Tell me if I’m wrong but....

23 Replies

Might be a little long winded but I don’t really know who else to ask and there seems to be a lot of knowledgeable individuals on here. Anyways, I’m looking for someone to tell me if my strategy is flawed, sound or could be done better.....

I am 30 years old, family of 5, six figure income living in a very affluent Southern California city where six figures doesn’t go far. I have a good job that offers a healthy pension and I make outside investments into 457 etc..... but I want to retire early and am planning on doing so with rental property. 

I have one property already that is cash flowing which is great. I want to move my family down to Oceanside ca and buy a single family home. Oceanside offers some of the last affordable beach city property in so cal, the neighborhood seems like it’s gentrifying and I truly believe over the years you will see a huge increase in the home prices in that city. My wife does not want to move the kids down there until the neighborhood gets nicer. My question is would it be a bad move to purchase a home and rent it out while we wait for the neighborhood to improve? I am into these properties for the long haul. 20-30 years from now. Does it matter if I lose 100, 200 or 300 dollars a month on it when I know eventually it will Eventually be Paige off by renters and will be all positive cash flow down the road? The way I see it..... it’s no different than putting that money into the stock market or 401k or whatever’s. You tuck into away and hope to get a return down the roadblock. Any advice is appreciated. 

Thanks! 

@Tanner Marsey

What if the neighborhood doesn't improve? Are you willing to put all your eggs in that basket?  What if the economy or market conditions change?

Ouch.. 200-300 dollars per month for an indefinite period of time that will never compound in your favor...

Consider looking for a duplex, triplex, or quad in your target neighborhood that cashflows. Tuck that cash away and use it to convert the space into the single family home of your wife's dreams once you two decide the timing is right for a move. Also- the place will be plenty big enough for your growing family. 

Good Luck!

Originally posted by @Cornelius Charles :

@Tanner Marsey

What if the neighborhood doesn't improve? Are you willing to put all your eggs in that basket?  What if the economy or market conditions change?

Definitely crossed my mind, however, surrounding neighborhood values are increasing. Lots of bars, restaurants and shopping going in. Many homes recently redone or in the process of being remodeled. It’s always a possibility but, long term, I think it’d be a win. And even if it didn’t.... could probably at least break even with a renter in there. 

Originally posted by @Victor Steffen :

Ouch.. 200-300 dollars per month for an indefinite period of time that will never compound in your favor...

Consider looking for a duplex, triplex, or quad in your target neighborhood that cashflows. Tuck that cash away and use it to convert the space into the single family home of your wife's dreams once you two decide the timing is right for a move. Also- the place will be plenty big enough for your growing family. 

Good Luck!

Here is why I don’t get the math and I’m sure someone more educated and experienced than myself will be able to see the flaws but for example

Say I lose 200 dollars a month on the property..... that’s 2,400 a year x 30 years.  72,000 dollars over the course of 30 years. So 72,000 + 50,000 down payment you’re into it for 122k. Let’s assume it rents for 3k/month 25 years down the road.... 5 years collecting rent you’re at the break even point. Everything after that is profit.....? 

I’m sure it can be done better and more effectively but I’m just unsure how. I’m wide open to suggestions. 

Thanks! 

@Tanner Marsey Greetings from Encinitas!  So here's the only way that this makes sense to me.  It would be on the assumption that you're 100% sure you've bought your forever home in Oceanside.  Now I wouldn't buy it in Oceanside but that's fodder for another story.  If you are 100% sure you've found "it" then I could make the argument that getting cheap money today is better than risking interest rates rising over the next 5+ years.  

But you're also bringing affordability into the equation and I'm guessing that what you buy won't be the completely redone home you're talking about.  To some degree, you'll be buying a fixer.  Where it gets painful is that fixers...well...need...fixing.  So it's not the initial $50K you have to worry about.  And it's not the $200/month that you have to worry about.  It's that you'll inevitably at some point over the next ___ year be shoveling more money into the deal.

Cash-flow positive deals are a little easier to rationalize because you're sinking "profit" (quotes intentional) back into the property with the goal of hopefully higher returns.  Now it's not really "profit" because the expense should have been factored in but we'll leave that for another day.  You're cash-flow negative so you take a giant cut with the $50K, 360 small $200/month cuts, and a big (or a ton more small) renovation cut.

The big...big...BIG things you're missing are the net present value of money as well as the compounding profits.  Assuming you wouldn't blow positive cash-flow of $200/month on wine and barbeque you could have that reinvesting and earning a return.  Since your timeline in the second post is 30 years you have to ask yourself what that return would be.  What's the opportunity cost of the $50K + $200/month + renovations?  

