After buying at the height of the market and having lost 60K in equity on my house, I am currently in the market to buy a second home which is a foreclosure in the masterplan that I live in. I’m doing this to leverage the loss on my primary residence in which I still have about 30K in equity and a very affordable payment in a very desirable neighborhood and good location.
I am offering 225K on the foreclosure which is a 2400 sq foot home with new models selling at 310K. It is also in the same masterplan community I live in, so is in a very desirable location. My plan is to pay 20% down and rent the property for the next 5-10 years and then sell.
My problem is with the forecast that the housing market will decline another 10-20 % over the next year or so. I would hate to lose money on both properties after doing all the right things like getting a 30 year fixed with plenty money down and being a responsible person with excellent credit.
I’m looking for advice if I should go ahead and purchase the property in the hopes that all goes well or rather stay away from real estate alltogether at this time.
I’m not looking to get rich, just want the tax write off and like I said, hedge the loss on my current residence by purchasing a discounted residence.
Well, in my opinion, it all comes down to the numbers and what you expect the market to do. What rent can you get for the property? Can you afford to lose money every month with negative cash flow while holding the property. Do you believe that the market will keep dropping? (I do) If so, would you be better off to wait? Do you think that Israel will attack Iran and will that result in an oil shock that will throw the economy into a DEEP recession?
Buying for tax benefits is like spending a dollar to save 33 cents. Tax savings are a benefit of real estate investing, but only if the total returns are positive.
You can call it hedging, but these properties stand alone. You will lose money on the one you have and may or may not with the second. You didn’t state whether you would be assured of long term positive cash flow with the second, though at $225k I doubt it. Nor did you address your holding period.
Though it’s cycles continue, real estate has risen from it’s valleys 100% of the time and there is no reason to think it won’t continue to do so. The question is, will your specific investment recover and how long can you wait? More importantly, why should you wait? There are too many other opportunities.
I personally would not be a long term investor in single family homes now. The risks and returns are currently unacceptable. In my view, short term flipping of SFH REO’s is the way to go in this environment. A close, but riskier second is forcing equity into distressed commercial properties.
I’m definitely interested in holding long term for wealth creation down the road, be that 5-10 years or longer, I don’t know yet.
The rent will cover the mortgage and I’m able to ride out vacant periods with other income I have. The main reason I’m interested in buying another property is simply the fact that I want to take advantage of the opportunity while it lasts. Even if the housing market drops further, eventually it will have to go back up and like I said, I’m going to hold on to my property. Plus I will already have established quite a bit of equity at the time of closing. Unfortunately I have no clue how to flip the property so that’s not an option for me. If somebody can explain I’d like to know how. I imagine it’s as simple as putting it up for sale and wait till it sells at the list price. What are the pros and cons though? What to look out for?
Equity, you said buying for tax benefits is like spending a dollar to save 33 cents. I look at it this way: My renter will pay the property tax and I get the write off. I definitely need the write off, Obama isn’t getting a red cent of mine :).
I hope somebody will reply as to how to flip the property. Like I said, it would have substantial equity.
If you got a 30 year fixed interest rate loan, then you only have a paper loss on your current residence. There are a thousand ways to hedge against this loss, but they all involve making money, not doing anything in the hopes that all goes well, or based upon a forecast.
An investment provides a high degree of certainty that you will keep the money that you invest and obtain an acceptable return; speculation risks the principal in the name of obtaining a return which is usually larger than an investment return. Unless you are getting $4000 per month in rent, monthly positive cash flow probably will not happen right away. Any property will cash flow with enough money down.
As a real estate investor you will want to evaluate your deals for cash flow, income capitalization, or annual return on investment. You should be able to use the search feature on this site or google to learn more about real estate finance calculations.
For a buy and hold strategy, the advantage of having this house in your own community is that it will be easier than having it a long distance, and you can keep your eye on it. If you are a new real estate investor, start small. If you can easily afford this house, you can learn about property management, taxes, cash flow, rehab, insurance, entity selection, business law, and a thousand other topics. Also in 20 years (or 30) you will have a house that is paid for.
For a flip strategy, you should be very familiar with how to appraise the value of real estate, you should know the comps, and you should know residential median values in dollars per square foot. Flip strategies dictate buying at no more than 70% of fair market value, then reselling the property. In this market (especially in Vegas) you should buy at such a low price that you are GUARANTEED to sell the property quickly and make a profit; 50%-60% of fair market value should work nicely. Flip investors care more about how desperate the seller is than how nice the property is.