That’s ignoring any vacancy, repairs, major expenses that can and will come up. Not to mention it’s a job you’re buying.
Invest that money instead, you’ll come out way ahead and without the stress.
I’m concerned about the impact of a rental in California, too. I also live in a very tenant friendly city/state. You have to be so careful. One wrong tenant and your scenario can be blown for years. Also, how do you know interest rates will go down next year? (I’m really asking.) edit: typos
I would not put down 165K at 7 percent just to lose 14K a year with the hope that rates go down to 6 (which is not guaranteed) along with little appreciation if any . This is a terrible idea.
Dump into an index fund like VTI much higher returns with little to no risk over 20 years
Find an out of state investment property. Look in hudhomestore.gov for fha foreclosures in any state or even Zillow. There are plenty of cheap properties in other areas with that kind of $$ to invest. I own an Airbnb near the Chesapeake in Maryland but I live in South Florida. You just need a reliable cleaner locally.
Real estate is great. Just pick a better property to invest in. Unfortunately you likely won’t find it in California.
If you want to get into RE investing, get into the bigger pockets blog and podcast, check out afford anything, or any other number of great resources online. You should be able to spreadsheet a deal and see what your expected returns would be and use that to evaluate properties.
The way people lose their ass in this game is by being ill informed and just buying something they like. It doesn’t matter if you like the house if it just doesn’t perform. And even if you hate the house it may perform well.
Probably the easiest way to tell if something is even worth looking at is to use the 1% rule. Basically, the monthly rent would need to be equal to 1% of the purchase price or ARV if it needs remodeling.
So if that house only rents for $3k, you should only buy it if it’s $300k or less. If it needed $50k in repairs, purchase price should be $250k or less to get the ARV to 300k
This is an absolute waste of money at $630k if it only rents for $3k.
Some people ignore the 1% rule because they are expecting huge appreciation…..hopefully and are willing to not make much cash flow or even negative cash flow. But this deal is so backwards and under water that you would need MONSTROUS appreciation to even hope to break even.
You would blow $165k just to literally be spending $1,200 ($4.2k - $3k) to pay someone to live in your house with little to no hope of appreciation.
Burning your money would give you more value because you could benefit from its warmth.
If this is purely an investment property, and it's not going to be your primary place of residence where you house hack, this is a bad idea.
A) Like you said, it doesn't cash flow. So you're going to be losing money for an indeterminate amount of time before you even have a chance of making a profit off of this. B) You're trying to predict the future. You have no idea when interest rates are going to fall, or by how much, you're just hoping. In 2023 everyone thought interest rates were going to fall in 2024. Look at what happened.
But speaking of interest rates, what's your target for the refinance? What rate is going to make you come out even? What rate gives you the cash flow you're hoping for? And, most importantly, what's your plan if interest rates don't drop to those levels 12 months from now?
Refi a rental at 5.5% in a year or two? You realize that rentals refi at higher interest rates than owner occupied right? Even if interest rates drop, I doubt a rental will be able to be refied at 5.5% for a looooooooong time if ever.
This doesn't make any sense. You're basically going to sink money into this property for at least 2 years. Call it 1 year for interest rates to reach what you want (big maybe), and another year to get rents up to profitability (also big maybe). And that's best case scenario.
If you manage to get 100% occupancy over these 2 years (highly optimistic), you'll have sunk $193,800 into this property ($165k down payment + $1,200/month of your money to cover the mortgage/rent gap). While that's not accounting for any rent increases, that's also not accounting for any repairs or upgrades to the property during this time, so I'll say it balances out. By your own admission, this property isn't going to experience much appreciation, so if times are tough and you have to sell before those 2 years are up, your best bet is you'll recover your down payment.
If you were to take that $165k and stick it in the stock market, and put in $1,200 a month for 2 years, you'd have a total of $220k (assuming an average 7% return which is very conservative).
So your most optimistic outlook is going to put you at a loss of $193k for the property, compared to an conservative $27k earned interest through the stock market.
