How to spend $300k

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How to spend $300k

Tony T.
Foster City, CA · Member since 2013 · 17 posts · 2 votes

I've got about $300k to spend on a home that offers capital appreciation along with some decent rental income (not expecting it to necessarily cash flow). 

Does it make sense to buy a larger house in the suburbs or a smaller home (or townhouse/condo) in the city? Let's say both options would yield the SAME capital appreciation. Does it make sense to buy a smaller home or condo?? My assumption is that with a small home or condo...there are fewer potential repairs compared to a large suburban home. Does this hold water? Or should I be thinking beyond this?

Thanks for helping me think through this.

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Steve Babiak
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
12y

Two things to point out. 

First, never reveal in public (like on the internet) how much money you have available; doing so will attract all sorts of unsavory types who will try to separate you from that money. 

Second, don't "spend" the money, instead "invest" your money. And do so wisely. 

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  • Skyler Smith
    Real Estate Agent · Logan, UT · Member since 2014 · 222 posts · 102 votes
    12y
    Pretty sure the right answer to this is "it depends!" I don't think that urban vs rural is always going to have the same answer. The strategy would really be laying out all the data in a spreadsheet. If capital appreciation is the same, the next question is which one cash flows more? Some unrelated considerations: - the condo in the city seems like it might have more options, e.g renting as a vacation rental, so you could charge by the night, not the month - are you buying the asset right out? If so, why not put a smaller down payment on both the suburban home and the condo? You're in this for equity growth and some smart leverage will get you there way faster - how's the rental market in the suburb? If you're on an all owner occupied street you may have troubles renting - HOA fees are nice to take care of some of the repairs in a condo, but can really eat into your cash flow
    0Reply
  • Walt Payne
    Real Estate Investor · Sebastian, FL · Member since 2014 · 812 posts · 432 votes
    12y

    @Tony T. search for, and read, some of the many threads on nightmare HOA situations. The problem is that even a well managed HOA can change overnight when one member who is doing a lot leaves, or a new member with an agenda is elected. An HOA is pretty much a legal dictatorship. They can even decide that you can't rent out your condo, or that you have to paint it hot pink with lime green trim, and there is nothing you can do about it. Many people buy condos, but personally I have had and heard of enough bad experiences with them that I now avoid them like a plague.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    12y

    @Tony T. 

    I think you've got that backwards.  You need to buy a house that has cash flow and enough equity to get it financed.

    Joe Villeneuve
    REcapSystem
    A2REIC

    0Reply
  • Account Closed
    Miami, FL · Member since 2014 · 125 posts · 7 votes
    12y

    @Tony T. I would go with turnkey property investing that offer immediate rental income, positive cash flow, and free local property management.

    1Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    12y

    Two things to point out. 

    First, never reveal in public (like on the internet) how much money you have available; doing so will attract all sorts of unsavory types who will try to separate you from that money. 

    Second, don't "spend" the money, instead "invest" your money. And do so wisely. 

    12Reply
  • Mitch Coluzzi
    Investor · Des Moines, IA · Member since 2014 · 238 posts · 230 votes
    12y
    Originally posted by @Account Closed:

    @Tony T. I would go with turnkey property investing that offer immediate rental income, positive cash flow, and free local property management.

    My first reaction was "I would like a unicorn as well!" ... To my knowledge, legitimate Unicorns are not for sale for any amount of money.

    Turnkey properties rarely have the best rate of return but they are typically easier to maintain. Finding free local property management is counter intuitive, no one works for free. The cost is likely buried in the HOA fees... and if not, remember you get what you pay for! From the get-go tenant screening through a "free" manager would worry me deeply.

    1Reply
  • Mitch Coluzzi
    Investor · Des Moines, IA · Member since 2014 · 238 posts · 230 votes
    12y

    @Steve Babiak great advice - it is wise to keep under wraps how much money you have to spend, have invested, or plan to make.  Trolls live everywhere, even in the helpful community of BP.