To put this in the most simple way possible, the Dow was at about 2K in 1988, 30 years later it's at 25K.  So let's take your $50K and multiple it by 12.5.  Your opportunity cost (at least with the simplest of examples) would be $625K.  That doesn't take into account the monthly or renovation costs.  Now because we (on this site) invest in real estate we think we can do better than the Dow returns.  So just use $625K as the "floor" of your opportunity cost.  Juxtapose that against your "into it for $122K" and you have a minimum of a $500K difference in math.

So if you want to start long term (read: 30 year) extrapolations you can't ignore ignore the opportunity cost over that lengthy period of time. 

That said, I doubt it would take you 30 years of rent increases to break-even.  I don't love Oceanside but it will ebb and slow with the rest of San Diego.  So, like I said, if you've found your "forever home" and want to lock in interest, have someone else pay down the majority of your mortgage, etc. then I think it's a viable strategy.

Just realize you're buying for "want" and "emotion" and you'll be fine.  Now trying to convince your spouse that it's a great idea...ummmmmm...I'm not going there...nope...no way...no how...I'm not crazy enough to cross that bridge...

Breaking even is one thing, losing money is another.  But losing money with a light at the end of the tunnel isn't always a horrible thing.  Not ideal, but sometimes the end justifies the means.

Also, you may want to pad your numbers a little bit.  When it comes time for you to take over the oceanside property as your personal residence, there's probably a decent chance you're going to spend some cheddar renovating the place.

Also, before you make this kind of investment, you should consult with your tax guy and your financial planner.  That might be the way you can make this kind of deal work.  Negative cashflow can sometimes be offset by the tax advantages.  But remember that tax laws change also.

You guys all make valid points.... and I’ve definitely thought renovation and maintenance costs.... losing money on a month to month basis would be worst case scenario. I feel pretty confident I could break even. I guess I’m trying to get the best of both worlds. Have it be a primary residence burn also be in decent shape and come out ahead long term if it ends up becoming an investment. 

@Tanner Marsey Not for nothing, but you should take a sample property on the market and pop it into the BP calculator to show how it's going to break even for you.  Post the results for the community to look at.  In the space of half a day you've gone from potentially "losing $100-$300" to "at least break-even".  Most of the time (not saying this is you) it's because someone is attached to an idea (or specific property) and just decide to change vacancy from 8% to 5%, change maintenance from 10% to 5%, etc.  You mess around with variables even a tiny bit and you can go from negative to positive cash-flow in about 30 seconds :-)  And, not for nothing, I've caught myself doing it more than once when I've been working my pro-formas.  That stupid "want" thing has a nasty way of creeping into your numbers even if you know it's there.  But you already own a property and maybe you can maintain objectivity way better than me.  In that case, it's still probably helpful for any rookies that might be reading this post.

And it wouldn't hurt to re-think what your actual goal is.  This isn't likely to be a savvy move (even at break-even) if your goal is to "retire early and am planning on doing so with rental property".  This is more like a: "I'd like to buy a forever-home in Oceanside and have a tenant pay down the mortgage but I'm not sure it pencils out.  So what should I do?"  

I've thought about doing this same strategy on a second home.  I'd pull the trigger tomorrow on that second home if one popped up that I fell in love with.  I'd happily lose money on that second home on a monthly basis.  Why?  I'm buying it for a second home, not as a pure investment.  The financial latitude I'd take with a second home is very, very, very different than what I'd do with one of my apartment complexes.  

Thank you! I appreciate the detailed response. I’ve felt confident that I could break even from the get go. But trying to make sure that if I am taking a hit every month I’d still be okay. Not sure what all the numbers are for the area I’m looking in but I’ll do a little research, plug it in and share with you guys. I really appreciate all the feedback. I’m just getting into this whole thing and definitely need guidance. 

@Tanner Marsey , instead of "I want to move my family down to Oceanside ca and buy a single family home", don't you really mean: "because where I'm renting would be too expensive to buy into, I'll settle for moving my family down to Oceanside ca and buy a single family home"?

Have you done the numbers - buying vs renting - where you really want to live?

What if you find that the difference isn't as great as you thought?

ie. How is it that your landlord gets you to pay off their mortgage, for a home that you would have liked as your forever home?

To help you along, have you considered selling your current investment property? Or, don't you have enough equity to make that a worthwhile option? [And if not, why not?]

[But in the meantime, how much are you saving, every payday? Discipline!] Welcome to BP...

@Tanner Marsey Got it. Well until you have a sample property all of the prognosticating is pointless. Put pen to paper on a real (ideally, recently sold) property and then you’ll know if you’re likely to make $200 or lose $500. Just pick a “sold” property so you don’t go down a rabbit hole of “Well if I can just get the $500K property for $400K it works!”

