Good Buy? Getting Cold Feet!

23 Replies

Hi All,

I am new to RE investing. We recently moved out of our first home in Lehi and bought two new properties in American Fork. One home is our primary residence (that we already live in) and the other is our first rental property that we are set to close on at the end of this month (it's a new build that we designed). The closer I get to closing, the more nervous I get.

Being a brand new home, I don't expect to have issues finding renters or having many expenses, but after setting aside ~$150/month for expenses/repairs/rainy day, I am really only banking on appreciation and mortgage pay-down. Is this a stupid plan? I always read on BP about how people are cash flowing crazy amounts, but I just don't see how you do that in Utah unless you are putting 50% down or have the right network to find under-market buys. 

This is all part of a passive, long-term retirement strategy, but I only had to put a small amount down, so I can still technically back out up until closing for a relatively small loss. Thoughts?

Well, it sounds like you will have the tenant paying for the mortgage, so there is that! Building a new home to become a rental is not something I hear about a lot. And being a new home, I'm guessing you didn't get any "deal" on it for sure. Hopefully you are not putting the highest-end finishes in the home... basically, don't build it to something *you* would want. It's a rental. 

So with the rental income you expect, it will pay the mortgage, interest, insurance, property taxes, and all the vacancy/repairs/capex expenses...and have how much left over?

First thing you must learn is that paying down a property reduces true cash flow it does not increase it. Money is too valuable to use to buy cash flow.

In your case if you are not in a high appreciation market there is no real upside to having no cash flow and only paying down the mortgage. Long term it will cost you as much as you make and is little better than forced savings.

Equity is where money goes to die. You only rely on your approach when you have excess cash to park.

Upside since it is new there may be a way to make a quick profit if you can turn it into your primary residence, sell at a slight profit in a year and move back to the one you are now in. 

I expect there to be around $50-$100 left over after ALL projected expenses, so not much. I feel good about the purchase price (in fact, if I were to go design the same home now, it would cost $15,000 above what I am under contract for). I didn't put high end finishes on it, but we did put some decent upgrades in it (with the mindset of resell value, etc.)

The home requires very minimal landscaping/outdoor upkeep, while still being a SFH, which is one thing we really liked.

Thomas - 

I agree; no cashflow and no appreciation is a terrible investment. My market has been booming over the last several years as the tech scene has been increasing significantly. One can only make an educated guess at if the market will continue to grow, but it looks positive.

Hey Steven, I live in American Fork myself. I'm interested in chatting and perhaps can share some insight into what rents are doing right around me. Feel free to PM me. 

In regards to your question, I suppose it depends on your goal. Are you anticipating market appreciation with an exit in a few years or is this the start of building a sustainable portfolio aimed at cashflow? 

Cash flow is important but as long as it remains rented, I would be happy with the loan pay down. Also, since it’s a new build do you think you could increase rent because most tenants would prefer a brand new home. Anyway it’ll be a good learning experience. Good luck!

I wouldn't back out of the closing if I were you.  I'm in the middle of a townhouse build at $220k with a bunch of little upgrades - started in November.  Same floor plan in the same puny little development is now selling at $250k before upgrades.  If nothing else, you may be able to flip the thing pretty much immediately and at least get yourself a little bump on it.

Generally speaking, we are NOT a cashflow market, but don't get too discouraged about the cashflow situation here in the UC. Positive cashflow above 5-6% in Utah County with SFR's is really, really, really tough to get. So if you are getting more than that you are better than most of us, or it means you have tons of cash and little or no debt service, or it means own free and clear, or it means you're an amazingly efficient developer or builder, or maybe the real estate gods have shined down upon you and led you to a killer deal that is getting you more money than almost everybody out here right now.

There are cashflow deals out there - just very few and far between, at least for now. 

If you invest too much into places like this, your issue will soon be that you do not have the ability to purchase more properties.  You need cash flow to scale unless you have deep pockets and a high outside income. 

@Stephen Hall I’ve done a lot of reading/research on UT and I am very very optimistic on the future of UT housing prices. Sure, we will most likely experience dips or corrections here and there and possibly in the near future but in the long term my bet is that you’d be really kicking yourself if you backed out of that house.

Utah’s population is growing rapidly. It’s expected to double in the next 50 years and most of that will be in SL and UT counties. A huge chunk of the population growth is internal but there’s also a lot of people moving here. UT County is expected to rival SLC as the economic powerhouse within the next couple of decades. There’s only something like 40,000 buildable acres left in SL county and there’s like 320,000 in UT County so it’s clear most of the growth will be pushed farther south and north by necessity. UT is consistently ranked the best place for business by Forbes. UT has very low unemployment. There’s currently a housing shortage. When you combine population growth, job growth, and housing shortage you get what we are experiencing. We all see that when prices go up rents typically tend to follow. I would just say make sure you have plenty in reserves in case there’s a some unforeseen dip in rents/vacancy.

