a plan to continue paying the mortgage if things get tough. If you have a solid other source of income like a W2 and it is secure, and it can pay the bills, then this might be worth trying. Deals like this one, probably won't scale very well, though.

Jeremy Fleming · Answer

Well, here's a few thoughts from the trenches. I have always been one to invest in 3+ bedroom homes, for resale reasons.
As well, I would not recommend buying a cashflow negative property, or even breakeven for that matter, as there are lots of places to buy at positive cashflow - unless you have endless cash reserves and money is not a concern for you.
Also, what's your plan if the market slows down or stagnates? It happens - I live in a super hot market, that collapsed a little over a decade ago, and it's been a tough climb back to where values should be.
I'm not trying to be a doom and gloom investor here - just wanted to point out a couple pitfalls you might want to consider. If you have more questions, fire away!
Cheers.

Should I Buy This Property (First Time Buyer)

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