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.
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.
@Manch Hon hit the nail. The central valley, especially fresno, has literally billions of dolllars being invested into infrastructure. We might not all agree the high speed rail makes economic sense but it is moving forward. The contractors that were awarded the first phase are here moving forward. End of the year we will be relocating highway 99 for the rail.
Frank
Hi @Tony T.
Welcome to BP. Having $300k to invest in RE is a nice "problem" to have. As others have suggested you really need to nail down your goals. Do you want cash low? Appreciation? Some of both? Location, etc? One thing about your question stuck out for me in particular:
"..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."
Very hard to assume all things will be equal regarding future appreciation. Especially if you're deciding between a larger house in the suburbs vs a smaller house closer to an urban area. If, for example, your purchase price is $100k (talking WAY outside the Bay Area or out of state) you may be able to buy a 4/2, 2000sqft house built in 1998 in the burbs, while for that same $100k you'd get a 3/2, 1400sqft house built in 1978 closer to the urban center. They can command the same rent, but 50% of the $100k value of the smaller house is in the land, while 80% of the house in the burbs is in the structure. Over time you'll likely get better appreciation on the smaller house near the city center since most of the value is in the land and you'll never be competing with new construction, as you will in the suburbs. Also, each turnover from that smaller house will cost less since the place is so much smaller. CAVEAT regarding land value in suburbs vs near city center: On the Peninsula in the 60-mile swath between SF and San Jose this does not apply. The value is in the land since there is nowhere to build and you never compete with new construction.
The whole condo thing is another story. I don't like them due to the lack of control. I hate the HOA component. But that's just me. Others love condos. I know people who invest in them and seem to do well.
Anyway, keep poking around the boards and asking questions. Do your due diligence and don't rush into anything. Determine your investing goals and WRITE them down. Go to local Meetups as people have suggested. Finally, PM me if you like. I live 5-10 minutes from you and would be happy to meet for coffee or some such thing. I LOVE talking real estate and have had lots of people help me along the way and enjoy passing it on.
Happy Hunting!
Cheers,
Jeff
you're definitely getting some good (though varied) advice here. My 2c:
1- I wouldn't worry about 'revealing' the $300k. In the Bay Area it's a nice start towards investing, but that's about it. As @Account Closed myself, etc. go to meet ups.
3- invest close to you! You know your area well and can easily manage the property. I'd want to stay with 30-40 miles. (Actually I'm spoiled, I stay within 2 miles of where I invest :). Trust me, it's much easier.
4- lg vs small home is probably a bit off. A lg home will probably be out of the immediate Bay Area. Appreciation will most likely be better in the core. But what I would consider is 2-4 units vs a smaller SFH. You just have to look at properties, their locations, the rents, etc. etc. to better understand this.
5- in SF condos can be great. In Bay Area suburbs, maybe not so much, as they are usually less desire able than SFH...unless you're on university ave in palo alto or something...and than it's SF prices.
6- IMO your real calculus shoud be between 2-4 vs SFH. Ru single? Own a home already? Willing to live in the investment prop? If yes to last Q, why not buy 2-4, move into the smallest one and collect rent. It's a great stepping stone to buying again in a few years with your banked appreciation and consequent refi/pull cash out. That's how people get rich around here.
Anytime you feel the urge to buy cheap houses for say 100K a piece...
LOL! You San Jose guys have an odd definition of "cheap"!
Hi @Tony T.
Very hard to assume all things will be equal regarding future appreciation. Especially if you're deciding between a larger house in the suburbs vs a smaller house closer to an urban area. If, for example, your purchase price is $100k (talking WAY outside the Bay Area or out of state) you may be able to buy a 4/2, 2000sqft house built in 1998 in the burbs, while for that same $100k you'd get a 3/2, 1400sqft house built in 1978 closer to the urban center. They can command the same rent, but 50% of the $100k value of the smaller house is in the land, while 80% of the house in the burbs is in the structure. Over time you'll likely get better appreciation on the smaller house near the city center since most of the value is in the land and you'll never be competing with new construction, as you will in the suburbs. Also, each turnover from that smaller house will cost less since the place is so much smaller. CAVEAT regarding land value in suburbs vs near city center: On the Peninsula in the 60-mile swath between SF and San Jose this does not apply. The value is in the land since there is nowhere to build and you never compete with new construction.
The whole condo thing is another story. I don't like them due to the lack of control. I hate the HOA component. But that's just me. Others love condos. I know people who invest in them and seem to do well.
Anyway, keep poking around the boards and asking questions. Do your due diligence and don't rush into anything. Determine your investing goals and WRITE them down. Go to local Meetups as people have suggested. Finally, PM me if you like. I live 5-10 minutes from you and would be happy to meet for coffee or some such thing. I LOVE talking real estate and have had lots of people help me along the way and enjoy passing it on.