Hi Stephen. Welcome to BP!

Your title seems to ask the question: Is the property a "good buy?"

However, you didn't mention any of the details that could help the community tell you if it's actually a good buy. What is the price and the projected rent? 

As a general rule, new construction and homes over about 225K don't work great for cash-flow. They may have nice appreciation but that's a bit of a gamble. Most buy and hold investors will stick to the older, smaller homes along the wasatch front.  Leverage and appreciation can make you rich but cash-flow is the safest and usually the fastest path to financial freedom.

Like @Ryan E. , I am very bullish on Utah residential real estate (under 500K) because of job growth, housing demand and supply limitations. Projections anticipate 8-12% per year price appreciation from Ogden to Santaquin for the next 2-3 years. It should be awesome . . . but cheap homes that cash-flow well are safer.

That depends Stephen. What is your plan for REI? If you are seeking cash flow, then it doesn't sound like this property meets your investing criteria to accomplish your goals. I'm also a fan of one offs. Can you leverage this opportunity into another one, real soon? If not, might be time to look at moving on to other opportunities, but it all starts with your WHY. Define your WHY, set goals that support your WHY, and cater your investing criteria to meet those goals.

@Douglas Larson - Good point...The home I am buying is 305k (including upgrades and closing costs). 1850 sq ft, 3 bed/2.5 bath. I'll have another $5k or so for putting in a lawn and blinds. It's on a tiny .07 acre lot (there is no front yard, but there is a decent sized fenced in backyard). They are selling this same home now for about $320-325k on a new design/build. Projected rent = $1,850; PITI + HOA = $1690.

@Jay Helms - The goal is to continue acquiring additional rentals as quickly as I am able. As soon as I have enough equity to either cash out refi or sell and split those proceeds into multiple homes, I will. This is a retirement savings play - every penny gets reinvested until then. As I earn more in my day job, I may or may not use some disposable income to expedite it all. I am super risk averse, which is why I'm dipping my feet into REI with a brand new/low maintenance home.

@Stephen Hall So I'll just be blunt: Trying to have a new home built for a cash-flow play won't work.  You're paying *some* premium for it to be brand spankin' new.  Two years down the road the premium won't be there anymore, it will be a "used" home, and it will sell for less than a similar "new" home.  But the roof will only have two years of age, the HVAC will only have 2 years of age, etc.  And it's not like the rent will be materially different on a 2018 build vs. a 2016 build.  

Similar to @Blair Poelman I do think if you're buying one of the first homes completed in a large development you stand a chance of prices rising as Phase 2, Phase 3, etc. are built and sold.  Down the road you might have a property that is 10% more valuable just because construction is complete, etc.  

People used to do this all of the time pre-200.  They'd put down a deposit on a spec. home and basically flip it when it was completed.  The "buyer" would never even set foot in the property.  I know more than one condo development in Orange County where it was quite the popular (and profitable) strategy at the time.

@Kyle Ransom I honestly never even considered that approach. It is not next door to a business park nor the slopes. Could be worth looking into, though. It does look like there are a few homes relatively near me with high occupancy rates on Airbnb.

@Andrew Johnson I appreciate the candid insight. Homes have appreciated since putting our deposit down and I suspect that will continue to be the case as they finish the last phase of the neighborhood. 

@Stephen Hall not a whole lot new to add, but it's not often that somebody living here in American Fork asks a question, so I'm like "oh hey I live here I should chime in!" :)

I had a rental townhouse in Pleasant Grove that I planned on holding indefinitely, but recently sold it after just 18 months because purchase prices keep going up so quickly here, and rents aren't really keeping pace. I decided to shift to a cash flow strategy that doesn't rely on appreciation, and that has taken my investments to Ogden, specifically older small multi-family properties. 

You wrote that your goal is to continue acquiring additional rentals as quickly as you're able. You probably already know this, but keep in mind that many lenders are 1.) not going to count the income from that rental in your DTI ratio unless/until you've got at least 12-24 months track record as being a landlord, and 2.) only count ~75% of rental income in your DTI. So depending on your DTI outside of this rental, you might not be able to finance as many deals as quickly as you'd like, even if you have the necessary down payments. Rising interest rates are not going to help. :/

As others have mentioned, it's a little difficult to imagine the growth and appreciation around here taking a drastic turn for the worse, but... ¯\_(ツ)_/¯ so if you have the flexibility to hold this through some hypothetical downturn, it seems unlikely this will be a big loser for you. It just seems a little less certain how big of a winner. We could have Seattle-ish prices within a few years and you'll make out like a bandit.

