Buying a rental?

[ordway]

My husband and I are still in the "accumulation" phase on the road to ER. We recently moved to southern California, which boosted the salary income considerably, even after accounting for the higher cost of living.

The housing situation here is insane. We're right on the coast, and there's nothing here we could afford. Well, to be honest, we probably could afford *something*... but I am not willing to pour all our extra cash into a $700,000 mortgage, nor am I willing to move to a crappy suburb with a long commute just to be able to have "only" a $500,000 mortgage. Right now we're renting a fantastic condo a block from the beach, within walking distance to town and biking distance to work, so we're pretty happy with our rental.

It's hard not to wonder if we're missing something big with not owning real estate, though. The thought crossed our minds whether it would be a good idea to buy a house to rent, purely for investment purposes. The town we live in is super pricey (and very nice, to be sure), but the neighboring town is not as nice (yet), and the prices are lower. People keep moving into the area, and apparently a large company is planning to establish a major outpost in that town (thus bringing in lots of employees who will need somewhere to live). It seems like there could be potential for growth there.

So, what are peoples' thoughts on buying a property (in these circumstances) purely to rent it out and then sell later for a profit?

My husband is more enthusiastic than I am about the idea - I am pessimistic about the likelihood of finding good tenants and having them pay on time, etc, while he is of the mind that "if they don't pay the rent, kick 'em out!" I also foresee lots of problems with being able to rent it for a high enough price to cover the mortgage, with having it be vacant between tenants, and with getting nickled and dimed by expenses like property taxes and repairs. On the other hand, my husband points out that the principle of leverage would get us a lot more return on our investment in the house than we would get from that same money being in the stock market.

Thoughts? Suggested books to read? We have never owned a house (or any property) and I admit that I feel about real estate the way some people feel about the stock market - it scares me and seems like way too risky a proposition to put my money into. I know that it makes sense eventually to buy a house that we're going to live in for a long time, but so far the circumstances haven't seemed right. But I don't want to pass up the chance to move our ER nest egg forward....

 

[Nords]

This thread recurs every few months...

Holly,

You'll be able to find other threads here on the rental topic, so I won't repeat their scary stories. Let me start you out with a few references:

(1) Investing in Real Estate, 4th edition or later, by Andrew McLean & Gary W. Eldred (who's taken over the new editions),

(2) Landlording by Leigh Robinson (7th edition or later),

and for your "kick 'em out" husband, (3) the video "Pacific Heights". His leverage principle works both ways.

What kind of tenants do you want-- renters like you who are too smart to be saddled with a huge mortgage? Would you rent from cash-strapped landlords like you?

Your instincts are sound, but the first book will help you put the numbers into a spreadsheet and compare apples to apples. I don't think you're missing anything by being out of the CA RE market. If it collapsed 20-40% you might take another look, but not at these prices.

 

[unclemick]

My nephew/wife are house hunting in greater San Diego right now. Expect to hear some poop when they get back in ten days - via my sister. Little niece has base housing so she's no help. In 84 went to a week training seminar in Del Mar - pricey even way back then. The instructor lived 'inland' in a 'starter' home and took a long commute. His wife had quit to have a baby and they were spending more than their income - because in a few months the commisions on the software package we'd bought would bring him above even. 300k for 2 Bedroom cottage in Del Mar was 'floor' in 84 - whatever that meant

 

[trumpeting_angel]

I have to second Nords's recommendations for books. I think McLean and Eldred have written one of the few sane books on real estate investment. I read it (and everything else I can get my hands on, most of which is nonsense) and am closing soon on my first two-family.

At, I believe, www.johntreed.com there is a page giving Reed's opinions about almost every real estate author and huckster extant - makes for great reading and a quick education about how to avoid the horseshit in real estate literature.

After my research, I came to believe that real estate was a better place for some of my money than stocks. While the market here is very high, it's not California. I just came back from there, saw a friend's $400,000 "house" in Oakland. I could pay $125,000 for it here, maybe up to $175,000 depending on the town. Now those are some crazy prices. OTOH, all that "green belt" land around the Bay Area that makes it so attractive, also really seems to limit the possibilities for new housing stock. I can't figure out how anyone is able to afford to live there. In San Francisco, my stepdaughter pays $600 a month for a ROOM, in which she and her 5-year-old live. They do have the run of the rest of the house, and kitchen privileges. Still. One room. Amazing.

Good luck, and do read up on this. There's a lot to learn.