    To the vagueness of your question it very much depends...  If you want to PM me with detailed numbers I would help you analyze them quick and give you a run down of my perceived pros/cons.

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    12y

    @Tony T. 

    Everything posted here is correct.  Bottom line is, the bottom line.  It depends on so many factors, not the least of which is what you ultimately are looking for in the way of returns.  Start with that, work you way "backwards", through market analysis, until you see what markets fit your ultimate "exit" criteria.

    Then you can decide how to, as @Steve Babiak so aptly said, "invest" your money.

    Joe Villeneuve
    REcapSystem
    A2REIC

    3Reply
  • Derrick Craig
    Memphis, TN · Member since 2013 · 969 posts · 524 votes
    12y

    I agree totally with @Steve Babiak 

    Your post is going to bring out some unethical sharks that don't mind biting... Be Ready!! 

    0Reply
  • Account Closed
    Investor · Sunnyside, NY · Member since 2014 · 355 posts · 114 votes
    12y

    @Tony T. 

    You may also want to look into the forums for posts about the pros and cons of factoring in appreciation as the primary objective of investing. Although, I do see that you're in California. Most of the threads that are along the veins of "don't factor in appreciation in your analysis... except if you live in markets like New York City or parts of California". If you're in one of those "parts of California", then your post makes sense.

    I agree with the others, beware the sharks...

    0Reply
  • Tony T.
    OP
    Foster City, CA · Member since 2013 · 17 posts · 2 votes
    12y

    Hey Folks,

    Thank you SO MUCH for the thoughtful replies! I just joined BP last night and am crazy impressed with the quality of people on this board...thank you.

    Seeing your replies, I should've thought through my question further...at the CORE of my question, I was trying to understand this...with ALL THINGS BEING EQUAL, does it make to buy a big house or a little house? My assumption is that all things being equal (price, future growth, market, etc,), it makes more sense to buy a little house because there are generally less things that can go wrong with it...fewer rooms to maintain...etc. 

    (I came up with the suburban house vs city condo thing as I thought this would be easier for people to grasp, not knowing that it would cloud my core question).

    Thanks for helping me think through this!

    0Reply
  • Tony T.
    OP
    Foster City, CA · Member since 2013 · 17 posts · 2 votes
    12y

    @Steve Babiak

    @Derrick Craig

    @Account Closed 

    Thanks for the advice about being aware of sharks!! Well taken!
    @Derrick Craig

    0Reply
  • Pete T.
    Real estate investor · Las Vegas · Member since 2013 · 798 posts · 171 votes
    12y

    @Tony T. I think you miss the point that all things will NEVER be equal and each deal is different. You need to define your goals first, then determine what will best answer them- as in what property, not completely eliminating a big house or condo or whatever. There are reasons I prefer small MF, however when I see something that works for me that is a SFH or condo, I weigh it the same as I would anything else and determine if it works for me.

    2Reply
  • Account Closed
    Investor · Sunnyside, NY · Member since 2014 · 355 posts · 114 votes
    12y

    @Tony T. 

    I'm going to go with @Pete T. on this one. either could be better depending on your goals. So figure out your goals first. If the question is: "is A better than B, if my main goal is problem free landlording"? then the answer is neither. If the question is: "is A better than B, if my main goal is appreciation? then you would have to analyse the past appreciation of A and B and the math will tell you (bearing in mind that past appreciation is not an indicator of future appreciation). You get the drift.

    What's better for you will also depend on where your heart lies. Find what you like. I could tell you that the way to make the most money is by doing A, but if A bores you and you hate the idea of it, then find other ways to make money.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Tony T. 

    @Skyler Smith 

    Skyler Tony is in Foster city 300k is a down payment .. there might be some very tiny condo's that are 300k I know I brokered a few in the late 80s that were 120k  so maybe they only appreciated to 300k.. But where Tony lives he is talking down payment for a home to live in.  And as we all know the Bay Area is not a prime buy and hold cash flow market its more appreciation driven... @Tony T. jmartin and others have had success buying income properties in the east bay  Oakland and Richmond specifically.

