I'm looking to buy a property (first timer) for that is a bit over a 1 million with 25-30% down. I will be living in it with my family.
Due to the high prices in our current market, I may not be able to cover the entire cost of the mortgage each month, and will run short by $1000-$1500/month (which includes property taxes). Essentially, I cannot cover the property taxes on this purchase. If I try to do that, I will be house poor, since I have other expenses.
Can I take a deduction for property taxes each year? Std deduction is $12000 so I would go over that deduction given the price of home.
Should I think about house hacking and building an ADU in the back of the house?
Is this still a worthwhile purchase?
Love to get your expertise and thoughts.
Have you already qualified for the loan? Is it a conventional loan? If you qualify for the conventional loan, you are not that house poor as lending criteria will protect the lender and you from you being over extended.
My view is adding an ADU in most CA markets is one of the worse RE investments. Here are some of my thoughts:
1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to list opportunity because if you had purchase RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) adding ADUs is a slow process. The time required is time without achieving any return. This amounts to lost opportunity.
If you choose to ignore all these reasons why an ADU is often a poor investment, look into receiving the $40k grant for building the ADU. It can help with item #1 above
Good luck
Have you already qualified for the loan? Is it a conventional loan? If you qualify for the conventional loan, you are not that house poor as lending criteria will protect the lender and you from you being over extended.
My view is adding an ADU in most CA markets is one of the worse RE investments. Here are some of my thoughts:
1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to list opportunity because if you had purchase RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) adding ADUs is a slow process. The time required is time without achieving any return. This amounts to lost opportunity.
If you choose to ignore all these reasons why an ADU is often a poor investment, look into receiving the $40k grant for building the ADU. It can help with item #1 above
Good luck
Have you already qualified for the loan? Is it a conventional loan? If you qualify for the conventional loan, you are not that house poor as lending criteria will protect the lender and you from you being over extended.
My view is adding an ADU in most CA markets is one of the worse RE investments. Here are some of my thoughts:
1) The value added by the ADU addition is often significantly less than the cost of adding the ADU. Search the BP for ADU appraisals to encounter numerous examples. This creates a negative initial position. This negative position can consume years of cash flow to recover. Make sure you know the value the ADU will add to the property before building the ADU.
2) the financing on an ADU is typically far worse than for initial investment property acquisition or is often not leveraged (HELOC, cash out refi, etc). Leverage magnifies return.
3) The effort involved in adding an ADU is comparable or larger than a rehab associated with a BRRRR. However if I do a BRRRR I can achieve infinite return by extracting all of my investment. Due to item 1, adding an ADU can require years to start achieving any return (once the accumulated cash flow recovers the initial negative position).
4) Adding an ADU is a slow process. It can take a year or more to complete an ADU. During this time you are not generating any return from the money invested in the ADU. This amounts to list opportunity because if you had purchase RE, at the closing it can start producing return.
5) ADUs detract from the existing structure whether this is privacy, a garage, or just yard space.
6) this is related to number 1, but there are many more buyers looking to purchase homes for their family than there are RE investors looking to purchase small unit count properties. This may affect value or time required to sell.
7) Adding an ADU does not make the property a duplex. For example in many jurisdictions I can STR units in a duplex but cannot STR an ADU (some jurisdictions will let you STR if you owner occupy). Duplex have different zoning that may permit additional units. Duplex can always add additional units via the ADU laws.
8) adding ADUs is a slow process. The time required is time without achieving any return. This amounts to lost opportunity.
If you choose to ignore all these reasons why an ADU is often a poor investment, look into receiving the $40k grant for building the ADU. It can help with item #1 above
Good luck
@Mindy Ma max property tax deduction is $10k, and you’ll get to deduct mortgage interest payments up to $750k, so if you are un-married then you’ll benefit from itemized deductions instead of standard.
However, this should not be a influencing factor in your decision. The real question is whether the property will appreciate enough to offset the large costs while you hold it. That is a tough question to answer in this market as price adjustments relative to interest rates are in flight. If you buy right, then it can be a great investment. Many people generate great wealth in CA real estate. However, buying in this market can be risky, so make sure you are underwriting the deal properly.
Btw, your situation is not clear when you say you can’t cover the full payments. Do you have some portion of the home rented and the rental income falls short of covering taxes? Based on your questions about deductions it seems that you are not renting the property, so how do you plan on covering payments?