Happy Hunting!
Cheers,
Jeff
Jeff, thank you so much for the thoughts...you addressed my core question and I really appreciate your confirmation and clearly stating what I have swirling around my head...it all makes sense I think I would love to get into something nice and small closer to an urban center that doesn't involve an HOA. I see you're in Redwood City...I work in Mountain View so cross RWC everyday = ) Would love to chat RE sometime = )
@Tony T, welcome to BP.
Do come to the meet up, it has been great the past few times. We have some very knowledgable people here.
NV seems logical, as it's just next door. TN? why TN, did you live there in the past?
I invest in Central Pennsylvania, which is also an odd choice for someone who live in the Bay. However, I lived there for a bit in the past, so I have some local knowledge.
What I have found out is if you ask a question on here you will get 100 different opinions. You obviously have out of state investing experience which is great. Money is money no matter if it is in the West Coast, Midwest, or East Coast. Wherever you get the biggest bang for the buck and by investing in a variety of different asset classes for diversification is where you should put your money. There are deals to be had in the Midwest. You having 7 properties as out of state investments is solid to your understanding of real estate cash flow, property appreciation and your risk taking attitude. No investor made big money without taking a risk of some sort. Don't let the naysayers try and dissuade you to sticking local especially with your level of experience and track record.
@Tony T. Your OP sounded like you're looking in the Bay Area, especially since you emphasize capital appreciation. I dunno, but in my book $300k funds + capital appreciation = Bay Area investment. With bank financing you can buy a $1 mil to perhaps $1.2 mil prop locally. 2-4 units somewhere up and coming.
Where else are you going to get reliable appreciation, especially out of state?
Tony,
Welcome to BP.
If you're looking for appreciation, I came across a recent article a month or two ago (data from Zillow) about the "Best City for Mom & Pop Landlords" suggesting that for long term gains / appreciation, the top 5 cities are:
1) San Jose $8900 / month long term profit
2) San Francisco $6000 / mth
3) LA $4300 / mth
4) San Diego $4100 / mth
5) Riverside CA $3600 / mth (I was suprised by this one).
I too invest out of state but those are purely cash flow plays.
Best of luck.
@Tony T, welcome to BP.
Do come to the meet up, it has been great the past few times. We have some very knowledgable people here.
NV seems logical, as it's just next door. TN? why TN, did you live there in the past?
I invest in Central Pennsylvania, which is also an odd choice for someone who live in the Bay. However, I lived there for a bit in the past, so I have some local knowledge.
I didn't live in TN, but bought several turnkey properties in Memphis given the great price/rent ratio. Additionally, bought a couple in suburban Memphis where there are better schools.
@Tony T. Your OP sounded like you're looking in the Bay Area, especially since you emphasize capital appreciation. I dunno, but in my book $300k funds + capital appreciation = Bay Area investment. With bank financing you can buy a $1 mil to perhaps $1.2 mil prop locally. 2-4 units somewhere up and coming.
Where else are you going to get reliable appreciation, especially out of state?
Hi Amit,
I should've worded my OP more clearly...I'm looking at spending about $300k total (about 75k down / 225k finance).
Thanks,
Tony
Tony,
Welcome to BP.
If you're looking for appreciation, I came across a recent article a month or two ago (data from Zillow) about the "Best City for Mom & Pop Landlords" suggesting that for long term gains / appreciation, the top 5 cities are:
1) San Jose $8900 / month long term profit
2) San Francisco $6000 / mth
3) LA $4300 / mth
4) San Diego $4100 / mth
5) Riverside CA $3600 / mth (I was suprised by this one).
I too invest out of state but those are purely cash flow plays.
Best of luck.
Thanks Leng, can you provide a link for this? I'd be curious to read it.
Thank you for mentioning this article. Last summer, my partner and I considered taking a very sizable amount of our real estate winnings to fly over state and invest for cash-flow. After running the analysis using historical rent growth and appreciation for the Bay Area, we were shocked and decided to stay local. Our ROI is great because we got in at the right time and saw massive rent increase in the last couple of years. One of our tenants just moved out after 2.5 years, we raised the rent 20% and got it rented immediately with 0% vacancy. However, the ROE is nothing to brag about due to the massive 7-figure appreciation that we got just in the recent years. He's now comfortably retired in Brazil at the age of 40. We have a joint account where he has access to the $$ at any time.
@Tony T. , below is the link to the article. Your rental in Summerlin, NV is in a good location based on my understanding. It's interesting that TN is at the bottom of the list for cash-flow. I'm a little surprised that KS and OH didn't make it on the list.
Best of luck.
@Account Closed If your partner is retired, why aren't you retired? :)
Were you guys 50/50?
