Monday, March 16th, 2009 at 10:16 AM
Real Estate Investment Strategies
Are you thinking about buying real estate for investment?
Here are a couple of ways to build a real estate portfolio:
1. Buy a house, live in it for a year (or two), then buy a more-expensive house and rent out the first one.
Any owner-occupied mortgage you get will require you to sign an affidavit stating that you intend to occupy the home for just one year – after that, you’re free to rent it out.
It means you have to move again and again, but at least you can get in with as little as a 3.5% down payment (or if you can get a VA loan, no money down on the first house).
2. Another way to invest is to buy, and hold, the cheapies.
LGS has mentioned his acquiring of condos in down markets, and then selling when the market tops out. Holding long-term works too, and let the tenants pay off the mortgage. You can purchase non-owner occupied homes with a full-doc loan package and a 20% down payment.
Make sure you’re comfortable handling minor repairs, or have a good handyman, because if you buy older homes, there will be plenty of maintenance
But last month there were 233 detached houses that sold under $200,000 in San Diego County, so hopefully you can find properties that rent for enough to cover your maintenance expense too. With rents being fairly strong on the lower-end, you should be able to generate a positive cash flow from day one – just look for those that are in decent shape, or whose price leaves you some room for improvements.
Here’s an example of one that’s currently on the market in Vista – for just $104,900 – your PITI monthly payment should be around $650 per month! This just listed Friday and there are already two offers in, so I’ll just point it out for demonstration purposes, but once it’s in shape, it should rent for $1,000 to $1,200 per month.
Posted on Monday, March 16th, 2009 at 10:16 AM in Real Estate Investing | 43 Comments » | 
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And the rents in Vista are….?
Former RB Resident | March 16th, 2009 at 10:20 amWhere are all the the investors now?
arizonadude | March 16th, 2009 at 10:24 amThanks Jim. This was a great post.
shadash | March 16th, 2009 at 10:26 amI added the rent to the post – should be $1,000 to $1,200 without too much trouble.
I would think that, for most folks, this one is a little rough, but hopefully it means you can get one in better shape for $150,000 to $200,000.
Jim the Realtor | March 16th, 2009 at 10:53 amWhat about condos? If you can cover HOA, etc., are they as viable as a rental home? I’m looking at the condos on Pell Place in Carmel Valley specifically.
BAM | March 16th, 2009 at 10:55 amI just wish I knew someone responsible like say a past president of a fraternity who remembers what a burden it is to stay sober when all around are supposedly enjoying themselves.
This one is nice. I men that. $45k to rehab yes but that rehab adds an instant $60k so it is the old fashioned version of an investment. Not being local my only question is what are reasonable rents? I’m thinking $1100 but that’s just a guess. So, buy for a $100k, invest another $40k and collect $1100 inflation adjusted forever. $30 k for down and paying for all that gas in the silver ghost. Another $50k in holding and rehab costs. I’m saying three months rather than two because of the “floor” in the bathroom. I’ve seen that before.
Conclusion; same conclusion as always. Youz makes yer money in de buying. I’d need something in the $80s not $100s.
Rob Dawg | March 16th, 2009 at 11:00 amWell, if you finance 80%, you’re talking a pretty tiny mortgage payment evne with the non-occupied premium. Probably needs 20K of work, easil, so you need to recoup that too.
If I still lived in the area, I might jump on this one. Too hard to manage/oversee a fixer from long distance.
Former RB Resident | March 16th, 2009 at 11:01 amWant them a little cheaper?
http://www.sdlookup.com/MLS-090008416-764_Surrey_Trl_Julian_Ca_92036
http://www.sdlookup.com/MLS-090008900-660_N_Juniper_Escondido_Ca_92025
Get the combo ‘home renovation’ loan to purchase, and fund the repairs!
Jim the Realtor | March 16th, 2009 at 11:20 amNice post, however, one important thing missing from it is how to price a home as fair valued. If you buy a home and the prevailing rent doesn’t even cover the real estate taxes, then what is the point. You’ve overpaid and it is likely to drop in value. If the prevailing rent gives you a 1% return on your money, then you are better off putting your money in a savings account, unless you know the value of the property/rents will increase in the future above and beyond inflation. Without a methodology to price these houses for their return potential, any sort of investments in them will be a crapshoot.
no bubble here | March 16th, 2009 at 1:41 pmCriteria: Property Type Residential Transaction Type Sale Cities Adelanto, Apple Valley, Victorville Price 30,000 to 90,000 Year Built 2000 thru 2009
72 listing(s) found.
