Home Buying in Menifee>Question Details

kben, Home Buyer in Sunnyvale, CA

Buying a house for investment

Asked by kben, Sunnyvale, CA Mon Jul 29, 2013

Hi, so as we can't afford to come up with 20% down on the house we want, we decided to invest our savings in a house that we can afford the 20% down payment for. keep it for a while and sell it when we will have the required $$ for the down payment on our dream house.
We are currently renting and we are hoping to use the investment house as week end house (not rent it).
we are also fortunate to work for a builder so we have some advantages buying a brand new house. The dilemma we have in this situation is whether to buy a fully upgraded house (2000 sq ft) vs a basic house with no upgrades (2500 sq ft). The difference in the price is about $40000.

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True investments look to the future value, and desirability, of the property. Upgrades are subjective - different buyers like different things. I assume from your question that the 2500 sf house is 40k less expensive - You could buy the larger house and put some of you own upgrades with the savings.

Good luck!
0 votes Thank Flag Link Thu Aug 1, 2013
$40000 is a big difference, especially when you are looking at return on investment ("ROI"). It depends on your goals and how fast the market in which you are speculating will be able to appreciate to the level where you could "cash out". Although the rental market has been steady, there is still no guarantee of a certain dollar amount that could be generated from a property. Historical trend could provide you an indication of how much to expect in rent, however, you should still factor in your vacancy and potentially having to cover any shortfall and maintenance, code enforcement issues, insurance problems, tenant with issues, etc. I have seen a lot of these problems that cause frustration and panic for property owners, which is why I would often become involved to "rescue" a property owner. As you would know, it is best to avoid these problems from the beginning.

I have met many property owners who treat the property as their "dream home" or their "baby" and everything that could be done to generate income might be counter-intuitive. This is a caveat to you as you might fall into this trap.

It looks like you are in the Bay Area? The rental market in the Bay Area is also different than the rental market in Southern California, particularly in Menifee, in which your post is listed. The purchase prices in Menifee have generally been good to high, depending on which part of Menifee you are buying. Tenants also have high standards for their kitchen, bedroom, yard, swimming pool, etc. for the lowest price. I've worked with tenants in all levels of pricing and am familiar with specific expectations in each area that I've worked, and I can tell you from personal experience that the Bay Area is different from Southern California.

If you are hoping that "someone" not necessarily a property manager will look after your property, you should evaluate if that is really how you would run your business. The same question goes for if you decide not to have someone local look after your property, if your tenants know you are far away, you are certain to be taken advantage of and quite likely you will keeping giving rental concessions that you are paying the tenant to live there -- yes, I've seen this happen too. This is not to say that all tenants would take advantage of you; this is a precaution that this could happen and I've seen it happen many times.

The bottom line is that it will depend on your goals and what you really want and how much you are willing to gamble. Do you want a headache to handle by yourself or have a headache handled by someone competent? If someone competent handles it, will you be hands-off and allow that person to do whatever it takes or will you want to micro-manage each step of every process?

A question you might want to ask is if the property is generating enough cash or breaking even so you are still getting rental property deductions and tax breaks, would you still want to sell it and trade for no deductions and tax benefits and no additional cash? Also, once you have listed a property as an asset to your name, this will affect your debt-to-income ratio and your reserves to qualify for traditional financing of your primary residence. There are also other factors in the loan underwriting and your finances which will take another couple hours to explain. Only experience can tell you all of this. Investing in real estate is not for everyone is more than simply buying real estate and get it rented. There are other dynamics involved, such as tenant rights, maintenance issues, eviction possibilities, mitigating your losses, contractor issues, etc. and how much time you could devote to babysit everyone in every part of this process.

This is mostly a numbers game and based on factors which you might not foresee and might not have control over. If you decide you need more control on the pricing and "need" to have a certain dollar amount or you cannot float, then you probably should stay away from having a rental property, otherwise, regardless of any favorable factors (i.e., top of the market rent, top-notch your property manager, etc.), you would likely remain dissatisfied and panicked.

On a side note, how much (in dollars) do you have as a downpayment? We might be able to structure a purchase that could meet your goals of having a personal residence and a rental home. There are also other ways to purchase which do not affect your first time homeownership status to qualify you for first time home buyer programs and other incentives.
0 votes Thank Flag Link Wed Jul 31, 2013
If this is going to be an investment property, it will be wiser to buy the house that more people will want when it comes time to rent, or sell. There are fewer buyers/renters for a 2500 sqft house, compared with a 2000 sqft house.

You might consider using FHA owner/occupied financing on a bread and butter house, that you can later rent out. The down payments and qualifying requirements are way lower. It won't require 20% down.

Maybe you could end up buying two or three houses this way, instead of one. You will actually need to live in each of these houses for a while, but this is a common, and efficient way to establish a cash-flowing portfolio of income properties without having to scrape up 20%-30% down payments to qualify for conventional financing.

Hope that helps.
Jay
0 votes Thank Flag Link Mon Jul 29, 2013
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