Anne

 

[wabmester]

Holly, before you take the plunge, you might want to look at what happened to real estate prices in SoCal from about 1989-1996.    1989 was considered the height of a speculative frenzy, but I have to tell you that 1989 was mild compared to what's happening now, and I expect the fallout to be severe.

In Orange County, for example, housing affordability is at an all-time low.   It was about 13% last I checked.   That means that only 13% of households can afford a median-priced house (that number is about 59% for the rest of the US).

That means that very few people can afford even a starter-home (I've seen one-bedroom condos going for over $300K).   That means that money won't be flowing in from the bottom to allow others to move up, which to me signals the beginning of the decline.

Here's what happened during the last housing bust:

- "luxury" homes were hit the soonest and hardest.   I saw prices drop close to 50%
- as prices started to drop, people stopped looking outside of prime locations, which meant that prices in outlying areas started to collapse hard (Riverside, for example)
- prices continued to fall for most of the decade, finally stabilizing around 1998

And in 1989,  very few lenders were offering interest-only loans, 100% financing, home equity loans, etc.    My crystal ball tells me that the foreclosure market in OC and San Diego, for example, is going to be HUGE in the coming years.

 

[charlie]

New housing in the North Texas area goes for less
than $80/sq ft, Scott Burns regularly warns about
the RE bubble on the Least Coast.

Cheers,

Charlie

 

[JOhn Galt]

I have written before about how cheap some waterfront
property is here in the Illinois boondocks. But, the winters are still cold and sometimes snowy.
Otherwise, we like the spot. I lived in north Texas from 1994 to 1998. We own land there, plus a condo. I am still amazed
at the low prices, and I'm not that far out of Dallas.
Unbelievable. Re. the condo, I just said to myself that at
the price
I could buy it with cash and not miss the money. I have
owned just about every kind of real estate there is
and think the Texas properties may be some of my
best buys ever.
I don't know why it is but north Texas real estate
is cheap cheap cheap! (Don't tell anyone. I may buy some more)

John Galt

 

[Jarhead*]

John Galt:

The reason it is so cheap there is the law of supply and demand. (Location, Location, Location).

 

[charlie]

Hey ex-jarhead,

Except for the occasional tornado or flood, we have
beautiful weather here about 8 months of the year.
The other 4-5 months suck. Houston is an arm pit in
the summer and Dallas is not much better but the
low humidity and cool nights of the high plains area
helps even things out.

Cheers,

Charlie

 

[John Galt]

The humidity difference between Houston and Dallas
is quite significant IMHO. When I lived in Dallas, the
locals would sometimes complain about the humidity.
Truly, I never noticed it, and that's compared with
Illinois where I grew up. Anyway, Houston in summer
tends to hot and damp. Dallas is just hot.

John Galt

 

[haha]

Houston is an arm pit in
the summer and Dallas is not much better but the
low humidity and cool nights of the high plains area
helps even things out.

We used to spend Christmas with my wife's folks in Denton, TX. My brother also lives nearby, and works at DFW. I remember how much I loved getting off the plane in December and seeing bright sunshine. When we returned to Seattle, it was like someone forgot to turn on the lights.

If I visited in summer it was hot for sure. But I spent some lazy time gigging frogs and catrching bass with plastic worms. Overall. I think it is pretty nice.

Chuck-Lyn, what part of TX do you live in? You mention the high plains. Big Spring? Midland? I sure like the pecans from those drier parts. But unless I am forgetting, not much in the way of cities west of Ft. Worth.

Mikey

 

[John Galt]

I MUST insert my $.02. The area around Denton is pretty nice, climate-wise and otherwise. Northwest
Texas is dusty and desolate. The good news is that
it really is like a whole other country. People who have
not spent some time there certainly can not appreciate
what is available in Texas. I agree with the bumper sticker
"I wasn't born in Texas but I got here as quick as I could!"

John Galt

 

[charlie]

Mikey,

I was raised in Wichita Falls, lived in Houston and
Austin while in college and have spent my adult
life in Dallas.

Of the 4 cities, Austin was a great place to live in the
50's. It was a nice little city with two industries .....
the University of Texas and the state government.
Then Dell took over and turned it into silicon valley
of Texas.

I love Texas but it's damn hot in the summer. Thank
God for AC.


Cheers,

Charlie

 

[haha]

I was raised in Wichita Falls, lived in Houston and
Austin while in college and have spent my adult
life in Dallas.

Thanks, Charley. I thought maybe you were living in West Texas. Weather's fine west of the Pecos. But a guy needs to like the company of jackrabbits, 'cause that's about all he'll get out there!