Inland Empire | March 16th, 2009 at 1:45 pmLooking at this area for an investment opportunity. I’d like your perspective regarding investing in real estate for this area. I realize you dont this area, but I’m seeking general philosophy on buying to rent. My question is: with this much inventory is buying a property at this prices is it a good deal. Will rental income fall as more investor (who have same idea has me)needing someone to rent all these properties they are buying. I live in this area and see a lot of of these home getting sold, but it seem they are mostly being rented out. These home will not appreciated that much in value. It is the desert (hot) and if gas goes up again there is still the problem of commuting 50+ miles to a jobs. Yes the rentals will yield a positive cash flow, but can you get real profit after maintenance /taxes/inflation in the long term. These neighborhood will not stabilize as they would with owner occupied unit and might even decline farther in value. This will feed the foreclosure monster all over again if these investor don’t make money and bail. Will it be just like those before who purchased during the bubble years seeking quick profits. There are ways to get these home for less than 7k a piece in down payment and closing cost, might the risk be enough for the possible reward with a long range horizon 5/15 years. Long post sorry just want advice and you are pretty good at giving it.
Purchase = $100,000
Rehab = $ 45,000
Rent
Kingside | March 16th, 2009 at 1:59 pmUsing Robdawg assumptions:
Purchase = $100,000
Rehab = $ 45,000
Rent = $ 1100/month
Taxes = $ 120/month
Prop mgmt= $ 160/month
Ins/maint
Net rent per month=$820/annual = $9840
$9840/$145K = 6.7% back of the envelope cap rate.
Not horrible, but I am looking for at least 8% cap with conservative assumptions.
Kingside | March 16th, 2009 at 2:09 pmI agree with Kingside, I was about to do a similar back-of-the-envelope calculation when I saw his.
The problem is that prices go so high is that everyone forgot about how to calculate the intrinsic value of real estate.
Three years ago, real estate was 100% overvalued.
Now, it’s 20% overvalued.
Will someone please wake me up when it is 20% UNDERvalued? In this particular instance, it means that the house is selling for $75K. (This would give you Kingside’s 8% cap rate.)
greenlander | March 16th, 2009 at 3:15 pmDon’t expect rent to be going UP for the next several years.
My guess is that this house in 4 years will be renting for $900 or less, perhaps much less.
Factor that possibility in first.
Average Joe | March 16th, 2009 at 3:25 pmAnother way of looking at these types of invesments is that if you can get the structure for 2/3 of what it would cost to build it, and the land for free, you probably are not going to go too far wrong.
Kingside | March 16th, 2009 at 3:47 pmAdelanto, Apple Valley, Victorville Price 30,000 to 90,000 Year Built 2000 thru 2009
… I realize you dont this area, but I’m seeking general philosophy on buying to rent.
I do this area. I was a landlord from the mid 80s to ’06. I even sold the one that was paid off. It may just be my opinion but it is an opinion forged in experience and familiarity. It ain’t done imploding. Unlike NSD the Antelope/San Berdoo triangle is a perfect storm and nowhere near as far along the process. THat last house I mentioned went for 273x rent in Apr ’06 and again Q2 ’08 for ~180x rent. I expect to see it short sale or REO anytime soon. There’s no competing with houses built in the 1970s and carrying costs of $200/mo. IMO there’s no reason to even try.
Rob Dawg | March 16th, 2009 at 3:57 pmAverage Joe is right. California is having financial problems that will likely translate into higher taxes. That means less for rents… which were already built for a running-at-peak-capacity economy. In the new reality of 10% unemployment, I would estimate that rents will either not rise for 4-5 years or fall for 2-3.
Either way, levering up in this environment is a poor choice. Wait until you can see the whites of their eyes.
Chuck Ponzi
Chuck Ponzi | March 16th, 2009 at 4:07 pmSold!!!!!!!!!!!!!!!I want to be a slumlord too!Can i get any moeny from the state to offer housing to the welfare folks?
arizonadude | March 16th, 2009 at 4:26 pm“Can i get any moeny from the state to offer housing to the welfare folks?”
Just go section 8. Those rents won’t go down.
Kingside | March 16th, 2009 at 4:44 pmI think things are getting better. The tone is changing here as well. 8% cap rates and houses for $80K don’t seem realistic in North County. Might be a handful in Vista/O’side/Dido, but you need to be tough stuff to put up with that.
8% cap rate is $123K per Kinside’s analysis. I don’t see the low end dropping another 15%. Just the opposite here in San Diego.