@Brent Coombs Nobody *wants* to end up in Oceanside. It sounds harsh to say it but that’s the reality. Oceanfront is great but what oceanfront isn’t? The better parts are inland and there are some decent communities but to schools are nowhere near the rankings of Carlsbad, Encinitas, Del Mar, etc. If you’re young you might like to downtown scene but when you have a family the appeal to walking around with your 4 year old next to intoxicated 18-22 year old army kids loses appeal fast. Nobody against the armed forces, I wouldn’t want my 4 year old walking by intoxicated Ivy League college kids either. Things get much better if you go south of Palomar Airport Road in Carlsbad. But at that point it’s pricey, really pricey. And renting to army personnel is great in many regards. You’ll ALWAYS get your rent and we had one tenant years ago in Encinitas and he kept the property up great. But he was older, not looking to walk to bars, etc. Again, just a different world.

So that’s my elitist snobbery for the night...

@Brent Coombs I don’t know if that’s really what I mean....there are lots of pros and cons to where I currently live. I used to love it and wouldn’t ever dream of leaving however the last few years the city has started to change in a big way. And I don’t know if the price of homes, the crowds, traffic and development are worth it or if it’s even a place i want to stay/raise kids. The way parts of Oceanside are now..... I agree that I don’t WANT to move my family there but In 5+ years that could be an entirely different story.... and that’s kind of what I’m betting on. Obviously that’s a roll of the dice....  

The reality of staying where I live is saving a large down payment (200k+) and continuing to work overtime every single month to make ends meet and provide a decent lifestyle for my family. And I don’t want to do that.... I’d rather be home watching my kids grow up. 

I am just trying to find out if the it makes financial sense for me to buy down there and possibly use as an investment if living there doesn’t work out. I think it would but like I said..... I’m pretty inexperienced and trying to get some opinions of more knowledgeable people who have been here before. 

Thanks again for the replies. 

@Tanner Marsey I remember as a kid reading BMX magazines from Huntington beach and there would be kids on their bikes next to the beach with girls in bikinis next to them, and we were all riding around old residential neighborhoods, LOL (so already jealous of where ya live!)

Now to the question! The first thing I would ask you to do is make sure your numbers are correct with expenses on the property. I do not deal with ocean front properties, but are there any hidden maintenance fees that my be needed owning a home on the water? In the Cleveland market, I always use the 50% of gross rent rule. So if your house will make you 1k per month or 12k per year, the Net Operating Income is 6k per year. take the NOI and subtract your principal and interest payment from that. This will give you a good idea of actual loss.

Overall, if you have the funds to do it and you see the market going up, I would consider doing it. Waiting until it is already back makes it not affordable. 

I would also look at the number of rentals there and the demand for housing there. You can figure that by using Craigslist. Run an ad and see what type of calls ya get. 

You may even consider Air B&B.

Good luck! save me a guest room when ya buy it!!!

So you want to buy a property as an investment. The hope being that the area will improve and it will become your family residence. Seasoned BPers have consistently advised against buying based on speculation that appreciation will occur. So We base your criteria on how the property would perform today. If it’s difficult to find that, be patient, look harder, and be creative. If you buy and the appreciation happens, you’ll have equity. You can use the equity to buy the home you want. Why do the investment property and the residence need to be the same property? Either way you’re hoping a jump in RE prices gets you into the home. It seems limiting to have the same property serve both purposes.

Originally posted by @Andrew A. :

@Tanner Marsey Have you considered Long Beach?

I have. I’m honestly open to any neighborhoods that I can raise my family and possibly make a good investment on a property that pays off down the road. Lakewood, Long Beach, cypress, los al.... we’ve looked all over. I am unsure if buying in any of those neighborhoods makes sense to buy in right now. Still have a lot of research and studying to do. I do like the idea of Long Beach due to lots of properties with separate rental units on the lot or duplexes, however, the price point for that stuff is high and the market Is very competitive from what I can tell. 

@Tanner Marsey , I lived in Huntington Beach for 17 years before moving to NorCal a couple years ago, I'll share my perspective, but it's specific to my situation.  HB has definitely changed since when I initially moved there in the late 90s and the last couple years have been especially crazy with all the development throughout the city, as well as the escalating prices (along with congestion, traffic, etc). The decision to move to a lower priced market was partially based on the realization that starting a family and building a stronger financial and investing base from which to grow will be easier to do in a market like Sacramento, as opposed to Orange County, especially at that point in the market cycle.  If I can become stronger financially in a less expensive market than I would have if I had stayed in HB, I will be in a better position to move back to Huntington Beach at a later point in life if we decide to do so, and hopefully at a time in the market cycle when things will cool down (although that may not happen in HB).  Sacramento was the choice in my case also because I was already investing in the area prior to the move and had a wide familial and social network here, so the decision wasn't purely based on financial factors alone. 

