Real Estate Question: What Should I do?
Wednesday, 23. June 2010
I live in Sacramento, CA, and it is one of the cities that has been hit hardest by dropping house prices. I am a 19 year old college student living with my parents. I work as a freelance videographer/video editor and bring in anywhere from 00-00 a month. I am also working on starting my own advertising/marketing company, but that cannot be considered since it is not a definite thing. I currently have no monthly bills since I live with the parents and bought my car in cash. I also have about ,000 saved.
The prices in Sacramento are so low right now, that I really think it is a great time for the first time home buyer to get a house. So here is my question:
I need advice on whether to buy a house or not.
So here is some more info: In four-five years I will graduate with an MBA, and according to the regional average, I will be making between ,000-,000 a year starting off.
Option #1 for me: I buy a house now that I would plan on moving into as soon as I graduate and get a full time job. A built in 2004 foreclosure house I wouldn’t mind living in would cost me about 0,000 right now. Since it is a foreclosure, say the actual market value is 280,000 So after buying it, I would then rent it out for the next four years. I would have my parents cosign(they have perfect credit) on my loan so I could get a low rate, say 6.25% (CA avg. 6.0% right now). After tax and insurance is added, I estimate my monthly total payments would be around 50. I could rent it out easily for 00 a month. So I would then lose 0 a month. Now I know that sounds stupid, but here is how I see it: Over a 4 year period I would lose ,200+ 8,000 for repairs. ,200 total. Now say the housing market goes up over the next 4 years and the house value goes up to 0,000. (It was higher than that in 2005). I then have over 0,000 in equity, and I only lost 15,000.
Option #2: I can buy a foreclosure house that I wouldn’t move into in four years. (it would be strictly investment). They go as low as 5,000 right now for ones not needing fixing. So say I get one for 0,000 to be safe. I can then rent that out and create a positive cash flow of about 0-300 a month after expected repairs and vacancy rate. The plan would be to then sell it when the market goes back up. Does that sound like a good investment to anyone? Keep in mind, I would have the extra work of managing the property and then I would also need to buy a second house for myself in four years.
Sorry for such a long drawn out post, but thank you to anyone who read through it. I could really use some advice on this. I aspire to be very successful and wealthy in life, and I think that starting off in real estate early will help me do that.
Thank You,
Matt
Openthathouse.com Says:
Option 1. Seems like you have done your homework. Look for a property in your area that you want to live and will keep its value in the neighborhood you are looking for. Although you may not want to live in this property. Well if your having a hard time finding renter’s than you may have to so as not to lose to much money. Foreclosures are a great way to get into a home, especially since you have a great downpayment. If you need help with the area or recent foreclosures please contact me. Good luck and Happy Living!
cridler Says:
I would not buy a house right now. Yes prices are down and they will stay down in CA for a while You are 19and even though you are well focused a lot will change in the next 5-6 years. Houses are illiquid and you will lose flexibility if you have a house payment.
My advice is to continue to save aggressively and when you get a better idea of what the future holds make a move on a house then.
You are doing a great job keep it up, I’m sure your parents are very proud of you.
es Says:
Because you already have an income, it isn’t a bad idea to invest $150.00 per month in a rental property
. You will be able to offset the house against your taxes-including the loss. a rental property can be depreciated. However, if you decide to move in 4-5 years from now, you would have to recapture the depreciation. Additionally, the interest rates for a non-owner occupied house is higher than if you were to occupy it, so here is what I would suggest:
1. Consult a Mortgage Broker with your parents and see what you qualify for regarding investment property that you won’t occupy;
2. Consult a CPA as well, to discuss the depreciation, and other income issues.
The only other thing I’d add is that you should still wait to invest. The market is still falling. Therefore, by waiting you may pick up the same property for less. Furthermore, as long as the Fed is injecting liquidity into the credit markets, the interest rates will remain low. Should they reverse their position and start hiking rates- then the interest rates on mortgages can go significantly higher. So, that too, should influence when you buy. Finally, it is probable that the equity will grow slowly. Don’t expect $100K profit in 4 years. Based on what I’ve been reading, it may be 2011 or
later until the glut of available homes is reduced. Until such time that inventory is reduced, you will be investing in a declining asset. Overall, I think you have a very good handle on the potential, but not on the time-frame. You can’t pick a market top or bottom, but the California market is a long way from hitting bottom. Just read the Yahoo Finance section on real estate, and you will get a good idea of this. Good luck!
