Buying property

[edfurlong]

This is a continuation of I'm a trustafarian

There is nothing keeping me in seattle to be honest. I could afford property in portland and my job prospects would be roughly the same as here.

I make very little money and that won't be changing in the relatively near future.

If I try to pickup a peice of [censored] three unit property for a bit under 300k my monthly payments would be around 1,400. I would be renting out the other two units, would the bank take that under consideration when considering the loan?

Take this hell hole for example.

[istewart]

omfg, I just choked on water when that picture popped up, hahahaha.

[jakethebake]

Yes.

[jakethebake]

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omfg, I just choked on water when that picture popped up, hahahaha.

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[BWebb]

Not really. They would want some assurance you would be able to make the payments if you were unable to rent the other two units.

[HDPM]

Be careful. That triplex will probably have all kinds of expenses. Be ready for them. You will be living with your tenants after moving to a new city and spending a bunch of money you have not had before and embarking on a new business, i.e. owning rentals. I would be wary of doing something like you propose. Getting a big mortgage on that property and living in a 2 bedroom unit yourself doesn't sound all that hot to me.

[Matt Flynn]

Redux:

We get little to no usable financial education in high school or college, then get finance advice from an industry that makes all of its money selling you services. Yeah, and those penis enlargement pills work and if you just take echinacea you won't get colds. Money markets and bonds are complete horseshit for a 19-year-old except as liquid cash equivalents. Anyone selling them to you either doesn't have the slightest clue about money or is making money off of you.

You need a 5% down payment and closing costs to buy a home. You do NOT need credit. You will, however, have to pay higher interest if your credit is bad. Ask about "stated income loans" and "rolling closing costs into purchase price." If your real estate agent cannot handle those or recommends against them, fire the agent immediately.

Buy the cheapest condo/townhome/home you can stand to live in, with the caveat that you want to be able to sell it. Your primary dwelling is a fair but not good investment. Anyone who tells you to buy the biggest house you can afford has no clue and should be dismissed or fired out of hand as an advisor. You can put your money to better use.

You may not, with bad credit, be able to do the really good real estate transactions. You may also have problems finding a decent (and cheap) management company. However, you can most certainly buy good rental property - JUST NOT IN SEATTLE. Seattle's too expensive for you. Plus you should get your feet wet buying your primary dwelling first. How much can you comfortably afford? Divide your current rent by $640. Multiply by $100,000. That is what you can afford easily, including Principle, Interest, Taxes and Insurance ("PITI"). Problem: you may not be able to afford more than a condo or townhome. Those are bad investments. They have "HOA dues" that can get very expensive and are not under your control. Also, they do not appreciate well. Better to live in a small detached home in the exurbs in a good school district. Even better, buy a duplex. If you can afford half the cost (as your "rent"), you rent the other half. If you move, you just rent your half too. Many a young man has become a rich uncle using that strategy, and it's the best for the underfunded and underexperienced.

When you buy the home, shop the mortgage. Do not stop at the one the real estate agent recommends. Never pay points for an owner-occupied home. "Points" are payments you make up front to reduce the interest rate on your mortgage. They are almost invariably a ripoff. Strongly consider getting a 5-year ARM loan. You are very likely to move within five years Might as well take the lower interest rate. Once you get a loan offer, walk to the next guy with a copy of your credit report and the "good faith estimate" the first mortgage guy gives you and ask him if he can do better.

When you buy, assume the house seller is going broke next week if you don't buy it. Ask how many days the house has been on the market (part of the real estate agent method of holding power over home transactions is witholding that datum from realtor.com and other basic sites). If the house has been on the market for >30 days, you are in the driver's seat. Your agent gets paid more if you pay more!!! So don't listen to them. E.g., on a seemingly good-buy $150K home that is empty and has been on the market for 60 days, offer $136,000 with $2,000 back in closing costs and a $2,000 cap on repairs, they pay all structural repairs, and you get the fridge, washer and dryer. (Be absolutely firm about the $2,000 back. It makes no difference whatsoever to the seller whether you pay $125K with nothing back or pay $127K with 2K back to closing, but it makes a huge difference to you.) They MIGHT tell you to hose off, but who cares. Move on to house B. If you end up with structural problems that are easily fixed (as most are), do not accept less than full money to fix them. I have threatened to walk three times and (with the exception of my first residential investment property, when I was underexperienced) have NEVER paid a cent towards basic structural repairs. Remember, if there's $5,000 to be had that you didn't ask for, you don't get it. Always be willing to walk.

Have fun. www.realtor.com is a decent site to find out what sells for what and what rents for what. Keep in mind location and school district are what sell a home, and that dirty homes that need painting sell for WAY less than clean freshly painted ones even though cleaning and painting are cheap.

One more thought: all those guys with 401K's have no clue when then can retire or how well they'll live. They get all excited about the concept of 64K at age 65 not realising that it's really 16K or less indexed for inflation and that most mutual funds do not have that high a yield. Whereas if you buy a rental property that is relatively new and you always roll the excess rent back into the mortgage (not the best strategy but very good for illustration), you KNOW that in 20-24 years the house will be paid off and you will have the future equivalent of 2/3 of today's rent as income each month. Will that be double todays rent? Triple? Who cares! The key is it will be the equivalent. Buy a $110K house that rents for $850 and you know, in 24 years, you will have the future equivalent of $550/month (after all costs) in today's dollars. How much gross income do you live off a month? Divide that by $550 and you know how many of those $110K houses you need for basic retirement in 24 years. (Throw an extra in for insurance.)

btw with decent managing of the mortgages you need at most 5% down to buy anything.

Matt

[Matt Flynn]

Your actual payments would be in the neighborhood of $1860 with 5% down. That is an older building, so include about $3,200/yr in maintenace. How old is the roof (4K), AC (2K) and heating system (2K)?

What would the other units rent for, and how is the rental market there?

Lastly, look at the ROI:

You will "pay" about $16,000 for this (5%, closing costs wrapped into it, add $4,000 in tidy-ups including washer/dryers, paint, etc. which you will get as cash back to a contractor). It will appreciate roughly 3%/year, or $14K. Keep in mind you pay 6% to sell. If you can easily rent the other apartments for $600, it is a good deal for you provided the neighborhood isn't bad (it will be at best fair) and the schools aren't bad. Shop around, figure out if it's a good deal, verify rents, do not trust any owner who says they are rented out, talk to the current tenants, etc. Do your homework. If they rent for $700 inspect it and grab it. Assume the owner is in distress and offer way lower than asking. Again, be careful, because often owners will wait until there are two good one-year tenants then price the property as if it will rent full time at a given rate. Nobody lies like duplex/triplex owners.

Why are people downtalking it? It's better than my first two apartments.

Matt

[edfurlong]

The place I linked to was just for an example and I would probably want to put down 20% because I would have the means to do so. I was also looking at duplexes in the low 200K range.

Thanks for all of your input so far. Like I said I'm still five months or so from having the money, so I'm just kicking ideas around.

[Saborion]

Hi Matt,

A few questions.

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closing costs wrapped into it

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Closing costs is?

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add $4,000 in tidy-ups including washer/dryers, paint, etc. which you will get as cash back to a contractor

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"you will get as cash back to a contractor"?