      Also Tony be careful not to get suckered into out of state investing. You must choose very very carefully the RE market out of the WEST coast is another animal completely. With much of it very nice but if you choose poorly you will be separated from your money.

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    12y

    @Jay Hinrichs 

     You just described the reason why west coast (California particularly) investors go out of state.  They can buy all cash properties where out west that same money would by the doghouse for a house the same size.

    You are correct though that you need to be very careful when you do.

    Joe Villeneuve
    REcapSystem
    A2REIC

    0Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y

    Tony, 

    Welcome to BP.  Spending $300k is easy.  Ask you wife and she will show you how.  If she doesn't know how, well, I'll have my wife help you out.  Invest it to make decent returns is another topic. 

    A condo in the city, or a house in the suburb?  In our area, when you buy a house for $1M today and you change your mind tomorrow, you can confidently put it back on the market and re-sell it right away.  Of course, you will lose money due to transaction fees and costs.  In the mid-west where people buy properties for cash-flow, not so much.  It's almost a guarantee that you will not sell it for the price you bought when you buy it from a TK provider.  Everything comes down to desirability.  Something is cheap for a reason, and so is something expensive.  

    @Johnson H.  and @Jay Y. are hosting a local monthly meet-up in North San Jose next Friday.  Join us if you can.  It's free, and I will buy you Nachos and drinks if you come early, say before 7ish.  You're on your own next month because I'm out of discount vouchers.  We have had over 20 members everytime.  Some came from SF, Livermore, Monterey, Los Gatos, Oakland, etc. so you're quite close relatively speaking.  Many of us invest both locally and out-of-state.  Come and exchange some ideas.  Let's help each other succeed.  

    http://www.biggerpockets.com/forums/521/topics/144...

    4Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Joe Villeneuve 

      I know why they go out of state.. but they need to choose very very carefully. They also have a different perspective they expect their purchase to go up in value. and save some very select markets in the so called cash flow markets the assets never rise in value and if they buy from a TK provider they probably over paid by 10 to 30% right out of the gate. the GRASS is not GREENER over the hill..

    what you get usually is investors that can't afford CA but they just got to have some real estate like the Simon and Garfunkle song "I have  some real estate in ( your pocket).. but they just don't know what they don't know.. and get sucked into buying in dead and dying areas because they think they are going to retire at a couple hundred a month positive  cash flow. So what goes through their mind is hey if I can just get 20 or 30 of these I can make 5k a month or more and in 30 years they will be paid for then I am making 20k a month.

    Fast forward to reality.. by the time they buy 2 or 3 and the PM rips them off the tenants don't pay the tenants trash their units they give up then they try to sell. and of course sine they bought from a Turn Key provider and paid far over market they lose 20 to 50% selling and you never hear form them again especially on BP.

    There was a post a little while back the poster asked anyone to post their success rate if they had owned mid west upper rust best TK for more than ten years how have they done.

    you got a bunch of local guys defending their market but not a one actual investor.

    There are good cash flow markets but one needs to be VERY VERY careful..

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    JLH Capital Partners51 Review
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    3Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y
    Originally posted by @Joe Villeneuve:

    @Jay Hinrichs 

     You just described the reason why west coast (California particularly) investors go out of state. 

    And got taken advantage of, lost their shirt, and never wanted to invest in housing again.  The money is here.  A couple in hi-tech making $250k to $400k could easily be found anywhere here.  Therefore, buying a $1M house is not a big deal.  $200k can be save in 2 to 3 years.  With $200k down payment and servicing a $800k mortgage, people still have a lot of disposable income.  That is why TK providers come here to solicit for business. The money is here.  How often do you hear people go to the mid-west to solicit for money/business?

    1Reply
  • Manch Hon
    San Jose, CA · Member since 2011 · 160 posts · 167 votes
    12y

    I can say what I'd do with 300K cash to invest.

    Chop it up 3 ways, 100K a piece, and use it as down payment to buy 3 properties each worth 500K. At that price range we are talking about condos in less pricey bits of Bay Area (no Palo Alto) or small houses in "up and coming areas" like east San Jose. You will be cash-flow neutral or even slightly positive, but appreciation will make you a millionaire in a hurry.

