Real Estate Tycooning

[mikester]

So..yeah, I have a house in a pretty nice area. I live in the Los Angeles area near the beach but not in one of the real beach communities.

I'd like to upgrade to a bigger house but the houses in my area are now priced out of my reach.

What's the feasibility of an idea of instead of selling my existing to upgrade to a bigger house - renting it out (rents are huge these days too) instead and using that income to help facilitate the upgrade?

For my house I think I could get upwards of $3k/month which is quite a bit more than my mortgage. If I finish the upgrades I want to do with Solar, AC and some space reconfiguration I think I could get a higher end rental rate. The yard is small so taking car of that would not be difficult. The house itself isn't overly large just a typical 3br/2bath. Still, it's in an excellent school district and housing is limited and in high demand.

I haven't run the numbers I'm just wondering from a 'best practice' standpoint is it something that folks do?

The fact is if I do the upgrades to the house I want - it may just make it what I need to stay in it and if so - then that's cool but I also like the idea of building some wealth up and just working my job isn't going to do that well.

Thoughts?

[Bill Douglas]

I think what might be a better idea - in the eye of the bank manager lending the money; would be to buy then rent out the expensive one with a higher rent. Then stay in your current place until a portion of the expensive one's loan is paid off and you can afford to live in the big one. Then the lesser rent of the little place is enough to finance the (reduced by then) loans. I hope this makes sense.

[dan88911]

Are talking about borrowing the cash to up grade. After which renting it out to pay back the loan.
Or renting out and using the cash low to up grade with the tenant in the house.
How are you going to build wealth putting the money in the house?
Where are you going to live with your house rented out?

[mikester]

No, I mean to spend money I have on upgrades to the existing house.

I have considered renting this house out and using it as collateral towards the purchase of a larger house for me to live in.

Of course if the upgrades prove to make this house more livable for our family then we might just stay here in which case that is what it is. But I don't think it is likely since the garage isn't what I want.

I could just sell it to upgrade either before or after upgrading it with the changes I want to make. They are not hugely expensive upgrades and would add significant value to the house. But like I said, I'd rather build an empire than just add a bedroom.

Bill, why would it matter which I lived in if the mortgages were paid on time?

[Bill Douglas]

The banks like as much income as possible. All of that debit/equity/ability to pay ratio stuff. They also seem to like the expensive to to be the "money making" one. More business focused in their eyes maybe.

[Mark Henry]

Personally I don't consider anything under a triplex a rental property. Renting a whole house puts all your eggs in one basket, one deadbeat could cripple you financially.
I bought my first duplex when I was 21 yr/old and didn't live in it till several years later. Reason I decided to live in it was because it was only a duplex and by then I had moved on to triplexes and one sixplex So the then new wife and I turned it back into single.
If you're serious about becoming a landlord sell the house use the money as a down payment on a triplex and let the robots (tenants) pay the mortgage.

If you don't think the rental business is for you then stay put and add an addition.

[look 171]

Hey Mike,

How are ya?

Where are you building that empire? Manhattan, Hermosa, or any of those places near work? My suggestion is to not sell your current home if its affordable to purchase or qualify for the next home. You mention about building wealth. Selling doesn't build wealth. In ten years, your current house will be worth another 30-40% jump maybe more. That's if the folks up in the office don't screw things up too much, like Toyota leaving town. I think your house rents for more then that.

I suggest making your current comfortable and rent it without the major renovation unless its in bad shape. The difference is really no more then 3-400 bucks a month compare to the upgrade you have to fork out. That could be in the 20-50k range (or more). That money can be put toward your down payment to reduce your monthly. When and if you are ready to sell that old house, after renters have beaten it a little (we hope) then spend money to fix it and sell it for a lot more then what you will get today. Let time make the money for you.

I just bought the home from my neighbor two house up from me. We are in the middle of a complete renovation so we can rent it. It needed it. Plus, the rent is crazy up here because of our little school. It ranks up in the top 5s in the city.

Call me. Best to call me at home after 8pm. No cell phone signal up here. Do you still have my home #? We can toss some ideas around. I will tell you my story.

Jeff

[look 171]

Originally Posted by Mark Henry

Personally I don't consider anything under a triplex a rental property. Renting a whole house puts all your eggs in one basket, one deadbeat could cripple you financially.
I bought my first duplex when I was 21 yr/old and didn't live in it till several years later. Reason I decided to live in it was because it was only a duplex and by then I had moved on to triplexes and one sixplex So the then new wife and I turned it back into single.
If you're serious about becoming a landlord sell the house use the money as a down payment on a triplex and let the robots (tenants) pay the mortgage.

If you don't think the rental business is for you then stay put and add an addition.

