We are still considering a property that has two units in disrepair.
Just when we were about to quit our search for a single-family house to purchase as an investment rental property, we may get another chance at a house we failed to get because we were too cautious in our bid. We have also decided to seriously consider another property that is significantly run down, but may offer the best opportunity for solid positive cash flow.
That’s the way it is when shopping for real estate, whether it’s buying a house you want to make a home or an investment property. Although I’m not sure how either of these properties will work out, I do know that we will take a hiatus from our search if we can’t close on one of them.
The reason we’ll take a break is that our area in Southern California is seeing a lot of competition for homes in the entry-level market, which is popular with first-time buyers and investors. Our median price is more than twice the national median of about $171,000, so the first-time buyer’s tax credit has not been a big factor. It is unlikely that an $8,000 credit is going to make the difference in purchasing a $350,000 property.
Our goal had been to pay $350,000 to $375,000 for a single-family home. With a 20 percent down payment, we figured we’d be able to come close to breaking even with a market rent of $2,000 to $2,100.
But two factors have changed our plan. The first is that rents have declined up to 10 percent in our area. Houses that rented quickly at our target price are now going for under $2,000. The other factor is that every home that has met our needs has received multiple bids, raising the sales price above where we can cover our costs.
The current low interest rates and the reported technique of lenders employing a measured release of foreclosures has created greater demand than there is supply. This phenomenon appears to be unique to the entry-level market. Houses above this level are largely taking many months to sell.
Our choice is to pay more and live with a negative every month or take the chance that there will be less interest as we get into the winter months. We’ll still keep an eye out, but I’m not optimistic.
The two properties mentioned above, however, offer some possibility we can close our deal now instead of rolling the dice on how the market direction in the near future.
We had offered $320,000 on a three-bedroom, two-bath house in a nearby community. The property is in an improving area and on a large lot that I believe will be in great demand and make for a good long-term investment. The down side is the property does not have a garage or a master bedroom with its own bath. Those two issues will make the house less popular with renters. All this equates to an estimated negative cash flow of at least $200 a month. Depreciation and other tax breaks will help bring this amount to near zero for the year.
The second property includes two rental units in desperate need of repair. The lot is also large and near the city’s library and government office. The vast majority of properties in this neighborhood are rentals. A majority of the properties appear to be well kept. Because of its condition, this property will be difficult to get bank financing, at least not without a significant down payment of a third to half the contract price.
This property will also require additional money to get the units to where they are desirable rentals. On the plus side, even with these expenses, the property will offer excellent cash flow and the size of the lot and its closeness to city amenities has long-term appeal.
We have some decisions to make in the next day or so regarding the first property because it’s received a lot of attention since being relisted. Our understanding is that our first offer was no more than $5,000 off the winning bid, so it will be interesting to see if the market has changed in the past two months based on how many offers are made and at what price.
I’ll let you know what we decide and what happens to these two properties in a future Reality Check post.—Rick Hazeltine