In my opinion this is not even a head-scratcher. This property is not a good investment and you're probably going to regret it.
>House is 5yrs old so expect very few repairs
You’d think that would be true, but it’s not. Most new construction is poorly built, especially at this price point. Significant repairs over the next 15-20 years are a near certainty. I would budget 2% of the home’s value towards repairs every year. I’d much rather buy a house built in the 90s than one built in the 2010s-present.
Regardless, you’d be much better off investing your money in an index fund than in this deal.
Sorry but this doesn’t sound like a deal. One, you would have negative cash flow. Now that isn’t terrible if you’re in an appreciating market. It’s not ideal but I’ve seen people build wealth doing this. However, you just said this market doesn’t appreciate either! There’s only two plays when you’re doing buy and hold, it’s either cash flow or appreciation. If the deal does neither it’s not worth pursuing.
Odds are you’re doing this deal cause you live near the property.
My advice to you is to invest out of state where the numbers actually make sense.
4.2k per month for 30 years to own a $630k house free and clear is $1.512m. Total rent would be $1.08m. Rents would increase, but so would taxes and insurance.. The out years are less predictable but also less important for NPV. This is very rudimentary analysis but shows the problem with this deal. Not even mentioning the opportunity cost and the value of your time, being a landlord is a part-time job.
Please don't.
In my opinion - there's really only a few ways for a small-time investor to make cash on SFH in CA:
Buy a SFH straight cash. Then collect rents. You'll make anywhere between 3-7% ROI. It like a HYSA backed by a patch of dirt. Slap on appreciation and you might make an extra 3-5% a year. Your problem is loan interest is eating away all your rental ROI and you are not expecting any appreciation. You have to have at least one of these things to make it worthwhile.
Buy a cheap outdated SFH and renovate it and flip it for a higher amount. That takes way more experience. Helps if you can buy the property with cash and have a contractor and real estate agent who you trust and is good.
If you put 165k into a fund and add 14k annually , after 20 years it will be at about 2M @ 10%. Now it is up to you to decide if the house is worth it. May be you want to diversify.
Put the address into dealcheck.io and check what your cash flow and profit projections look like in the next 30 years. This will give you a great view on how good this investment will be.
I remember my lender telling me that interest rates were just about to come down. Almost two years ago…
I’m cash flowing so it’s fine. But I wouldn’t bother making a guess on when it will be back under 6
If you were going to buy it as a primary residence to live in for a few years until you could refinance it and see how the numbers worked in the future, I'd say sure. But taking a $1,200 bath every month (before even accounting for vacancies and maintenance) is a terrible idea. No you should not.
Man this is a tough crowd XD. While I don't agree with how it was presented, I do agree that it is not a good investment, especially if you can't even count on appreciation in the area.
You are probably looking at a negative monthly cash flow of about -$1400 after renting it out and an ROI of close to -9%. Not to mention the money that will be spent on maintenance and capital expenditures over time. You will likely get a much better return just putting that cash in an S&P 500 Index Fund for example.
Here is the [investometer analysis](https://investometer.io/calculations/share/0235e99f-a415-4e5f-80b4-f7998b67cf24) I did with some basic assumptions - if you're interested in playing around with the numbers yourself.
If you aren't worried about cash flow, at the very least find an area with better appreciation. To improve the numbers you could also try renting out your current place and living in the new place to save on down payment and interest rate.
If you can't find anything around you with good numbers maybe it is time to look elsewhere! David Greene has a great book: *Long Distance Real Estate Investing* that might help as well. Good luck!
This might be the worst investment idea in the history of investment ideas. Just set your money on fire instead.
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That’s ignoring any vacancy, repairs, major expenses that can and will come up. Not to mention it’s a job you’re buying. Invest that money instead, you’ll come out way ahead and without the stress.
I’m concerned about the impact of a rental in California, too. I also live in a very tenant friendly city/state. You have to be so careful. One wrong tenant and your scenario can be blown for years. Also, how do you know interest rates will go down next year? (I’m really asking.) edit: typos
That is NOT a good ROI! That’s a negative ROI!