The challenge with a quick flip is the costs associated with buying and selling. Even if you save some $ by using Homie or Flat Rate Homes (I've had good success with both), you'll likely end up paying ~3% buyer's agent fee.

Oh, and read the fine print of the HOA before you count on AirBnB. Doesn't mean you'll get busted, but in almost every one I've looked at in Utah Valley, the explicitly prohibit short-term rentals.

Based on the info provided here, I definitely wouldn't back out, especially if you were able to somehow do it with a smaller down payment. The emphasis most people in this forum place on cash flow is correct; it's very important to have a healthy margin every month especially as your portfolio gets bigger. If you have 10 properties that are just breaking even and things go south, you can be in big trouble. But having one property that's breaking even isn't going to be your downfall. I would keep it and maybe focus more on cashflow on your next purchase or two to balance it out. 

A brand new home will still have some maintenance costs of course, but the fact that everything is brand new should give you a great first 10 years of low expenditures. I have three houses like that in SLC and I love having them in my portfolio.

Side note: funny to hear people that don't know Utah say it's not an appreciating market. The market fundamentals of extremely limited land, heavy population growth, no government debt, and lowest unemployment in the country etc. are driving strong appreciation and I think the outlook is very strong for the next couple of decades. My Utah rentals only cash flow a few hundred dollars each and I could get better cash flow here in the Midwest, but I think in 2040 I would really regret having let go of them.

@Stephen Hall  My husband and I have had some success with new construction of townhomes in Utah county in the past few years, but our older single family homes still outperform them in terms of cash flow.  The appreciation has been a little bit incredible around here lately.  We bought a new townhome in Saratoga Springs in the first phase of construction for $205k about a year and a half ago, and the same floor plan in the new phase is now selling at $260k!  We rent that townhome for $1650/month, and I know of other investors in our area renting townhomes upwards of $1850/month.  By chance, is this rental property located in the Oakwood development in American Fork?  That is a very nice development.  Last summer, I know of at least one of those that rented at about $2000/month.  I hope this is helpful and good luck!

@Jed Wood Seems like a lot of people acquiring new properties in Utah are going to the outskirts of town and/or outside UC/SLC, which makes total sense. I can definitely see the value there. The rise in interest rates from the time of going under contract to locking rate have caused my payment to go up about $100/month, which is one of the main reasons I've been getting nervous. This definitely doesn't seem to be the best investment I could have made, but I think it'll be a good opportunity to see how I like landlording before dealing with a house that constantly needs things fixed, etc. Re: AirBnB, really good point. I probably wouldn't have even looked at the HOA rules. It's something I will probably do later on (somewhere like Lake Tahoe where I can take advantage of it as a getaway myself), but I thought better of it for the time being. Plus, furnishing the house would cost a pretty penny.

@James Marshall 100% with everything you say...Seems to me that having a healthy mix of cashflow and appreciating properties in your portfolio is a good way to mitigate risk and maximize return....kind of like the stock market, I suppose. I grew up in the bay area in what has turned out to be one of the most ridiculously overpriced/overappreciated zip codes in the country...I never would have thought Utah would appreciate so honestly freaks me out that I won't be able to afford to live here in 15 years. Re: your cashflowing rentals in the midwest, I always see the HGTV shows and have briefly looked at Tulsa, where I spent some time seems that those properties cashflow well, but I assume there is very little that a fair assumption? Otherwise, aside from all the extreme weather, I would think that region would be overflooded with investors.

@Amy Kendall Yes, you are correct about the community I'm building in. It's a quirky little place (I live in the neighborhood as well), but the very low maintenance and close proximity to everything is really nice. I have heard the same thing about one renting for $2,000 (probably the model I am in as its the largest of the models, though not by much). I figure there are definitely renters willing to pay that price (or $1,850 as with the one I'm renting), but it is a much more limited market I think.

My husband and I own several new build townhomes in Orem and Herriman. We bought them a couple years back and the appreciation has definitely been the biggest benefit. Our older multi-families in Utah have been way better investments for us in terms of cash flow (which is what we're after).

Now we've started investing out-of-state, so we're entertaining the idea of selling the townhomes and using the proceeds to acquire more units elsewhere. I think the new builds can still be good investments, but I don't see them as a huge cash flow play in our market unless you're able to build a portfolio with quite a few of them. They are pretty easy to manage though, and that's always nice! 

@Shazia Chiu It sounds like the smaller/older/sub $250k properties tend to cashflow best, based on what you and others are saying. I'll have to look more into them, thanks!

@Justin Hammond 20%. 25% would have yielded a better rate and (obviously) a lower payment, but wanted to keep a decent amount in savings to be safe.