    4Reply
  • Account Closed
    Investor · San Jose, CA · Member since 2012 · 2k+ posts · 3k+ votes
    12y
    Originally posted by @Manch Hon:

    I can say what I'd do with 300K cash to invest.

    Chop it up 3 ways, 100K a piece, and use it as down payment to buy 3 properties each worth 500K. At that price range we are talking about condos in less pricey bits of Bay Area (no Palo Alto) or small houses in "up and coming areas" like east San Jose. You will be cash-flow neutral or even slightly positive, but appreciation will make you a millionaire in a hurry.

     Manch,

    You need 25% down payment, or you will get hit with the interest rate. In South and East San Jose, you can find deals that cover your PITI and leave about $200-$300/month. That's it. The massive appreciation in the last 2 years took a big bite out of future appreciation so I suggest to tread lightly even though history shows we still have room to run.

    You can still find $200k to $225k/door with apartment buildings in downtown compared to $300k to $325k/door for an equivalent condo. However, you have to be able to borrow at $2.75% to 3% to get a decent CoC returns. If you're borrowing at 4.5% to 4.75%, you're toast. :0)

    1Reply
  • Manch Hon
    San Jose, CA · Member since 2011 · 160 posts · 167 votes
    12y

    There is zero reason for CA investors to go out of state. I admit I have been tempted. For Bay Area folks that's what Central Valley is for. Anytime you feel the urge to buy cheap houses for say 100K a piece take a look at towns up and down along Hwy 99. Stockton, Fresno, Bakersfield etc. We are building High Speed Rail there, investing 70B worth of infrastructure to connect Central Valley to the coast. Pretty huge upside if you asked me. :)

    3Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    12y

    @Jay Hinrichs 

     You are of course correct in making sure the market works.  There are many markets that work.  We have a lot of investors rushing to my area.  I work with some very large (see million dollar) investors.  They are very careful, or they wouldn't have the multi-millions to begin with.  They know the advantage of going out of state for cash flow...big cash flow.  They also, as you said, make sure they are very careful.

    Joe Villeneuve
    REcapSystem
    A2REIC

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    12y

    @Joe Villeneuve 

      Been many big money investors separated from their dough as well.  I know one hedge fund from CA that went into low end Detroit and I have been trying to help them best I can . but no one can help an investor when the area turns to dust..

    When I was investing in Columbus Ohio there was a Hedge fund from NY that dropped 20 million into the market and lost most of it.. and that was pre bubble they were terrible investors just had no clue as to the asset class and whats involved

    Podcast Guest on Show #222
    JLH Capital Partners51 Review
    WebsiteView Page
    0Reply
  • Kathryn M.
    Investor · Bay Area, CA · Member since 2014 · 63 posts · 77 votes
    12y

    Hi Tony,

    Welcome to Bay Area BP. I highly recommend the local meetups, I think the closest ones run regularly are Oakland and SF/South Bay by @J. Martin emphasized, things are never the same. I am no expert but I will share  my personal generalization which I think might address your question.

    All things being the same: 

    * A small house (not necessarily condo) will appreciate at a higher percentage than a larger house. IMHO this will be due to the higher % of land (appreciates) vs building (depreciates) ratio. Perhaps related to adage: buy worst house in the street.

    * A larger house will rent at a higher % than a smaller house --> IMHO rent increase will be higher than the increase in operational costs.

    The combination of the above two will determine your total return. I can't think of generalization that addresses the combination as the mix covers a such a wide spectrum.

    * In a "normal" steady state market (not 2009), a single family home will appreciate better than a condo due to higher % land value. Since 2009 some condos have appreciated spectacularly well  as they were "oversold" in the financial crisis.

    * Condo operational costs could well be less due to less land, exterior area per entity. However, that assumes similar operational efficiency... IMHO this is not guaranteed and will depend on the specific Home Owners' Association.

    1Reply
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