Having said that, I of course miss the weather and living a couple blocks from the beach but what far outweighs those losses is being able to see my daughter grow and spend time with family, along with not having the financial pressure of high living costs.  At the same time, I probably could have stayed in Orange County and figured out a way to pull through and maybe house hack, etc, so I'm not saying moving to a lower priced market is the only answer.  My point is that there are many factors to consider when trying to figure out what to do and the answer can be very different for people in the same situation.  

This brings me to the question of whether it makes sense to buy a negative cashflow property in Oceanside with the hopes that everything will work out over the years?  My position is in line with many prior posters - the bigger question is what is your opportunity cost?  If you are investing in a property that will cashflow negative, what other kind of investments are you missing out on?  From a financial position, it might definitely be better than buying something in Orange County, where you will be even more cashflow negative but it might make sense to consider other options that will put you in a better financial position.  Another way you can look at it is this - if you want to stay in HB but are settling for Oceanside, why not ask the question "HOW can I afford to live in HB?" Maybe it means house hacking, or buying a multi-unit property out of state that will help offset your OC living costs, or something else.  Whatever it is, you should aim for an investment that will put more money in your pocket each month, as opposed to something that will be taking money out of your pocket.  As others have said, from an investor's standpoint, you should be able to find an investment that is improving your financial position and not draining your cash reserves.

Sorry for the long post, I realize I'm jumping all over the place but this is just food for thought from another HB'er :)

@Sergey Tkachev all very valid points. A lot of guys I work with put a lot of money into their deferred compensation plans. (Myself included) essentially they tie up 1500 dollars a month over an average of 30 years. It’s invested and in the long run you hope to see a return.... I’d like to use real estate to supplement my pension over our deferred comp for multiple reasons. More liquid, passed down through generations, possibly start seeing/utilizing the profits before retirement.  I think that’s why the negative cash flow doesn’t worry me so much.... I’m not really wanting/needing to see a positive roi for 20-30 years. (Ideally I would see cash flow in order to pay off mortgage quicker or use the money to obtain other properties). I would consider breaking even to start a win. With appreciation, rent increases etc.... I’m sure it’d generate income down the road. 

I look at Oceanside and I see what hb was 20+ years ago. A blue collar working class community with a few rough pockets. Hard working people buying homes for 200-500k that are now worth 800k-1 million or more. I think the equity/profit will be there in the future. I know a lot of people in my current situation(young family, decent income but can’t afford a 900k dollar home) that are looking at Oceanside and Ventura as a viable option in order to raise their family by the beach. The gentrification going on in oside is pretty apparent.  

I have a lot more research and leg work to do before I make any decisions. I am currently looking at MFR properties in various states across the country and a few mountain vacation rentals in Southern California and would like to obtain one of each before the close of 2019. We will see though....

thanks so much for the input! 

@Tanner Marsey

I think Andrew pretty much covered how to analyze it as an investment. One thing I will throw out is the new Accessory Dwelling Unit (ADU) Law that was passed in California, allowing you to rent out a 2nd unit even if its only zoned for 1 unit. Looking into some of our properties now to see if they would cash flow off the bat in San Diego with this, but my gut says yes. There is a process to getting the ADU approved. If you are looking for someone to help with this Gerald Barksdale with Design Build CA really knows his stuff.

@Tanner Marsey Not making any overall suggestions, but ... Feeding a house $240/m when it rents for $1000/m is one thing.  Feeding it when it's renting for $2400/m ... in a naturally supply constrained coastal area ... with Prop13 tax protections ... and a growing market ... is, different.

In that situation, it doesn't take much for rents to rise 10%.  If you've got 30y financing and believe increased inflation is coming, that's another tailwind.

@Justin R. I don’t quite understand.... throwing 240/month at a house that will rent for 2400 isn’t that big of a deal due to its earning potential down the road....? My goal would be to obtain 30 year financing, however, pay it off around the 18-20 year mark depending on cash flow, if it ends up being our primary residence  or refinancing to obtain other properties. 

I'll just throw my two cents in about Oceanside since none of you live here but find issues with it. I live here and have been here for many years. It's a great city of real down to earth working class people who enjoy life and don't want the snobbery found in cities south of here. There are two areas where you wouldn't want to live. If you stay clear of them you will be okay. Aside from those two areas you can find a great home here that is affordable where you can raise your family and be safe. The city is doing a lot of developing and property values are increasing everywhere just like the rest of So Cal.

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