Mikey

 

[sgeeeee]

Thanks, Charley. I thought maybe you were living in West Texas. Weather's fine west of the Pecos. But a guy needs to like the company of jackrabbits, 'cause that's about all he'll get out there!

Mikey

Jackrabbits? ? ? Don't overlook the Western Diamondbacks.

 

[cute fuzzy bunny]

Beware the Jackalope.

Most foul and bad tempered beast you'll ever find.

 

[ordway]

Dragging this thread back on topic (heave... ho!) by main force...

Thanks for the book recommendations - I'll see if my library has them or can get them. I think it's pretty clear that my gut feeling ("don't buy anything in my area right now") makes sense, given the bubble-like environment around here.

For a slightly different take on the idea... Let's say I know that I want to live in a particular area when we ER, and it's a lower-cost area than here (no jobs = lower real estate prices). Is there any merit to the idea of buying our "retirement home" and renting it out while we're still saving up for the actual ER time?

 

[wabmester]

Is there any merit to the idea of buying our "retirement home" and renting it out while we're still saving up for the actual ER time?

It may make financial sense, but be very certain that you want to be a landlord.   Especially a long-distance landlord.   I've done it myself, and it's fine until something goes wrong (maintenance, eviction, etc).

I've also purchased a couple of properties from people who bought vacation homes and rented them out.   In both cases, the properties sustained considerable damage from neglected maintenance.

In one case, a few dollars worth of caulk around the windows would have prevented about $10K in damage.

In another case, a couple from CA built a new house on the beach, rented it out for 10 years while waiting to retire there, and in the end got divorced and sold the place for less than it cost them to build it.

I guess the moral of my story is that if you go forward with this idea, send me a note when you're ready to unwind the deal  

 

[trumpeting_angel]

But people have done this, and successfully. I think the most important aspect is research. Research the financial aspects (MacLean and Eldred to start, and Eldred has a book simply on investing in second homes), then research on the area, and then researching specific properties, and THEN researching management options. Then researching potential tenants (credit reports, references, (and while researching the legal aspects of landlording) how much you can charge in security deposit).

I keep getting offers from American Home Shield, an insurance co. that insures the basic systems in your home or rental property. I haven't RESEARCHED it yet, but it could be a good investment. They seem to have an agreement with Service Master, so there's always "someone to call" when something goes wrong. Might be a good deal for a long-distance landlord.

Anne

 

[John Galt]

Hello Anne. I am a long distance landlord. I have American
Home Shield.

The sellers paid for this service at closing when
I bought the property. I suspect the realtor got a "cut"
for promoting it and I considered it a bonus (no cost to me) Unfortunately, I did no research (as usual).
Although they have been prompt to respond, there
is a $50.00 deductible on each service call. I have paid out $150 since March. Also, there is a time limit on
their service before a new $50.00 deductible is charged
(one year??). Anyway, I'm still glad I have it although
I would not have paid the up front cost myself.

John Galt

 

[unclemick]

I hate to say this because I don't know the numbers but I remember three of four absentee landlords(all retired engineers from my old plant) have one or more Houses in CA kept from their working days. One in FL. A mixture of sons/daughters and rentals. I remember some saying they were a fall back nest egg booster(mostly bought in the 60's and 70's).

Ken - a widower(70ish?) remarried a younger woman, sold six houses in CA, and bought a bed and breakfast place near the French Quarter. Not an ER type for sure.

 

[haha]

But people have done this, and successfully. Anne

Anne, you are so right. Still, many things that have been successfully done still don't recommend themselves very strongly on their merits.

One rule I try to keep is not to mix two goals which tend to interfere with one another- pleasure and money making.

If I bought a vacation cabin on a lake, I'd want to go to the mountains for relaxation. The cabin would become just one more obnoxious job. I think a family redoubt is a great thing for the very rich, since they can hire someone to look after it. And if the snow is no good in Vermont, they can go to Switzerland.

But doesn't apply to me.


Mikey

 

[John Galt]

I kind of agree with Mikey. It's a slippery slope and before you know it you are "working" again. I have
fought against my entreprenurial instincts ever since
I ERed. Our only rental property is our condo which
MAY become our main home at some point. Anyway,
even my minimal involvement (hired out management)
is sometimes a nuisance. The question for me is:
Does the income/tax deduction offset the mental
stress and annoyance vs. leaving it empty?
The jury is still out.

John Galt