@Amit M. ,
Yes, everything is 50/50. He moved there in February of this year. The cost of living is cheaper in Brazil. He and his wife are currently renting a 4-bedroom house there for $1,150/month. Their health insurance is $350/month. He made $6k renting out rooms using Airbnb during the World Cup. He's always thinking of ways to make money. Everytime, he was thinking of getting a job, the people there would stop him.
He's looking into buying land and building houses there. Cost of land acquisition is $20k-$25k. Construction cost is around $65k-$70k for a 2,000 sq.ft. house. You can sell them for $150k. It takes about 4-6 months to build a house. That is his assignment for now. We will get a private lender in the U.S. to fund the deal. The profit will be split. Not sure how that will be structured yet.
Although I'm not retired, I don't have a real job. Gasp!!! I'm making decent money syndicating deals and referring business. The cash-flow from the rentals is paying for most of our living expenses. Wife's salary is helping out the in-law parents' living expenses. Right now, it's $1,500/month, but will by $2,500/month next year. My income is going back into investments. The money I make from miscellaneous stuff is going into my daughter's stock investment account. Believe or not, it's over $25k YTD for her and still counting. People pay me very generous for my time when I help them out.
@J. Martin and about 20 other BP members met my wife and daughter. When J asked my wife what I do, she said I don't do anything. LOL!!! That's the story of my life.
wow. SoCal is a different world.
Meh, a measly 300k....
Where you live is not really considered an investment, it's an expense. living in a small house will reduce expenses and increase cashflow. But you have to live somewhere. Once youve decided, look at rent vs own calculations, but be wary of buying tulips.
Now, with a portfolio of rentals in the real world, assuming a 25% equity and a nice performing portfolio, that should get you... say, .... 60k a year net? maybe more. You could use that to rent in socal...
$60k net on a $300k investment? That's 20% CoC returns. That's much better than what turnkey providers are offering here. How reliable is that 20% CoC returns and for how long?
Every market has its own masters. The masters tend to get the best deals. You'd be lucky to get some leftover from them. It's best to understand your market and how people are making money from it. You can add SJ to your list, but I don't think it will do you any good.
Best of luck.
Minh L.
ok, for example, take 250k and borrow 750, use the 1 mill to buy 20 x 50k houses, each net say 6k a year, less the mortgage payment at 60k a year, nets 60k.
Keep the 50k remaining as a capital buffer!
YMMV
@Account Closed was being a little conservative. Here's why, you take that same $50k he was putting into each SF, and the house is probably worth at least $62k. Refi out the $50k, use it again, keep repeating this until your arm gets sore. Now multiply that times 6 (6 x $50k = $300k).
CCR is infinite, since you never actually spend the money...it comes back to you with every refi.
Joe Villeneuve
REcapSystem
A2REIC
@Account Closed asked my wife what I do, she said I don't do anything. LOL!!! That's the story of my life."
That's something I can totally relate to! My wife always say the same thing about me. She just sees me with a flex schedule, taking long lunches, occasionally yelling at someone on the phone (usually a bank now...and soon to be my contractor :) while she has to deal with an office job, and the occasional Office Space (movie) type of situations. She quotes her boss recently, "hey, can you take care of this file?" Thaaaaaannnkkkssss.
In our household the rental income does all the heavy lifting (covers living expenses) and her income is more like Monopoly money, and goes towards mani/pedi/massages, and crazy expensive "healthy" foods that she loves. It's good that she saves money too, as that savings account always looks good while applying for loans.
In reality, we all have different monetary needs, and we all have different ideas of working/semi working/retirement. In my case I really focus on working smart, and consequently all my deals are structured as hunting for elephants- meaning few deals but with big pay offs at the end. The last 4 months have focused on nothing but getting my tenants to vacate my latest acquisition (significant progress bring made too, thank god) and a refinance and a clever HELOC manipulation. The tenant thing is mostly psychology, black magic, and a whole sh!tload of patience. The refi is an arduous pain in the ***. The HELOC thing is a nice freebie US Bank threw my way: I can fix a large portion of my balance for 5 years, IO payments at 3.5%. They offered that to their private banking clients. Sweet! An easy way to turn a HELOC into 5 year fixed (IO payments) at a killer rate. Easy and a total no brainer. One needs those every once in awhile too.
Here's why, you take that same $50k he was putting into each SF, and the house is probably worth at least $62k. Refi out the $50k, use it again, keep repeating this until your arm gets sore. Now multiply that times 6 (6 x $50k = $300k).
So you are saying you buy houses worth 62K but only pay 50. And immediately refi out the 50?
That sounds more like black magic to me. But I'd love to see more details how that's done in practice.
Why is that Black Magic. Keep in mind what I wrote, "put that same $50k in" a house. I didn't say buy the house for $50k. That $50k cash represents purchase and rehab. The rehab justifies the added value (to $62k). My lender will lend between 75-80% ARV/LTV, with no seasoning, on Non-OO.
Joe Villeneuve
REcapSystem
A2REIC