Long term investing....Real...... Long term

12 Replies

Happy Fourth of July everyone ! 

So the other day, a friend of mine came up to me. He knows that I am real estate investor and realtor, and he always likes to pick my brain over this and that....usually something very silly.

But this one was good, and it got me thinking.  So this friend of mine is in his late 30s, and has another 30 yrs of career left ahead of him before he wants to retire.  He lives on the east coast in the DC area, and plans to retire out in the Phoenix, AZ area as he has lot of friends and family on the west coast. 

So he wants to buy a property in Phoenix area which can be rented out, for another 25-30 yrs before he retires and can be his retirement home.  

I suggested him a TK model in parts of the country where TK business is a viable business model, but as far as I know there aren't any TK providers in Phoenix. Secondly, a lot can change in a given area when we are talking about 30 yr time frame. Even in Northern VA (where I am) areas have changed drastically in 30 yrs. The time frame is the major drawback in his analysis. Additionally, I suggested that he might not make a whole of profit, to which he responded that as long as he breaks even, he is happy.

The positives in his analysis, is that since the pouring of California residents and retirees in the AZ market, it seems lot of people are bullish on AZ (especially Phoenix), so as long as the demand keeps going up, he can buy the property relatively cheaper.

Has anyone done this kind of investment?

Originally posted by @Chinmay J. :

Happy Fourth of July everyone ! 

So the other day, a friend of mine came up to me. He knows that I am real estate investor and realtor, and he always likes to pick my brain over this and that....usually something very silly.

But this one was good, and it got me thinking.  So this friend of mine is in his late 30s, and has another 30 yrs of career left ahead of him before he wants to retire.  He lives on the east coast in the DC area, and plans to retire out in the Phoenix, AZ area as he has lot of friends and family on the west coast. 

So he wants to buy a property in Phoenix area which can be rented out, for another 25-30 yrs before he retires and can be his retirement home.  

I suggested him a TK model in parts of the country where TK business is a viable business model, but as far as I know there aren't any TK providers in Phoenix. Secondly, a lot can change in a given area when we are talking about 30 yr time frame. Even in Northern VA (where I am) areas have changed drastically in 30 yrs. The time frame is the major drawback in his analysis. Additionally, I suggested that he might not make a whole of profit, to which he responded that as long as he breaks even, he is happy.

The positives in his analysis, is that since the pouring of California residents and retirees in the AZ market, it seems lot of people are bullish on AZ (especially Phoenix), so as long as the demand keeps going up, he can buy the property relatively cheaper.

Has anyone done this of investment?

happens everyday.. people buy their retirement home well in advance..  usually in more rural areas .. I think limited factor or unknown is water.. but who knows..  SALT is affecting all the high tax and high priced real estate markets.. to the benefit of low tax lower price point markets..  

Definitely a smart move.  Have someone pay for the home you plan to move into.  In 30 years there will be repairs/upgrades needed.  He needs to come up with a strategy to cover that work.

Originally posted by @Shadonna N. :

Definitely a smart move.  Have someone pay for the home you plan to move into.  In 30 years there will be repairs/upgrades needed.  He needs to come up with a strategy to cover that work.

 I believe his strategy is to buy a condo unit so he is only responsible for the inside. 

My question why doesn't he buy and play the appreciation game.  Even at a modest 1% a year (talking metro northeast)  even he he invests locally, he has someone else paying down the mortgage to a point where when he's ready he can just make it his primary residence towards the end to avoid capital gains tax and just keep it moving in 30 years with a nice chunk of change.  Also 30 years is alot of time for any residence. My parents both a newly updated house 31 years ago,  today it needs a major updates. My current condo is only 40 years old and I had to do major updates and I don't have half the amenities all of the new builds offer. Neighborhoods that once were desirable are not and ones that weren't are.  Change is inevitable. 

@Chinmay J. - With historically low residential interest rates, 30 yr fixed term debt is as close to free money as we've seen.  The delta between the interest rate and inflation is minimal, inflation also reduces the real time value of the fixed payment over time, and rents tend to rise with inflation.  Meanwhile the note is paid down by the tenant.  And of course there are tax benefits.

Granted, the market may go through multiple cycles over 30 years, but so will everything else.  For a 20-30 year strategy the buy side is less of a concern and turn key could be a reasonable solution.

