Investing or Paying off Existing Mortgage in Todays Market!

10 Replies

My info: Primary residence is a Triplex bought at $320000 in 2011, current est $465000. Rent collected for 2 units $2300. Mortgage, insurance, taxes, & water = $2000 a month.

My initial plan: Buy a triplex or quad every 2-3 years.  Build income & get rich slow. lol.

My Dilemma: I have feverishly been working 3 jobs saving and looking for a new property for the past 2 years in the just outside Los Angeles city areas. Prices are skyrocketing! I mean, the places I recently looked at are lower end neighborhoods are $550000 with foundation and roof damage, where the rents would barely cover the mortgage, these would be investment only properties. The ones I really like, or would move into as well as be an investment, are $850000 to >1mil. 1. These are just out of, or are completely out of my price range.  2. Sometimes the financials on the more expensive ones wont break even and are in the Red!. Even My property I currently own, would barely make a profit if bought in today's market.

My Question: I've built up a significant down payment to buy a place up to $650000, but am starting to tire and be discouraged looking at the crap being offered. I could pay off around 3/4ths of my existing mortgage, but the investment seems to be doing fine the way it is. 

What wold be the better option? And what do you think is happening or will happen with today's market? Should the better option be to wait, build a larger down payment & see if prices fall?

Find a different market.  You're looking at a time where interest rates are very low, which allows you to leverage your equity out and actually put to work for you, but the market you're in won't allow it.

The USA has 50 states, and many cities within each state.  It amazes me sometimes why investors insist on losing money, or at best breaking even, staying in markets that are killing them financially.  There are too many other options (other markets) where the investment funds could be placed that are making money holding with very few properties needed.  This is the 21st century.

Joe Villeneuve
REcapSystem
A2REIC 

We are still investing but I foresee only another 2 years or so left in areas we want to invest. Mostly because of the interest rate. Have you looked in other areas of California. While the Valley has certainly increased, not that much! I buy houses out here from 160k-205k getting rents of $1400-$1600. Our taxes, insurance and mortgage is $950-$1200. You might also have to change your price point.

Hi Steven - Welcome to BP! I ran into the same trouble while living in the Washington DC area about 2 years ago, so I switched markets (Texas!!) and never looked back. Don't be afraid to consider a market you can't drive to - it really can be done. I spent a good year nearly every night online studying my new market, made one trip to tour homes (i live overseas), and got to the point where I was super comfortable with neighborhoods in the new market that I could make offers without seeing the house myself. 

On this point, it also helps to find a local agent and inspector who are tech savvy - I've been using FaceTime to tour properties and be "present" at inspections, which has worked out well and saves me money on airline tickets!

There is a whole world of great investments out there - just not in the LA area at this moment. BPers are investing in all kinds of markets outside of where they live. You can too! 

I agree with everyone up there you should definitely look at markets that make sense. 2nd tier cities are pretty good for investing and are relatively stable. 

Out here in Vegas, you can still buy SFRs for $175k ish and can rent it for 1000-1100. That's not a bad price point. I wouldn't really touch 4plexes and triplexes in Vegas though.

Thanks for the replies!

I had thought about leaving the Los Angeles County area a few times, as some of my colleagues and friends have actually done so. 2 moved to Texas. Just not ready to leave yet and don't really know where I'd go.  And being fairly new to investing I am reluctant to buy in a place I cant get to in less than an hour.  Maybe ill expand my search up to Bakersfield which is 2 hours away.

Tanya are you actually living in Washington and investing in Texas or did you just totally move your base?

Is there anyone Investing within LA County... and making money? Or any hopes of doing so?

@Steven Scott   I am in your same boat pretty much. I own a duplex 3 miles south of USC. I just rented out a 1 bedroom to a USC med student.

I want to do this again but I am looking to invest certain cities in the midwest where rent for a 2-3 bedroom costs $1500 - $2000 on one side of a duplex that would command 2-3 times more to buy in Los Angeles in a duplex that is similarly priced. 

And I'm told that those cities are over priced!  That tells you what the Los Angeles county market is like price wise. 

I have friends in finance who have told me to hold my money and wait till next year this time. They seem to think prices of properties will start to drop.

So if you can rest (3 jobs at break neck speed can cost you health wise) plus you want to live to see the fruits of your labor and start looking around in 12 months you might be in better shape to make serious moves.

Just a thought.

Good luck in your investing!

@Steven Scott  All of my family lives in the LA area, and I find that cash flow rental properties there are not only super expensive, but older and often run down or in so-so neighborhoods. 

All over Texas, you can buy something built in the last 10-15 years for a fraction of what you would spend in LA (or DC, for that matter), which will save you long term on repair costs. Tenants are also attracted to newer properties, especially in great neighborhoods with desirable school districts. 

Take a quick weekend trip and go tour some homes with an agent in a market you are interested in - you'll quickly see that its not as hard as  you might think. While you're there, also go visit property mgmt companies. If you pick a good mgmt company and a solid, cash flowing property in a desirable location, you really can't go wrong, imho.

Oh - and I don't live in the U.S currently. I'm in Caracas, Venezuela :)

I feel like I am in the same boat.  I bought two properties in Bakersfield in 2011 when prices made sense.  Prices have gone up dramatically since and no longer seem to work. 

Some of the price to rent ratios mentioned in the replies here do not meet my acceptable cash on cash return of at least 10%.   

For example 175k for $1000 rent would not meet my investment return goals. See the two scenarios below for what I mean.  (Please correct me if I am missing something here.)

Scenario 1: Financed Purchase

If you put 20% down and financed the remaining 140k at 4% and factored in 1% property taxes your monthly payment would be $814.21.  That leaves you $185.79 a month for maintenance costs and insurance.  Lets say insurance is a low $25 a month. That's $160.79 left for maintenance costs.

Lets say maintenance costs are an unrealistically low $50 a month. We have $110.79 left.  That's not including vacancies and property management (or paying for your time spent).  $110.79 x 12 = $1,329.48.   $1,329.48/$35,000 = 3.8% Cash on Cash return

Scenario 2: Cash Purchase

$1,000 - $75 (unrealistically low maintenance and insurance monthly costs) - $145 (1% property taxes, may be higher in your area) = $780. $780 x 12 = $9,360.

$9,360/$175,000 = 5.3% Cash on Cash return.

If I used the 50% rule on the scenarios they would have turned out even worse. Investors buying at these high purchase price to rent ratio make it harder for me to find something that is actually investible. 

Again, Thanks everyone for the replies!

My update is I finally found a triplex and am in escrow in Harbor City...

The Rundown: Price $520,000, Down Payment $130000 (Gulp, whew sometimes its hard to say that), Mortgage (4.25%No Points), insurance, taxes, & water = $2700 a month. Rent for all three units together is $3200.  Redfin.com Refund $4200 ( I love Redfin!).

Annual ROI ~ 4% with me maintaining and managing.

The numbers could be better. I know it doesn't follow any investment rules. I don't think any property in SoCal does.

@Steven Scott  This has probably been said already, but I would look in a different market, and possibly break up your sizable down payment to purchase multiple properties

Brandon L., Real Estate Agent in VA (#0225225026)
571-510-0027

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