Down here, a duplex or more is under rent control in some cities. That can fcuk ya as a landlord. In Ca, its difficult to get rid of a renter and the $$$ you have to pay to get em' out. It is for sure not in favor of the landlord.

[aigel]

Jeff is correct. NO upgrades if you plan on renting out the house. Tenants will just trash the house and your upgrades and you will get a few hundred more a month - if that - after upgrades. You do have to assume they wreck the place and that you will have to remodel to sell.

Another consideration is your interest rate. If you finance or refinance the house as a rental, you will pay more. So, usually people buy the house for themselves, get a loan, live in it and move out down the road, keeping the owner occupied mortgage rate. I do think this is commonly done and must be legal. (not an expert).

Finally, if you ever want to sell the house, you will owe capital gains taxes and owe back depreciation, so it is best to re-invest in another rental property. Alternatively, you could live in it for 2 years and sell it as your main residence, applying the funds to your next house of same / higher value.

That's all I know about owning second homes / rental income. IMHO I would be very careful renting out a single family home. I'd look into a multiplex / couple condos instead. Mark makes a good point about being exposed to a single tenant. Of course Mark does probably not live in a place even close to the property costs we face in CA. Another consideration is if you want to own 2 homes in the same area. What if it all tanks together? Diversify?

JMHO.

G

[look 171]

Originally Posted by aigel

Jeff is correct. NO upgrades if you plan on renting out the house. Tenants will just trash the house and your upgrades and you will get a few hundred more a month - if that - after upgrades. You do have to assume they wreck the place and that you will have to remodel to sell.

Another consideration is your interest rate. If you finance or refinance the house as a rental, you will pay more. So, usually people buy the house for themselves, get a loan, live in it and move out down the road, keeping the owner occupied mortgage rate. I do think this is commonly done and must be legal. (not an expert).

Finally, if you ever want to sell the house, you will owe capital gains taxes and owe back depreciation, so it is best to re-invest in another rental property. Alternatively, you could live in it for 2 years and sell it as your main residence, applying the funds to your next house of same / higher value.

That's all I know about owning second homes / rental income. IMHO I would be very careful renting out a single family home. I'd look into a multiplex / couple condos instead.

JMHO.

G

George,

The only upside to selling current home is the 500k cap. gain tax. Since its their primary res. they get away with that huge number. Its really free money. A friend's a banker and have always trying to convince me to sell to take advantage of this.

I will have to say this, fix the house to a much nicer then livable condition of a normal home will get you some extra monthly rent money, again not much more then 2-400 bucks. That's a lot unless its high rent district like West Hollywood or Santa Monica.

[mikester]

Jeff, that's an angle I hadn't considered. Buying something else and then renting it out.

In this area there are some multi-tenet buildings but I'm not sure I would be able to come up with the capital for that as easily as I would be able to come up with enough for one of the smaller houses. I'll have to do some looking around.

Right now I'm in a holding pattern on actually doing anything probably for a year or so but I do need to reconfigure the inside of the house a bit. The bedroom walls need to be played with a bit and the front bathroom is about ready for a redo. It's mainly a lot of little things that could basically be a GUT IT and refresh the inside. Kitchen's in good shape but the wife's always wanted a true laundry room or area. Oldest son's bedroom is too small and the youngest son's is too big. It's enough of a mismatch to say I can't just switch them for a remedy - a wall needs to move and doorways and a closet need to be adjusted. It sounds like a lot but honestly I don't think it is unless the support structures have to change too much.

If I bought a multi-unit and started renting things out I could keep the smallest for my own home/office maybe and kill a bunch of birds with one (expensive) stone.

[aigel]

Originally Posted by look 171

George,

The only upside to selling current home is the 500k cap. gain tax. Since its their primary res. they get away with that huge number. Its really free money. A friend's a banker and have always trying to convince me to sell to take advantage of this.

I will have to say this, fix the house to a much nicer then livable condition of a normal home will get you some extra monthly rent money, again not much more then 2-400 bucks. That's a lot unless its high rent district like West Hollywood or Santa Monica.

$400 / mo will be $5k/year or 10 years to recoup $50k. By then the house will need another remodel.

I hear you on the 500k cap gain tax break, but selling is also an automatic 10% penalty. 6% realtor fees and easily 4% on getting it ready and fixing stuff coming up during inspection. That's what's always kept me from selling for an "upgrade". I am easily pleased though. Don't worry much about laundry rooms, kitchen upgrades or bathrooms, as long as everything is functional. My tri tip BBQ tastes exactly the same and is cooked on the patio!

G

[McLovin]

Your carrying costs on the house are more than the mortgage.

Property tax is a big one.

A!ong with a bunch of others.

