Buying an expensive home in Utah

13 Replies

I'm interested in getting into SLC area real estate investment, and would greatly appreciate advice from those who know the area. 

1. Is now a bad time to buy in the SLC market, in general?

2. I have an offer on a nice 5800 sq ft house in Olympus Cove for $480k which probably needs $50k of work. It currently rents for $3k / mo but that could go up. It seems like a reasonably good buy to me, but I note the rent is way below the 1% rule. Also, I'd have to finance this by mortgaging my current home in Sandy (which I own in full, worth $320k). Other homes in the neighborhood go for far more ($600-700) for less square footage -- I suspect this one stayed on the market because it had an odd basement and needed some work, but the fundamentals look good. 

I'm getting it inspected next Tues and want to know if I should back out, or if that seems like a good deal?

Thanks if you have recommendations!

-Aaron

What's your plan?  Cash flow now?  Speculation for possible appreciation?

As a rental for cash flow, this is just about break even if you manage it yourself.  If you pay a PM, you're cash flow negative about $450 a month.   If you can handle that and you think there's appreciation potential then maybe you want to proceed.

Houses this expensive rarely make good rentals.

you're buying in the wrong state to live strictly by the 1% rule (which is really a guideline).  

We have a bit of a trade-off here. nicer homes and nicer areas but much higher costs and lower cashflow. Translates to a little bit lower risk - but not zero-risk. 

This isn't to say we don't have any "bad" neighborhoods - but I would argue a C in salt lake county (even west side) is some level of A or A+/- in a lot of other markets.  D's and F's here are the same as D's and F's anywhere else, just costs way more here.

We also don't have such drastic swings like many other markets- so you're probably not going to find massive appreciation in a short amount of time like we're seeing in places like Vegas. However what we do have is slow and steady. 

SL county is a great place to live and invest, but just like every market, you're strategy will need to be adjusted according to what works here, and not base your strategy on what works elsewhere.  

You may be able to find a 1%-er here, but outside of extremely creative financing and an enormously massive amount of excellent luck, I've not seen it in at least 8 years. 

Blair Poelman, Broker in Utah (#9299425)

Seems like this deal is for a pro. The numbers you've listed above sound better for a flip. But 500k financed with equity from your primary sounds like a headache. 

As @Jon Holdman said: "Houses this expensive rarely make good rentals."

Why aren't tenants in this rent range buying, particularly in an appreciating market?

We've found that tenants in the higher end price ranges either have credit issues and can't buy or are not long term (rent while building or shopping, unknown/short term employment engagement, etc)

@Bryce Till is right.  This looks like a much better flip opportunity.

Also, the median house price decline in the recession was because houses like this took large hits.  The more modest homes in the $150-250K range barely dropped at all.

Thank you all for your feedback!

@Jon Holdman: my plan is to buy now and hold it, and use the rental to subsidize some repairs. Then, when the current tenant leaves (probably in 2--3 years), occupy it myself and rent out my house in Sandy. Also, my kids go to that school district, and the extra space will come in handy when they're teenagers. But, it is definitely a stretch so I need to think carefully.

The rental currently has a PM (costs $150/mo) but I plan to fire them as soon as the current lease is up for renewal. Honestly I can do a better job myself, I live nearby, and previously managed the rental of my Sandy home for 5 years (while out of state, no less!).

Right now I have 100% equity in my Sandy home, which I don't expect to appreciate (much). I also have no desire to play dice with the stock market This Olympus Cove home is quite a bit under market ($80/sq ft in a neighborhood where prices are typically 150/sq ft) and has good appreciation potential if I manage to fix the key issues (a chopped up basement, dated carpet and wallpaper). 

As a pure investment, it's ok but I could probably do better. That said, this is clearly the best deal (for my needs) on the MLS in the last 2 years. Assuming I put nothing into it and took out 15-year fixed mortgages, I'd be making the equivalent of 10% ROI on an investment of ~$160k from my Sandy home -- but with -$300 negative cash flow (-$1300 if I move in and rent Sandy). With mixed 15-year loan and 30-year refi it's more like 8% ROI, and I break even in cash flow. With all 30-year loans it's more like 5%, but positive cash flow (break-even if I move in). My day job is great, I make $5400/mo, I'm hoping for a promotion, and my wife plans to go back to work as a lawyer in the next 2 years. But bad things can always happen.

So in short: this sounds like a possibility, but I wonder if we're in a bubble right now and if I should be wary of buying anything (even if it seems like a deal compared to the other overpriced crap on the MLS).

@Blair: Thanks for this. How do the A,B,C,D F letter grades work? Where would this home fit in?