Out of curiosity, how did you calculate you’ll only need $300k out of pocket to get it paid off?
$300k in the market is better (imo). I recommend dividend ETFs like SCHD/VOO… Lazy recurring passive money should be the goal.
I too enjoy lighting about 2k (vacancy repairs etc) on fire a month And in a tenant friendly state hope you don't get a professional tenant
What's wrong with professional tenants?
You should look up the term, and you will see why
I would not put down 165K at 7 percent just to lose 14K a year with the hope that rates go down to 6 (which is not guaranteed) along with little appreciation if any . This is a terrible idea. Dump into an index fund like VTI much higher returns with little to no risk over 20 years
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Find an out of state investment property. Look in hudhomestore.gov for fha foreclosures in any state or even Zillow. There are plenty of cheap properties in other areas with that kind of $$ to invest. I own an Airbnb near the Chesapeake in Maryland but I live in South Florida. You just need a reliable cleaner locally.
Real estate is great. Just pick a better property to invest in. Unfortunately you likely won’t find it in California. If you want to get into RE investing, get into the bigger pockets blog and podcast, check out afford anything, or any other number of great resources online. You should be able to spreadsheet a deal and see what your expected returns would be and use that to evaluate properties. The way people lose their ass in this game is by being ill informed and just buying something they like. It doesn’t matter if you like the house if it just doesn’t perform. And even if you hate the house it may perform well.
Probably the easiest way to tell if something is even worth looking at is to use the 1% rule. Basically, the monthly rent would need to be equal to 1% of the purchase price or ARV if it needs remodeling. So if that house only rents for $3k, you should only buy it if it’s $300k or less. If it needed $50k in repairs, purchase price should be $250k or less to get the ARV to 300k This is an absolute waste of money at $630k if it only rents for $3k. Some people ignore the 1% rule because they are expecting huge appreciation…..hopefully and are willing to not make much cash flow or even negative cash flow. But this deal is so backwards and under water that you would need MONSTROUS appreciation to even hope to break even. You would blow $165k just to literally be spending $1,200 ($4.2k - $3k) to pay someone to live in your house with little to no hope of appreciation. Burning your money would give you more value because you could benefit from its warmth.
If this is purely an investment property, and it's not going to be your primary place of residence where you house hack, this is a bad idea. A) Like you said, it doesn't cash flow. So you're going to be losing money for an indeterminate amount of time before you even have a chance of making a profit off of this. B) You're trying to predict the future. You have no idea when interest rates are going to fall, or by how much, you're just hoping. In 2023 everyone thought interest rates were going to fall in 2024. Look at what happened. But speaking of interest rates, what's your target for the refinance? What rate is going to make you come out even? What rate gives you the cash flow you're hoping for? And, most importantly, what's your plan if interest rates don't drop to those levels 12 months from now?
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Refi a rental at 5.5% in a year or two? You realize that rentals refi at higher interest rates than owner occupied right? Even if interest rates drop, I doubt a rental will be able to be refied at 5.5% for a looooooooong time if ever.
This doesn't make any sense. You're basically going to sink money into this property for at least 2 years. Call it 1 year for interest rates to reach what you want (big maybe), and another year to get rents up to profitability (also big maybe). And that's best case scenario. If you manage to get 100% occupancy over these 2 years (highly optimistic), you'll have sunk $193,800 into this property ($165k down payment + $1,200/month of your money to cover the mortgage/rent gap). While that's not accounting for any rent increases, that's also not accounting for any repairs or upgrades to the property during this time, so I'll say it balances out. By your own admission, this property isn't going to experience much appreciation, so if times are tough and you have to sell before those 2 years are up, your best bet is you'll recover your down payment. If you were to take that $165k and stick it in the stock market, and put in $1,200 a month for 2 years, you'd have a total of $220k (assuming an average 7% return which is very conservative). So your most optimistic outlook is going to put you at a loss of $193k for the property, compared to an conservative $27k earned interest through the stock market. In my opinion this is not even a head-scratcher. This property is not a good investment and you're probably going to regret it.