SFRs are IMO the worst way to invest in real estate. Esp in a place like so cal.

[porsche4life]

Option 3.... Sell your home in Cali, take the pile of cash and come buy a big nice house here, and have money left over for investment purposes! .

[look 171]

Originally Posted by mikester

Jeff, that's an angle I hadn't considered. Buying something else and then renting it out.

In this area there are some multi-tenet buildings but I'm not sure I would be able to come up with the capital for that as easily as I would be able to come up with enough for one of the smaller houses. I'll have to do some looking around.

Right now I'm in a holding pattern on actually doing anything probably for a year or so but I do need to reconfigure the inside of the house a bit. The bedroom walls need to be played with a bit and the front bathroom is about ready for a redo. It's mainly a lot of little things that could basically be a GUT IT and refresh the inside. Kitchen's in good shape but the wife's always wanted a true laundry room or area. Oldest son's bedroom is too small and the youngest son's is too big. It's enough of a mismatch to say I can't just switch them for a remedy - a wall needs to move and doorways and a closet need to be adjusted. It sounds like a lot but honestly I don't think it is unless the support structures have to change too much.

If I bought a multi-unit and started renting things out I could keep the smallest for my own home/office maybe and kill a bunch of birds with one (expensive) stone.

You do know that laundry room is NOT going to gain more rent money. How bad is that bath? For rent, it should be nicely done for big bucks in your area. When and if you decided to move back when the kids go off to college, then give her the new Masterbath and Laundry that she wants. Bath remodel is all in the materials labor is all the same, so that's something to think about unless you are interested in moving major plumbing around. My friend, many of the pelicans know him. He sells old air cool parts for a living, just went through this very same situation as you. Wanted a bigger house and I convince him to not sell his current home, fix it and rent it. He's putting it on the market next week. Someone else will be making all his current house payment for him.

I also suggest holding off on the bedroom wall move. Again, not much gain on rent. Change out the old carpet is what I would suggest. No one like old carpet, bathrooms and kitchens.

Why have an office and take away from rent money? Unless you can write it off and off set your income if not, keep the office at your house. Depending how much is rent, it might be cheaper to rent an office and work out of that. Its legit write off only if you have a business. Depreciation is the tax advantage. Assuming you stay in your current home and pick up a muti-unit, then go ahead and do the remodel to your primary resident then. Charge that remodel to your muti-unit and take the tax break from it. Hush, hush, but they all do it.

[look 171]

Originally Posted by McLovin

Your carrying costs on the house are more than the mortgage.

Property tax is a big one.

A!ong with a bunch of others.

SFRs are IMO the worst way to invest in real estate. Esp in a place like so cal.

Do you live in Socal? If its so bad, how come so many people are doing it and are laughing all the way to the bank?

I know, the numbers don't pencil out sometimes, but if a 500k house can be purchased with a $100 down, put a few bucks in it and rent it for 4k a month isn't too bad. Now, if you put down 10 % (not sure if qualification is even an issue here?) and expect to be in the black is wishful thinking.

[McLovin]

Originally Posted by look 171

Do you live in Socal? If its so bad, how come so many people are doing it and are laughing all the way to the bank?

I know, the numbers don't pencil out sometimes, but if a 500k house can be purchased with a $100 down, put a few bucks in it and rent it for 4k a month isn't too bad. Now, if you put down 10 % (not sure if qualification is even an issue here?) and expect to be in the black is wishful thinking.

People in So Cal will pay $4K a month to rent a house that can be bought for $500K?

[McLovin]

Where in So Cal can you buy a house for $500K, and what would it look like?

[mikester]

$500k not on the west side or down in orange county easy.

[look 171]

Originally Posted by McLovin

People in So Cal will pay $4K a month to rent a house that can be bought for $500K?

Most folks can't come up with the down payment and must find a roof over their head with good schools for their kids. Many are forced to do this or drive two hours in traffic and save 3-500 a month on rent.

500k houses are around but they need work. Sometime more work then others. We just picked up one in December for 560 and it will rent for 4k (maybe a little more) all day long. I put 80 in it because my plan is to flip it. It is only 1100Sq' but the whole house is almost brand new. Most folks don't want to put that kind of money into a flip. I am dumb enough to put in custom cabinets and Carrera marble and kept a lot of the original architectural details and reproduced many of the broken ones. The payout will be great and it will sell in a couple of days.

In My neighborhood, there are three houses for rent. I have one of them and I am asking for the lowest rent of the three(in 2 months), a little below 4k and the other two are almost 1000s' more then my lil' renovated shack asking 4800 bucks. Good school, quiet canyon/hill living with a view is what most folks want. Lots of Hollywood creative types, writes like it and have settled here for the peace and quiet.