@Mindy Ma Boy, I hate to see someone start off with such tight stressful numbers. Seeing as how it's California, you might be ok, but there is a lot of talk about the vaunted Cali appreciation becoming more normal and in line with the rest of the nation (or even less). Add to that that this crazy economy right now is so unpredictable, no one really knows where it's going.....except downward.
@Dan H. has made some excellent points above, I would take note of them, he knows his stuff, esp the Cali market.
You do know that with your 30% down, you could buy an entire house free and clear of a mortgage, in a lot of wonderful places in this country? That is more appealing to me than what you have planned. I get the chills just reading your post.
Just my .02.....
@Mindy Ma max property tax deduction is $10k, and you’ll get to deduct mortgage interest payments up to $750k, so if you are un-married then you’ll benefit from itemized deductions instead of standard.
However, this should not be a influencing factor in your decision. The real question is whether the property will appreciate enough to offset the large costs while you hold it. That is a tough question to answer in this market as price adjustments relative to interest rates are in flight. If you buy right, then it can be a great investment. Many people generate great wealth in CA real estate. However, buying in this market can be risky, so make sure you are underwriting the deal properly.
Btw, your situation is not clear when you say you can’t cover the full payments. Do you have some portion of the home rented and the rental income falls short of covering taxes? Based on your questions about deductions it seems that you are not renting the property, so how do you plan on covering payments?
@Dan Heuschele we’re saying the same thing. I’m suggesting that while OP will be limited on max property tax deductions, OP will get to include mortgage interest deductions - thus should likely use Itemized instead of Standard deductions.
Invest in Texas, things make a lot more sense over here
You do know that with your 30% down, you could buy an entire house free and clear of a mortgage, in a lot of wonderful places in this country? That is more appealing to me than what you have planned. I get the chills just reading your post.
There are 20 million millionaires in the US and 2-3 million homes in the US that are worth over $1 million. So, only a fraction of millionaires own million dollar homes, which is likely why they are millionaires.
Yes, HousHack! It's the best way to start out. Building an ADU may also be a great option to help offset the costs but that's just more money out of pocket. Maybe buy at $800k with 10%-20% and then use the extra cash for the build on the adu. Let's connect!
@Mindy Ma
Can you deduct property taxes?
Only partially.
Currently there is a State And Local Tax (SALT) limit of 10,000. Your likely already taking that up with state income taxes for federal.
You can take the interest on 750k of principle for federal which will push you to itemize.
For CA, the standard deduction is less than half of that of federal and the SALT limitation is not relevant (though the state income taxes can't be deducted). The amount of principle you can take interest on is also higher
@Mindy Ma I'm an investor in San Francisco Bay Area. I have rentals here that I acquired before 2010 so I'm cash flowing but I'm highly unlikely to buy anymore in California. I just sold a property here because I was going to be -$300 a month best case scenario (rent minus my monthly payment (P&I, property taxes, HOA) not considering tenant management or vacancy issues. I had local investors saying I should hold onto it because of Bay Area appreciation but I don't want to be at a loss each month hoping that it'll get better. I decided to cut my losses. Running short $1000 to $1500 month is a bit steep. I hope all goes well for you.
@Allan C. You make a great point. I've never heard that it's a financially sound decision to buy a property being in a negative cash flow hoping it'll appreciate enough and rents going up enough.
@Mindy Ma I'm an investor in San Francisco Bay Area. I have rentals here that I acquired before 2010 so I'm cash flowing but I'm highly unlikely to buy anymore in California. I just sold a property here because I was going to be -$300 a month best case scenario (rent minus my monthly payment (P&I, property taxes, HOA) not considering tenant management or vacancy issues. I had local investors saying I should hold onto it because of Bay Area appreciation but I don't want to be at a loss each month hoping that it'll get better. I decided to cut my losses. Running short $1000 to $1500 month is a bit steep. I hope all goes well for you.
@Allan C. You make a great point. I've never heard that it's a financially sound decision to buy a property being in a negative cash flow hoping it'll appreciate enough and rents going up enough.
>I've never heard that it's a financially sound decision to buy a property being in a negative cash flow hoping it'll appreciate enough and rents going up enough.
historically this has been a 100% sound decision meaning true in all cases) for coastal CA for a 10 year or longer hold going back at least 60 years. Meaning there is not a single 10 year period for any of the large coastal CA cities where the return on average has not exceeded inflation.