I’ve lived in Phoenix for 38 years. I think it’s a bad idea to buy here for the purpose of retiring to that exact house in 30 years.  

The heat is getting worse year after year because of global warming and the “ heat island effect”, where more concrete and roads that hold heat mean the temperature stays hotter at night.  It’s noticeable in the time I’ve been here.  

Your friend may not want to live in the Phoenix area at all.  He may decide to retire where his grandkids are, which is common. 

Neighborhoods in Phoenix and surrounding cities change over time, and a good one today may not be desirable in 30 years.  The house will be old by Phoenix standards then, and outdated in looks and technology.  

Why would he want to buy a house for 350K or more and only break even over 30 years?  I would advise him to invest that money in the stock market.  In 30 years, he’ll be able to buy a much nicer brand new house, with lots of money left over.  And no worries about being a long distance landlord all that time.   

@Gregory DeRosso and @Lauren Kormylo  - Both of you are spot on and I had advised him the same. We will see if this post and responses from y'all helps him at all to change his mind.   Just in my DMV area I have seen once that were Class A pockets go to Class C and ones that were Class C have now become  Class A (thanks to gentrification) in last 20 yrs that I have been living in this area. 

BTW - He wasn't thinking of buying $350K house.. He is too cheap for that LOL.. More like a $100K condo.. $125K max

@Bevla Reeves - TK is Turnkey. It is a model where the operator buys junk properties in decent neighborhoods, and rehabs them and sells them to either newbie or out of state investors with tenants in place.  This model is typically used in Indianapolis, Kansas, Cleveland... usually in midwest. 

@Chinmay J. , that’s on the very low end of prices. What your friend will get for 125K or less is a 2 bedroom condo, under 1000 sq ft, in a C or less neighborhood.   I’m sure living in D. C., he will not want to retire to that.  Prices have gone way up here.  I mentioned 350K because that is around the level of quality, neighborhood, and amenities he would want to live in after living in DC.   

Originally posted by @Chinmay J. :

@Gregory DeRosso and @Lauren Kormylo  - Both of you are spot on and I had advised him the same. We will see if this post and responses from y'all helps him at all to change his mind.   Just in my DMV area I have seen once that were Class A pockets go to Class C and ones that were Class C have now become  Class A (thanks to gentrification) in last 20 yrs that I have been living in this area. 

BTW - He wasn't thinking of buying $350K house.. He is too cheap for that LOL.. More like a $100K condo.. $125K max

@Bevla Reeves - TK is Turnkey. It is a model where the operator buys junk properties in decent neighborhoods, and rehabs them and sells them to either newbie or out of state investors with tenants in place.  This model is typically used in Indianapolis, Kansas, Cleveland... usually in midwest. 

 Oh, got it!  BP is usually very good at providing hover definitions for acronyms, but they don't have one for TK! ;)) Thanks!

Why not invest in an asset in appreciating market that will provide the best risk adjusted ROI and when it's time to retire he can sell/refi and then decide where he wants to live?

The two main reasons are: 

1.) Take emotion out of investing. If your dream retirement home is also your investment property you are likely to make decisions that you otherwise wouldn't if it was a pure investment. These decisions probably won't be smart ones. The goal should be to be set up for retirement in the terms of financial freedom/flexibility not just a place to hang your hat. 

2.) 10 or 20 years is a long time to know where you'll want to be. 30 years is (like you said) a really really really long time. Ideally your friend may be a bit more well off and would like to retire in something nicer than a $100k condo. Maybe he won't want a condo at all. If his family has grown (kids, grand kids, pets, etc) he may have different needs than he does now. 

All I know personally is that I have no idea what my wants/needs will be in 30 years.

If your friend wants to make 0 return and have the mortgage paid off over 30 years by a tenant, then almost any house would work for that in the Phoenix area.  However if he can only invest in houses in the 100K range, he's better off not investing at all as 100K is not going to buy you much.  He would be better off putting his money in a crowd funding project yielding 8% over 30 years.  If he started with 30K at an 8% rate he'd have 300K after 30 years.  With 30K down on a 120K house, I'm not sure that house would be worth 300K in 30 years.   @Chinmay J.