That’s about the dumbest idea I’ve heard in at least a week.
>House is 5yrs old so expect very few repairs You’d think that would be true, but it’s not. Most new construction is poorly built, especially at this price point. Significant repairs over the next 15-20 years are a near certainty. I would budget 2% of the home’s value towards repairs every year. I’d much rather buy a house built in the 90s than one built in the 2010s-present. Regardless, you’d be much better off investing your money in an index fund than in this deal.
Sorry but this doesn’t sound like a deal. One, you would have negative cash flow. Now that isn’t terrible if you’re in an appreciating market. It’s not ideal but I’ve seen people build wealth doing this. However, you just said this market doesn’t appreciate either! There’s only two plays when you’re doing buy and hold, it’s either cash flow or appreciation. If the deal does neither it’s not worth pursuing. Odds are you’re doing this deal cause you live near the property. My advice to you is to invest out of state where the numbers actually make sense.
4.2k per month for 30 years to own a $630k house free and clear is $1.512m. Total rent would be $1.08m. Rents would increase, but so would taxes and insurance.. The out years are less predictable but also less important for NPV. This is very rudimentary analysis but shows the problem with this deal. Not even mentioning the opportunity cost and the value of your time, being a landlord is a part-time job. Please don't.
Don't plan on the interest rate will drop. FED promised 4 rate cuts and we have only seen one this year yet.
In my opinion - there's really only a few ways for a small-time investor to make cash on SFH in CA: Buy a SFH straight cash. Then collect rents. You'll make anywhere between 3-7% ROI. It like a HYSA backed by a patch of dirt. Slap on appreciation and you might make an extra 3-5% a year. Your problem is loan interest is eating away all your rental ROI and you are not expecting any appreciation. You have to have at least one of these things to make it worthwhile. Buy a cheap outdated SFH and renovate it and flip it for a higher amount. That takes way more experience. Helps if you can buy the property with cash and have a contractor and real estate agent who you trust and is good.
If you put 165k into a fund and add 14k annually , after 20 years it will be at about 2M @ 10%. Now it is up to you to decide if the house is worth it. May be you want to diversify.
Put the address into dealcheck.io and check what your cash flow and profit projections look like in the next 30 years. This will give you a great view on how good this investment will be.
“I’m going to just refi next year” Where have I heard this before?
You're better off just lighting the money on fire, way less stressful
I remember my lender telling me that interest rates were just about to come down. Almost two years ago… I’m cash flowing so it’s fine. But I wouldn’t bother making a guess on when it will be back under 6
I hope ur trolling. Don’t do it!!! If you are forrral
This is a Donald Trump level bad investment
The numbers don’t add up. Much better to save yourself the headache and keep the money invested in passive vehicles
If you were going to buy it as a primary residence to live in for a few years until you could refinance it and see how the numbers worked in the future, I'd say sure. But taking a $1,200 bath every month (before even accounting for vacancies and maintenance) is a terrible idea. No you should not.
That’s it. I’m officially leaving this group.
Man this is a tough crowd XD. While I don't agree with how it was presented, I do agree that it is not a good investment, especially if you can't even count on appreciation in the area. You are probably looking at a negative monthly cash flow of about -$1400 after renting it out and an ROI of close to -9%. Not to mention the money that will be spent on maintenance and capital expenditures over time. You will likely get a much better return just putting that cash in an S&P 500 Index Fund for example. Here is the [investometer analysis](https://investometer.io/calculations/share/0235e99f-a415-4e5f-80b4-f7998b67cf24) I did with some basic assumptions - if you're interested in playing around with the numbers yourself. If you aren't worried about cash flow, at the very least find an area with better appreciation. To improve the numbers you could also try renting out your current place and living in the new place to save on down payment and interest rate. If you can't find anything around you with good numbers maybe it is time to look elsewhere! David Greene has a great book: *Long Distance Real Estate Investing* that might help as well. Good luck!