Investment property - Advice

Maybe its me, but this looks and feel very old.  Is there enough demand for older homes for rent? You can probably rent a newly built 3 bed house for 3400-3500 in newer neighborhoods.
 
IrvineOrange said:
I own a property in Irvine and looking for an investment in or around irvine
https://www.redfin.com/CA/Irvine/192-Woodbury-92620/unit-108/home/5888366

with 20 percent down, this can be a good investment property? looking for experts advice.

There is absolutely NO property in Irvine right now that cash flows on 20% down while taking into consideration actual real costs of investment properties like maintenance and vacancies etc.  I dont even have to run the numbers to know this but to prove it to you I did below.

Purchase price: 848,888
down payment: 169,788 (20%)
Rate: 4% (probably higher since investment property)
closing costs: about 15k?
rent: 3000 per month
Vacancy rate: 5% (about 2 weeks per year)
Property taxes: about 10K a year (is there mello roos here?)
HOA: 2040 a year (170 month)
insurance: about 2k a year
maintenance: 1500 a year ( most likely more for this older home)
I wont even calculate PM fees which everyone should because your time is money and one day you may not want to manage this.


Annual cash flow:  NEGATIVE $20,246
Cash on cash: -10.31%
total ROI: -4.22%

Calculate all the deductions like mortgage interest, repairs, depreciation and you are still losing money while having the headaches of a rental.

You are better putting that money somewhere else.  Consider opportunity costs of buying this as well.  Good luck to you.




 
Single family homes are rarely good rental investments unless you buy the home at the bottom of a market cycle or hold the home for a LONG time.  It's the capital appreciation and principal paydown that makes up for what is mostly a negative cash flow scenario.  Current market pricing is far from cheap, so the promise of high price appreciation is questionable as far as this current cycle is concerned.

If you plan to take on a 30 year fixed rate loan and keep the home for thirty years; when it is paid off you'll be looking at a nice nest egg for retirement.  If this is your plan then form an LLC as the proposed tax changes will affect you.  Most people I know that have owned rental single family homes get tired of the hassle or of writing checks long before 30 years.
 
Better to buy a rental home somewhere in Georgia. Hmmm what was that city called?
 
By the way, my calculations included a total ROI which figures capital paydown into the equation.  This number is still negative about 4%.  Therefore unless you get big appreciation in this property you WILL lose money. 

 
IrvineOrange,

This a post I wrote on a different thread. It may make sense to look outside of California as the CAP rates are the lowest in SoCal and the Bay Area. Outside of Atlanta market, I also think that investing in North Carolina and South Carolina are also a good options. In northern Atlanta market, Forsyth County, south of Hall County, and north Gwinnett is where the population is currently exploding. I would say that we are still 15 - 20 years behind Orange County in terms of infrastructure and development. The North Atlanta market is still very much in its emerging growth phase today.

The real estate markets (at current prices) I would avoid are the ones making new all time highs. These markets include, Denver, Dallas, Portland, and Seattle. The appreciation money has already been made in these markets. Also be very sensitive to tenant/landlord laws in an area you are considering to invest. You don't want to be going thru an eviction process either in Orange County, CA or Cook County, IL where the landlord/tenant laws favor the tenants, not the landlord.

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"This chart below should be a guide to where it makes sense to investment vs not. Four of the worst places to own investment properties are obvious: San Francisco, San Jose, Los Angeles, and San Diego. Texas also has very high property taxes reaching 3% in certain counties. You sort want to invest in the next Austin. Austin used be a one of the highest Cap Rate MSAs but you can see that is not case anymore. Need to look for an MSA where the numbers are in the high 90s and eventually will drop down to the low 70s like Austin did. Today, investing Austin, TX is no longer attractive due to the low cap rates."



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OP:

I think Panda gives some of the best advice on this post.  I think you should listen to what he said and take a look at those charts.  Good info.

 
Investing in Orange County has never been about cash flow, so comparing to Forsyth County is like comparing oranges to peaches.  Similar but not the same, and oranges are much more popular.

In order to succeed at investing in Orange County, you have to invest for appreciation.  That means buying when the cycle is favorable (i.e. prices are low).  Right now, everybody feels like prices are very high.  Prices could go even higher, but the risks are increasing.

Going with hello's numbers, you need 4% appreciation per year just to break even on your negative cashflow.  You only start to profit if appreciation exceeds 4%.  So two questions you should ask are: Will appreciation be higher than 4% over the long term?  Will the returns you are getting be worth the risks you are taking?
 
Out of state investment properties are bad unless you have some level of contact there or have a bunch in one area (hire property manager).  Horror stories abound.

If you were going to invest in OC...it needs to be  close to 100% down because you could not rent it out low enough considering all the cash buyer landlords out there. 

You need to look at IE/Central Valley/Las Vegas for a "real" investment property. 

Personally, I would just just invest in a REIT or the stock market.
 
the.irvine,

I would agree with what Irvine commuter said. You have to find good foot in the ground people / team whom you can trust whether you decide to invest in the Carolinas or Atlanta. I believe that the most important skill for the investment broker/PM is having the ability to find, select and screen good tenants. When it comes to property management, I believe that my clients should be ones in control with full transparency, not the property management company. I favor the PM model of self-management out of state with backup support when needed to save on the fees. There are also two full service property management companies I am now working with for those who want to be completely hands off in property management. 