@Bryce: what would a pro do? My sense is, this house is too big to justify the time investment of many flippers (thus, why it stayed on market and is selling for roughly half the price/sq ft).

@Karyn T.: One reason I like this property is that taxes are oddly low at <$4k. (I think they don't count attic square footage, or assess it at a much lower value). Insurance is a bit higher than I'd like, though (Farmers quoted me $1.6k /yr). I'm getting the inspection report next Tues -- on the surface the most expensive (big) repair items are the shake roof and deck. The occasional toilet/sink repair isn't a big deal for me, since I live 10 minutes away. 

@Aaron Knoll

Just like grades in school, but more common in this area to be referred to as "rate"

A= best
F = worst

There are varying degrees of each rating (+ & -), and all are relative to the national, state, and local market.

Blair Poelman, Broker in Utah (#9299425)

Everyone has given you great advice, let me just add one thing. Think of how big the market is to rent a $3k house in Utah? There's only so many people that can afford this that doesn't just buy a house. I'm confident you can find something way closer to the 1% rule in Utah.

@Quintin Mortensen, that's a good point. There are certainly people who move to SLC for 2--3 years, have the disposable income, and want a nice place (though not always one that big) , knowing they're not there permanently or don't yet want to buy. That neighborhood (Olympus Cove) has very good schools and is usually in high demand. But I agree, the market for that clearly won't be as big as the market for smaller, more affordable properties. 

I also have a strong preference for single-family properties for liquidity: I do not want to own apartment complexes or even duplexes; I prefer to deal with a handful of tenants in properties I can sell easily if needed, even if that means lower return. 

Also -- it's not like lower-end rental properties at the right prices are falling from trees in SLC (especially closer to downtown). The closest thing we found was a 2000 sq ft $280k home in Canyon Rim that might rent out for $1800. On the other hand, we'd never want to occupy it and sell it. That said if you can recommend a wholesaler to show me the numbers and how I'm doing it wrong, I might bail on this offer. 

Low end rentals are all over the place in SLC, you just have to know where to look. There are many wholesalers in town with such deals, PM me and I can send you a list of guys who regularly email out such deals. They rarely show up on the MLS.

There are much better ways to capitalize on the equity you have in your home than by purchasing the Olympus Cove home, which is just an extremely expensive, poor performing asset--it becoming a family home aside. With 320k you could make far more money with a little bit of education by doing hard money loans, credit-partnering on rentals, purchasing multi-family properties, or low end rentals, providing seconds for rehab properties, etc. Multi-families are great performing assets and are plenty liquid, you just have to be creative with the financing. 

There are many Real Estate Investment Associations in town with great investors, really good education and they cost almost nothing to attend! Google SLREIA, UVREIA, and Utah REIA and by showing up and networking, you'll learn many different ways to invest your money than by pouring it into a monster house that may or may NOT appreciate in the coming years. Best of luck!

Hi Aaron.  Welcome to BP.  Always great to meet more Utah investors.

The good time to buy is any time you find a deal where the numbers work.  There are plenty of deals like that in Utah.

$480k for 5800 sq ft in Olympus Cove really is a good deal.  If your repair estimates are solid you should have some instant equity.  If your plan is to minimize how much it costs you until you move into it yourself, then the rental numbers could fit your needs.  If your plan is to generate cash flow it's not a great investment.  Making a couple of assumptions from what you said above I only came up with a 1.5% cap rate.  But the difference is always in the details.

I agree with @Jeffery Breglio about the investors associations.  If you want to meet other people to work with as you invest, they are a great resource.


@Jeffery Breglio, thanks for this. One challenge here is that (1) I have a wife and kids who need a home and (2) my day job is busy enough and I'm not sure I want to get into more "creative" real-estate investment, beyond buying/owning 1--2 SFR's that turn a tidy profit and occasionally need me to come and fix a toilet. Also -- I could be wrong but $320k (as nice as it is) is probably not enough to start a self-sustaining real estate empire and retire.

@Jim H., thanks for this. It does seem like a good deal -- maybe just not a particularly high-performing rental! My plan is roughly like this:
- rent out the Olympus Cove house for a few years, stockpile income
- do repairs and deduct them for tax purposes
- in 1.5--2.5 years, move in (it's in my kids' school district)
- rent out my Sandy home for additional revenue ($1700-1800/mo)
- or, sell Sandy and use proceeds for more investments
The worst thing about the deal is I'd have to get an investment grade loan on Jupiter, which is about .25 pts worse than what I could get as a principal residence. On the other hand, rates are really low (2.625% for a 15-year fixed). 

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