Mozart | March 16th, 2009 at 5:09 pmMozart, 8% + cap rate deals are out there. You just have to know your farm, be able to put up with a lot of rejection, and find properties where you don’t have FHA buyer competition.
Kingside | March 16th, 2009 at 5:19 pmI can’t see any abatement in the falling price trend.
Piggington’s data
Don’t be a knife catcher. The real deals are coming.
There’s obviously some optimizing, because asking prices are going up this spring.
Perhaps there’s some truth to the rising asking prices and we’re near the bottom. However, I think that’s just wishful thinking, and we’ve got another selling season that will just turn into a bust like it did last year.
greenlander | March 16th, 2009 at 5:22 pmKingside, if you’re looking for around 8% return, have you looked at municipal bonds?
http://www.nuveen.com/CEF/FundDetail.aspx?FundCode=NAC
7.71% return (I think CA income tax exempt too), low risk, no headaches.
no bubble here | March 16th, 2009 at 5:29 pmI have thought about CA general obligation bonds, but leveraged bond funds are not for me. If all I care about is yield, hard money lending is the way I like to go.
Call me a knife catching, bubble headed ATM machine, but I am getting very interested in so cal real estate for long term investment. Although I use my 8% cap criteria as a screening tool, I want a better return than that. The advantages of RE investing include tax depreciation, increasing ROI through leverage, tenant reducing your leverage, and yes, some day, increasing ROE through rents increasing and appreciation. Real estate ownership will eventually be a great hedge against inflation.
I have tried to get JTR to send me some great deals, but it apparently takes more than buying him lunch .
Kingside | March 16th, 2009 at 5:44 pmKingside, actually, real estate prices will fall with inflation. For example, suppose you just bought a 100k home with a 5% return ($5k rent). If inflation cranks up to 5% and bank interest rates go to 7%, your home price has to fall in order to return a higher percentage. If someone was looking to buy your home at a 7% return (probably even higher, why should he now buy to invest at 7% when he can get 7% risk free) then you home would go for $71k. 5k rent/$71k=7%!!!
no bubble here | March 16th, 2009 at 5:59 pmReal estate does not change in value based on change in yields the same way bonds do. If inflation cranks up, wages go up, and rents will go up with inflation.
In inflationary environments, real estate prices tend to go up at the same time as interest rates increase.
Your leverage (monthly payment), if fixed, will go down in real terms as inflation increases.
Kingside | March 16th, 2009 at 6:08 pmRents go up with inflation, but it goes up on top of your base rent. 5k*.07=5350 next year, etc. 5350/100k=5.35%, still way below 7% new inflation bank rate. Prices have to go down to compete with bank rates. If prices go up, your return will fall below bank rates!
no bubble here | March 16th, 2009 at 6:29 pmKingside,
Rob Dawg | March 16th, 2009 at 8:05 pmYes, your envelope looks just like mine which is why I wanted a $80k purchase price to make the deal.
If you want to keep it simple (and safe), research to get a realistic rental price, cut that in half, and divide by the proposed purchase price–that’s about the cap rate most small landlord tend to acheive in practice (i.e. a 50% expense ratio). Inexperienced landlords tend to underestimate their expenses (i.e., overesimate their net operating income) because they don’t think the properties will stay vacant as frequently as they tend to do, they forget to factor in insurance, or don’t budget for a third-party manager.
Even dividing by half might be a bit rich for condos–the HOA fees tend to be higher than maintenance in a lot of locations. But it’s a good rough guide that worked well for me for about 15 years, until anything and everything got too expensive.
Whether you should expect a 6% or 8% or better cap rate is your call. 8% is pretty rich for San Diego during the past 30 years. That’s what I got on the only property I’ve purchased since 2006 (using Jim), but you have to go to low-end spots to find it as far as I’ve seen. That may or may not be a good strategy in the long run and I wouldn’t presume to advise on that subject–it may be a matter of your taste as a landlord as much as anything else. It’s very easy to underestimate maintenance expenses by a big margin on low-end properties…word to the wise.
lgs | March 16th, 2009 at 11:44 pmI don’t see a vacancy factor built into the envelope calculation. There goes the cap rate with a 1-2 month vacancy.
I sold a paid off Temecula rental in December. I was a bit late to the party, but remain convinced I made the right decision. I look around and see all the “for rent” signs on foreclosures purchased by investors, and it gives me pause. There’s going to be an oversupply of rentals in the IE. All those excess homes for sale are morphing into excess homes for rent.
no_techie | March 16th, 2009 at 11:47 pmI should have said “That’s what I got on the only *rental* property I’ve purchased since *2002* (using Jim), but you have to go to low-end spots to find it as far as I’ve seen.”
