Real Estate Investor · austin, TX · Member since 2014 · 57 posts · 7 votes
I don't know what property to buy:
Property A: Pros: In up and coming area. This area WILL appreciate significantly over the next 5-10 years. A great LT investment. Had remodeled bathrooms. Great location. Cons: will need new roof in 5-10 yrs. Needs all new floors (1500 sf), new kitchen. New HVAC. Popcorn ceilings have to go. Price 257K - mortgage is around 1700/mo. Rental comps are about 1500/1600ish.
Property B: Pros: Price 180K, which I love. Rental comps 1300-1400. Mortgage 1100. In less desirable area (not as much to do - mostly residential), but usually easier to find renters. HVAC and roof are new. Also has a beautiful view of a stream from the back porch. Cons: Probably won't appreciate as much as Property A due to location. Needs new flooring, kitchen, bathrooms, popcorn ceiling.
Ideally, I'd want something that will appreciate but also be able to rent out in 1-2 years after I move to my next property.
Chicago, IL · Member since 2015 · 298 posts · 261 votes
10y
As Jacqueline stated Prop A is cash flow negative and to me that is a non starter. Even if in 5 years you can gain significant equity, there is no way to know what will happen by then. What is appreciation slows down? It is akin to gambling and investors are not gamblers. Even if it appreciates, with the amount of cash you are paying just to keep it afloat you might end up just breaking even in the 5-10 years.
Prob B is also cash flow negative once you factor in maintenance and reserves. I personally would not buy it either especially given the fact that you said appreciation is much less likely.
That is my opinion based on the initial reading of what you wrote.
Investor · Corona, CA · Member since 2014 · 746 posts · 372 votes
10y
Which best meets your current goals? Prop A seems like a good long term place and if it appreciates as much as you anticipate in the next 5-10 years, you could use some of the equity for the roof and still have equity left over to possibly put down on another property.
Edited to say: Prop A currently looks cash flow negative. So you'd need those updates, the rent would need to be in line to make money. Even with appreciation, who would want to be out of pocket every month for the next 5-10 years?
Chicago, IL · Member since 2015 · 298 posts · 261 votes
10y
As Jacqueline stated Prop A is cash flow negative and to me that is a non starter. Even if in 5 years you can gain significant equity, there is no way to know what will happen by then. What is appreciation slows down? It is akin to gambling and investors are not gamblers. Even if it appreciates, with the amount of cash you are paying just to keep it afloat you might end up just breaking even in the 5-10 years.
Prob B is also cash flow negative once you factor in maintenance and reserves. I personally would not buy it either especially given the fact that you said appreciation is much less likely.
That is my opinion based on the initial reading of what you wrote.
Rental Property Investor · Rockwall, TX · Member since 2015 · 891 posts · 701 votes
10y
I agree with @Nnabuenyi Anigbogu and I think his advice is sound. Buying properties with negative cash flow and hoping for appreciation is speculation. If the market turns, you could be in for a nasty surprise.
Real Estate Agent · Brooklyn, NY · Member since 2015 · 231 posts · 66 votes
10y
Hey I agree with many of the previous posts. Just a secondary piece of advice. I am one for never rushing into anything. If you aren't sure and don't have the time to make a decision you are comfortable with then you definitely should wait.
I think that opportunity will always come around and if you aren't sure that this is a good opportunity then I would sit this one out.
Sam Harris.
Rental Property Investor · Knoxville, TN · Member since 2015 · 45 posts · 24 votes
10y
Your last sentence says you plan to rent it out in a year or 2? Does this mean you are looking at this to be your primary residence? If so, I would get the cheaper house assuming its not an hour from work and stockpile the extra cash for the next deal. If you are buying for a rental immediately, I seriously doubt either will cash flow.
Asa
Rental Property Investor · Lynnwood, WA · Member since 2015 · 45 posts · 21 votes
10y
There are four major ways of making money in Real Estate,
1.When you buy.
2.When you sell.
3. Equity
4.Cash flow.
I think you always buy to make money from now going forward.
With that said, every investor has their own philosophy on What, Why and How they invest.. So big question becomes.... How do you want to make money off your investment.
Cash flow is king.
Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
10y
Unless you are dam sure about appreciation neither of deals makes sense. Banking on appreciation while having a negative cash flow is the way a lot of investors have gone out of business.
Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
10y
In my opinion, saving 30% on purchase price (B) for a sacrifice of just 14% in rental return is heading in the right direction, but not enough unless POSITIVE cash flow is nipping at your heels. Counting on future appreciation and/or deliberately losing money to supposedly "save" on Tax should be seen for what it is: Gambling! Do you feel lucky...?
Real Estate Agent · Port Huron, MI · Member since 2012 · 295 posts · 82 votes
10y
Based on the information you provided I would not buy either of them. Please provide ARVs for both properties. Even with ARVs you would be looking at a live in fix and flip situation. One last thing, best and final means a multiple offer situation, if you're an investor act like one and stick to the numbers.
Realtor · Cleveland, OH · Member since 2015 · 2k+ posts · 857 votes
10y
If you all don't like negative gearing you could not invest in Australia. Investors have based their whole strategies off negative gearing.
I like to gamble. GO A! Negative gearing ain't bad if you are for sure that it will appreciate. The fact you are from Austin I'm thinking your on decent pay and the property will go up.
Every investment has risk and rewards. If you going to live in for a while as well then go A, bigger tax write offs!
Also if you keep trying to look a for a deal as everyone here says you're going to be on the side line for a while. Take the plunge but learn to swim. Least your in unlike a whole bunch of tyre kickers
Investor · Lafayette, LA · Member since 2015 · 152 posts · 50 votes
10y
I agree with everyone else, going for property A is gambling, pure and simple. Sure it may appreciate over the next 5-10 years, but how many on here believe that there won't be some type of market correction in that time. Plus will the appreciation cover the negative cash flow during that time AND make a profit? If you can't guarantee it, why do it?
Investor · Austin, TX · Member since 2015 · 8 posts · 2 votes
10y
Property B. The reasons are:
1. Better fundamentals "as of today". Don't go for Appreciation. Austin is not like Manhattan or San Jose. Austin + Texas has lot of land that builders can build to eternity. Just needs to some good corridors/arteries to connect to the central area.
2. Gambling on Appreciation is when you have some "other" financial backing to fallback on when things go wrong. Not typically when starting out or have a lot of mouths to feed etc. and in a already a "frothy" market and rising values for last 7 years.
3. If you are too much of a negative cash flow, couple of large expenses will put into a large hole.
So, being realistic is the key and RE market is local..So base your expectation on that and not looking at other RE markets like CA etc.
Investor · Saint Augustine, FL · Member since 2015 · 227 posts · 61 votes
10y
I would not purchase either for the reasons clearly stated above...add on to that you feel rushed...as an aside a lot of Realtors seem to be trying to create a bidding "frenzy"...I would walk away from both....however if you go for it then good luck and let us know how it goes ...
Investor · Coplay, PA · Member since 2015 · 404 posts · 315 votes
10y
Neither one sounds good. I am not against a negative cash flow if there are perks that make up for it. Appreciation is not a perk.
I do not figure appreciation in on buying a property. i
Sounds like a money pit with all the upgrades you are planning on doing.
I am settling on a property tomorrow that will cashflow at $33.59 month. Benefits: no cash out of pocket. $1700 in my pocket at closing. Paid off in 10 years. Money put aside for vacancy, minor and major expenses each month. Property manager. Tax benefits. Very minor updates $500. More updates when the first tenant moves out.
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y
Some important details missing here. What discount from market value, in their current condition, can you acquire property A & property B for? If you are a newbie buying through a realtor off of MLS in a hot market like Austin, assume this would be $0 (or maybe even negative).
Second, what will the homes be worth AFTER your remodel, and what will those remodels cost you? In a high appreciation, low cash flow market like Austin, you need to think and run your numbers more like a flipper, even if you intend to live there 2 years and hold as a rental thereafter. This value add IS likely your profit in the short term, and in the long term if you are right about appreciation then rent growth will take care of the cash flow. If you are wrong, then you still have your value add equity bump. So long as you have good value add opportunity, a good solid down payment (20%), and the means to hold as your primary indefinitely in case you are wrong about appreciation, I see no problem with it. I would not move and turn it into a rental until it can support itself with positive cash flow, though ... if after 2 years it won't and you need or want to move, then sell and take your profits tax free.
I would suggest that folks from high cash flow, low appreciation neighborhoods that are spouting advise that may work in their neck of the woods, may not be successful applying the same strategy in a completely different market. Real estate is local, what works well in one market may not be appropriate for another. There are smart, non-speculative ways to turn a profit in REI in just about any market, but they are not likely to be the same strategy from one market to the next.