Now you have not only heard it, but I invite you to also look into my claim. Anyone can state whatever they want, but I invite you to scrutinize my claim. I will point you to Neighborhoodscout and core logic as two places to look at the stats.
Good luck
Yep! All those years in Cali gave me that very mindset. Now it will not work everywhere, but if you know your market, it is not a dumb way to invest....
If this home is in the Bay Area I am happy to take a look at the deal and can give you a more informed answer that just a generic. But in general no you don’t want to buy something cash flow neg unless u are getting a killer deal on an amazing property which someone like me or someone else should probably weigh in on before pulling trigger. I am a investor and real estate agent in the Bay Area. Feel free to pm details to discuss specifics.
Thank you so much for all the advice. I am quite nervous to be net negative, but affording a home in this area that is somewhat safe to walk around in is so hard. Yes, I'm approved for a conventional loan. I'm in southern Cal, and due to family reasons, have to remain here. After reading the posts, however, I decided not to proceed with that property, but am continuing to look around. Wish this market would cool down a bit faster.
I decided not to proceed with that property, but am continuing to look around. Wish this market would cool down a bit faster.
It may not anytime soon. Maybe look elsewhere......?
@Mindy Ma I'm an investor in San Francisco Bay Area. I have rentals here that I acquired before 2010 so I'm cash flowing but I'm highly unlikely to buy anymore in California. I just sold a property here because I was going to be -$300 a month best case scenario (rent minus my monthly payment (P&I, property taxes, HOA) not considering tenant management or vacancy issues. I had local investors saying I should hold onto it because of Bay Area appreciation but I don't want to be at a loss each month hoping that it'll get better. I decided to cut my losses. Running short $1000 to $1500 month is a bit steep. I hope all goes well for you.
@Allan C. You make a great point. I've never heard that it's a financially sound decision to buy a property being in a negative cash flow hoping it'll appreciate enough and rents going up enough.
>I've never heard that it's a financially sound decision to buy a property being in a negative cash flow hoping it'll appreciate enough and rents going up enough.
historically this has been a 100% sound decision meaning true in all cases) for coastal CA for a 10 year or longer hold going back at least 60 years. Meaning there is not a single 10 year period for any of the large coastal CA cities where the return on average has not exceeded inflation.
Now you have not only heard it, but I invite you to also look into my claim. Anyone can state whatever they want, but I invite you to scrutinize my claim. I will point you to Neighborhoodscout and core logic as two places to look at the stats.
Good luck
Dan, thanks for the feedback. I agree about California appreciation. That's why I didn't sell the SFH in the Bay Area (owned free and clear with low property taxes until I took out the equity line to do the renovations) but buying more properties now, it would be a huge stretch financially for me with high prices, taxes and interest rate.
So you think buying in a CA coastal city and breaking even or even being in a negative cash flow could be a financially smart decision? I'm looking at the Midwest with cash flow of $200 to $300 a month maybe $400 if I'm lucky from what I've heard from other Midwest investors. Midwest appreciation has historically been slow but properties are affordable - I bought a SFH 10 years ago for a low price and and getting decent rental income from great tenants.
@Mindy Ma I'm an investor in San Francisco Bay Area. I have rentals here that I acquired before 2010 so I'm cash flowing but I'm highly unlikely to buy anymore in California. I just sold a property here because I was going to be -$300 a month best case scenario (rent minus my monthly payment (P&I, property taxes, HOA) not considering tenant management or vacancy issues. I had local investors saying I should hold onto it because of Bay Area appreciation but I don't want to be at a loss each month hoping that it'll get better. I decided to cut my losses. Running short $1000 to $1500 month is a bit steep. I hope all goes well for you.
@Allan C. You make a great point. I've never heard that it's a financially sound decision to buy a property being in a negative cash flow hoping it'll appreciate enough and rents going up enough.
>I've never heard that it's a financially sound decision to buy a property being in a negative cash flow hoping it'll appreciate enough and rents going up enough.
historically this has been a 100% sound decision meaning true in all cases) for coastal CA for a 10 year or longer hold going back at least 60 years. Meaning there is not a single 10 year period for any of the large coastal CA cities where the return on average has not exceeded inflation.
Now you have not only heard it, but I invite you to also look into my claim. Anyone can state whatever they want, but I invite you to scrutinize my claim. I will point you to Neighborhoodscout and core logic as two places to look at the stats.