Although investing in Santa Ana vs investing in Forsyth County are apples and oranges as median home prices in Santa Ana is much higher than the median home price of Forsyth County, the tenant profile you will find in Forsyth County is going to be very different from the profile from that of Santa Ana. I would argue to say that the median household income of a Forsyth County resident is much higher than that of a Santa Ana resident. You find tenants who are white collar professionals in Forsyth County while the median home prices are much lower than that of Santa Ana. I like to focus in B and A class assets with good schools and demographics that attracted white collar professionals. These areas are currently North Gwinnett and Forsyth County. Forsyth County is by far the strongest landlord favoring county in Georgia that I know of. Forsyth County is currently the wealthiest county in GA and the 6th fastest growing in the nation with low property taxes.

the.irvine said:
Is it possible to manage out of state rentals? Say in ATL, NC , Dallas-TX etc
 
Liar Loan said:
Investing in Orange County has never been about cash flow, so comparing to Forsyth County is like comparing oranges to peaches.  Similar but not the same, and oranges are much more popular.

In order to succeed at investing in Orange County, you have to invest for appreciation.  That means buying when the cycle is favorable (i.e. prices are low).  Right now, everybody feels like prices are very high.  Prices could go even higher, but the risks are increasing.

Going with hello's numbers, you need 4% appreciation per year just to break even on your negative cashflow.  You only start to profit if appreciation exceeds 4%.  So two questions you should ask are: Will appreciation be higher than 4% over the long term?  Will the returns you are getting be worth the risks you are taking?

OC used to cash flow.  It doesnt anymore.  Unfortunately "investors" are fighting for scraps now and resort to chasing appreciation.  In my opinion that is not really investing, but speculation.  Cash flow is king, appreciation is a bonus. 

I dont understand why one cannot compare Irvine RE to Forsyth RE.  Yes they have different pros and cons.  But isnt that what one should do when considering different investment choices? 

Furthermore, you will need more than 4% appreciation if you plan to make money.  Consider opportunity costs and selling costs of about 5% of home price.

Your goal is clearly to make some money.  You are really better off putting the money in other investment vehicles or if you really want to buy RE, then look outside of Irvine or outside of California. 
 
hello said:
OC used to cash flow.  It doesnt anymore.  Unfortunately "investors" are fighting for scraps now and resort to chasing appreciation.  In my opinion that is not really investing, but speculation.  Cash flow is king, appreciation is a bonus. 

I dont understand why one cannot compare Irvine RE to Forsyth RE.  Yes they have different pros and cons.  But isnt that what one should do when considering different investment choices? 

Yes, there have been points in time when OC cashflowed, most recently in 2011, but in general most of the return will come from appreciation.  Even those that bought cashflowing assets in 2011, have gotten most of their returns from appreciation.  The difference with other markets is that cashflow might be the primary return you get, while appreciation is secondary.

You can compare Irvine to any cashflowing market including Forsyth, but without context for the type of investing at play I don't think it makes any sense.  It would be like comparing a tech stock to a pharmaceutical stock.  They are both stocks that can be compared, but what does it really tell you?  One pays a very high dividend, and the other pays no dividend.  They both might go up in value, but generally a tech stock will have higher appreciation if purchased at the right time in the cycle.

I completely agree with you that investing for appreciation is speculation.  That's what I am, a speculator.
 
Panda said:
the.irvine,

I would agree with what Irvine commuter said. You have to find good foot in the ground people / team whom you can trust whether you decide to invest in the Carolinas or Atlanta. I believe that the most important skill for the investment broker/PM is having the ability to find, select and screen good tenants. When it comes to property management, I believe that my clients should be ones in control with full transparency, not the property management company. I favor the PM model of self-management out of state with backup support when needed to save on the fees. There are also two full service property management companies I am now working with for those who want to be completely hands off in property management. 

Although investing in Santa Ana vs investing in Forsyth County are apples and oranges as median home prices in Santa Ana is much higher than the median home price of Forsyth County, the tenant profile you will find in Forsyth County is going to be very different from the profile from that of Santa Ana. I would argue to say that the median household income of a Forsyth County resident is much higher than that of a Santa Ana resident. You find tenants who are white collar professionals in Forsyth County while the median home prices are much lower than that of Santa Ana. I like to focus in B and A class assets with good schools and demographics that attracted white collar professionals. These areas are currently North Gwinnett and Forsyth County. Forsyth County is by far the strongest landlord favoring county in Georgia that I know of. Forsyth County is currently the wealthiest county in GA and the 6th fastest growing in the nation with low property taxes.

the.irvine said:
Is it possible to manage out of state rentals? Say in ATL, NC , Dallas-TX etc

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I am no expert in real estate investing but I am in touch with several...single home investment is super tough with minimal return.  Money to be made in on flipping, not owning/renting.  You can screen all you want but get just one bad tenant...you have lost all your profit.

Money is in commercial real estate and multi-unit residence complexes...problem is that you need substantial cash flow to do that. 

If you have like $150-200K to invest...you are much better off in the stock market or mutual funds.  If you really want to invest in real estate, go with a REIT.
https://ycharts.com/indices/^DJER/ytd_return
 
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