It was 2006 that I sold all the rentals…but getting ready to get back to being a buyer, soon.
To acknowledge some of the comments made here with this post and others: I know that even bargain properties are a strategy for bankruptcy if we see a gripping deflation during the next decade. There are so many factors, and too many are political, however, that every one is on their own with that question. I don’t have a crystal ball and wouldn’t offer advice on the probabilities favoring deflation versus stong inflation in the coming years. Time will tell! Good luck.
lgs | March 16th, 2009 at 11:58 pmOuch… Stonebridge:
http://homeatstonebridge.com/
Thank you for your interest.
This site is no longer being maintained.
We’re sorry for the inconvenience.
Blue Streak | March 17th, 2009 at 2:33 amJtr- What’s the premium for non-owner-occupied mortgages these days? A point? more?
shoppingaround | March 17th, 2009 at 4:33 amHaving sold the Temecula house, I should have mentioned that I wait for rental properties that pencil out that are as close to the beach as possible. It’s just not time yet (for me at least).
no_techie | March 17th, 2009 at 7:11 amTo get the same interest rate as owner-occupiers, the premium is 3 points with 20% down payment, or only 1.75 points with a 25% down payment.
You can also take a higher rate, about a half-percent, instead of paying the extra 1.75 points.
Jim the Realtor | March 17th, 2009 at 9:28 amKingside, I’m still looking for those ‘great’ deals for you!
Jim the Realtor | March 17th, 2009 at 9:31 amWhat my husband and I decided to do 10 yrs ago was live on his salary and pay off our mortgage with mine. We were able to get that mortgage paid off in 3 yrs, then bought our first rental house. We put the same money towards that that we put towards our original mortgage, plus the $1000/month that we were getting in rent. Paid off in 2.5 yrs, then bought the next, now with $2000 additional going towards the mortgage. So we now own 10 houses, no mortgages, all we pay for is taxes and maintenance. We have money in the stock market in our 401k’s, but if we were going to retire soon we would be in big trouble if we hadn’t decided to go the landlord route. It is great to know that we have a pretty steady income, regardless of what the market does. Even if half our houses were unoccupied, we would still be in good shape.
landlord_in_KS | March 17th, 2009 at 9:57 amHi Jim,
utc renter | March 17th, 2009 at 10:06 amI have a basic question, maybe if I google I’ll find the answer, but I trust you to give a better one, more accurate:) So, here you go.
If I am a first time home owner, can I buy and not live in it? Meaning, I keep renting but I buy a condo/townhome as an investment property and rent it out. What is the penalty for doing that, if there is any? What are the advantages/disadvantages? Is there a rule/law that says that you have to live in a house for two years before you can rent it out? Can you please explain?
Thanks!
If you state from the beginning that you intend to occupy, and sign the affidavit that says you’ll move in within 30 days after close and reside there for 12 months, then you’ll get a preferred interest rate about 1/2% lower than investment-property rates, and be able to use a much-smaller down payment.
If you rent it out, and they catch you, then they can foreclose on you if they want for violating the terms of the agreement. It’s more likely that you could convince them that you agree to move in, rather than get foreclosed.
They do hire third-party companies to run random audits of occupants within a few months of closing.
Jim the Realtor | March 17th, 2009 at 1:08 pmIf you state from the beginning that you intend to occupy,…
The key word is intend. If there is a concern then put the utilities in your name and register to vote. Signals intent.
Rob Dawg | March 17th, 2009 at 2:08 pmPut your name on the mailbox too, the guys who do the audits are moving quick and may not get out of their car if they see an easy verification.
Jim the Realtor | March 17th, 2009 at 2:11 pmI am interested in investing in real estate, and I hope someone in this thread can shed some light for me. Should I follow the strategies Jim suggested, or just buy some REIT funds and don’t have to worry about the headaches of mortgages and being a landlord?
EX-SD | March 17th, 2009 at 10:14 pmThere’s several issues with REIT funds. First, they’re falling off a cliff price wise. Which might be good if you’re looking to get in cheap. Second, they’ve overextended themselves with rosy rent projections and vacancy levels and are in trouble. Third, as a result of all these, they’re short on cash and have been paying dividends with stock, not good. SPG is currently yielding 10%+. If things get back to normal, you could end up with a nice investment. If things get worse, at least it’s “too big to fail”.
http://www.google.com/finance?q=NYSE:SPG
no bubble here | March 18th, 2009 at 11:29 am