Good luck
Dan, thanks for the feedback. I agree about California appreciation. That's why I didn't sell the SFH in the Bay Area (owned free and clear with low property taxes until I took out the equity line to do the renovations) but buying more properties now, it would be a huge stretch financially for me with high prices, taxes and interest rate.
So you think buying in a CA coastal city and breaking even or even being in a negative cash flow could be a financially smart decision? I'm looking at the Midwest with cash flow of $200 to $300 a month maybe $400 if I'm lucky from what I've heard from other Midwest investors. Midwest appreciation has historically been slow but properties are affordable - I bought a SFH 10 years ago for a low price and and getting decent rental income from great tenants.
Have you ever calculated your monthly appreciation over your ownership period of your Bay Area RE? The reason I ask is $400/month is nothing. I do realize the cost to acquire your OOS was much less, but owning and acquiring residential RE has a level of effort.
I have various properties in San Diego county. My monthly appreciation over their hold ranges from $2.4k/month to $16k/month. I suspect your monthly appreciation will be much higher than $2.4k because 1) San Fran is one of the few areas with better historical RE appreciation than San Diego 2) my lowest monthly appreciating RE was a cheap and small home so that $2.4k would be higher if not a cheap starter home. 3) the hold time on that lowest appreciating asset is now experiencing its 3rd significant decline.
I suspect your monthly appreciation to likely be over $5k/month.
My issue about recommending a coastal Ca purchase at this time has little to do with the cash flow. The reason I am hesitant to recommend a purchase at this time is that I believe prices are likely to fall further. If the choice is binary buy today or not buy at all in the market, I suspect buying today will work out great for a long hold (>10 years). However, i suspect a purchase next year is likely to do better. The market is tough to time, but feds have made clear further rate increases are coming. Higher rates affect affordability. This could (probably will) result in further value decline.
Have you looked into syndications? They are all coming out of a duration where virtually all of them out performed pro forma because of the incredible RE appreciation. Some syndicators have been syndicators since the great recession (GR). Some that have not been around as long have creative value adds and conservative projections that may make them still worth looking into. There are many syndicators on BP, lots to choose from. Syndications are passive after joining (must do due diligence before joining) and have produced good return. Do make sure you do your research. If they have done a couple house flips but their syndication is for a new development (or multiple new developments) that is probably a stretch for the syndicator (possibly growing too fast). There are also syndicators (the syndication is into a pool that invests in other syndicators) that you join and they research and select syndicators taking a fee. Ideally they have more time to research and weed out the losers so that after their fees the return is at least what you would have received doing it directly yourself, but the effort on your behalf is less. Do your due diligence in all cases.
Good luck
The property was a condo with increasing HOA fees so that was mistake #1 and my realtor was not knowledgeable so I overbid on this condo, mistake #2 (vet realtors carefully). For me being -$400 a month was going to affect drain my reserves. Also I talked to several landlords in that area and it's very difficult to evict tenants. In certain cities in the Bay Area, you have to pay a tenant a relocation fee to get them out if you want to sell the property or move back in (it was my primary residence). The location was good for commuters (close to freeway, bus stops), close to shops and restaurants but there was increasing crime. I sold it and I hope the buyer enjoys his new home. If I buy in California again it would a SFH that's further out maybe in the Central Valley as people move further away from San Francisco Bay Area because they can't afford to buy or pay high rent.
I haven't looked into syndication. All of my properties sort of fell into my lap so my weakness is analyzing numbers for future purchases. Thanks for the advice.
I'm in the Bay Area and finding it very difficult to find anything where my rents would be more than the mortgage payment. I've talked to many investors and everyone has a different opinion. Some people say Nevada (Las Vegas area). Some people say Texas like an hour outside the popular areas (Austin) but property taxes are high. I'm looking in the Midwest (Indiana, Ohio, Missouri) and other states (Tennessee, Kentucky,Florida panhandle area). Other people say no on Florida (definitely no in Miami). Have you considered out-of-state?
I have a SFH rental in Indianapolis metro area. My property manager quit his full time job recently and has a nice cash flow from his Indiana properties (duplexes and an apartment building). I could connect you to a few realtors and other investors if you might want to investigate Indiana. Good luck!
Thank you so much for all the advice. I am quite nervous to be net negative, but affording a home in this area that is somewhat safe to walk around in is so hard. Yes, I'm approved for a conventional loan. I'm in southern Cal, and due to family reasons, have to remain here. After reading the posts, however, I decided not to proceed with that property, but am continuing to look around. Wish this market would cool down a bit faster.