p.s.- no property is rented 100% of the time. Are you prepared to pay the mortgage during vacancies? Are you ready to evict someone occupying your property, if they don’t pay? Ask the lawyer what eviction proceedings cost, and what the time-frame is. Some states are very pro-tenant.
A Real Realtor Says:
Bad idea.
You should NEVER get into the rental business until you have been a homeowner…I have had $15K in a single repair…try squeezing that out of someone that doesn’t own anything.
Also, never count on a job that you don’t have yet. MBA’s are a "trendy" degree and I know alot of them that can’t find jobs where an MBA is needed….an MBA is only worth it if you have work experience.
Most people graduate from college anticipating to be successful and wealthy in life….and then find out it isn’t as easy as you think it is.
If you make the decisions on future income that may never come into fruition, you’ll be bankrupt by the time you are 22.
My advice?
Stay with your parents or rent cheap until you finish college…save everything you can. Get a PERMANENT job…THEN buy a house.
Then you’ll be making decisions with real money with a real future and not hypothetical.
The market isn’t going to turn around anytime soon…experts are predicting as much as an overall 30% drop in housing prices for this year.
Hopeful Home Solutions Says:
My advice?
Don’t do Option #1. Don’t ever buy an investment property that won’t cash flow. Don’t depend on the value to appreciate as the reason to purchase the property. That is what got a lot of current investors in big trouble, and they’re currently in foreclosure or close to it. That being said, there are some investors that will buy properties such as these (slightly negative cash flow) if they’ve done an analysis and feel that the specific area is an emerging market. It didn’t sound like you had done a detailed analysis of your market to make that determination. Also, I’m not one of those investors, so I have a biased opinion on this to start with.
I would recommend going forward with Option #2, as long as you have taken into account reasonable repair expenses and other expenses. Have people give you written quotes for everything – construction, insurance, mortgage rates, closing costs, etc. It sounds like you have a good general overview of what’s entailed. It will be work, but it is good experience, and in 4 or 5 years when you are ready to buy your own personal house, if the market is up you can sell and get a nice large down payment from the appreciation. If the market is still down, as long as you’re cash flowing, you have the option of not selling the house at that time, and just qualify for a mortgage on a personal residence with less of a down payment. I’m sure if you continue to live with your parents, you will still continue to save money. Also, the mortgage company will ADD to your income some of the profit you are making on your rental property (usually about 75% of the profit – you will need to show your last 2 years tax returns), so it will not hinder you from getting the mortgage for your personal residence.
Also, make sure you keep as much of your $28K that you have saved up as possible, and don’t put it all down on the house. As a landlord, there is a time, especially in the beginning, that you potentially won’t have money coming in until it’s rented, but you have costs you have to carry. Try to have as much reserve funds as possible as a safety net.
One other critical point. The market will probably continue to go down in your area. Don’t overpay for any house. Figure out your numbers, and don’t stretch it, i.e., if you think you can rent the house after it is repaired for between $1,800 and $2,000 a month (just as an example, I don’t know your market), use the $1,800 number in your projections. If you have a range of expenses, use the higher number. Also, get the numbers from a few different people/estimates. It is safer to do it this way.
Every real estate investor will tell you that right now is a great time to be investing in real estate. I am trying to buy as much as I can right now. The road to wealth is real estate. I wish I had started investing (or thinking about it) when I was 19. I’d be retired by now. But realize it is work, and it will take up some of your time to manage the property, but it will be worth it in the end.