Stuck on what to do with my money - Need Help

[ShawnRea]

Hello All,

I am stuck right now on what to do as my next step in real estate. I purchased a side split property in the Niagara region very close to a college 2 1/2 years ago (we live in the upstairs 3 bedrooms and we have a family of 4 living downstairs in the bottom 3 bedroom apartment. During this time I have saved enough money to buy a 2nd property and am now ready to move and rent out the upstairs of the 1st property.

I have found some new builds in the Niagara region that are 2000 sq ft for $360k and will be finished end of 2017, If I buy that I don't plan on renting it out. Just moving in and staying for a year then selling to hopefully make a profit of 50k or more, then repeating the same process by purchasing another new build. The other option is to buy another side split similar to mine near the college as well at a cost of about $250-$270k and move in and rent the downstairs again basically duplicating the 1st investment. There are pros and cons to both, I understand that... but what im looking for is advice on what the general concensus of investors would lean towards....a short term investment with the new build or another long term investment with the older side split home.

Thank and looking forward to any feedback you have.

 

[Matt Crowley]

$50k sounds like a very aggressive gain on a house. Why not just buy some land and keep your family in one place if you think prices are going gangbusters? Unless it is a historic building (which it isn't), buildings do not become more valuable in time, they deteriorate and are only new once. The gain you are seeing is in land value.

How long do you want to keep house jumping? This isn't just an investment, this is where you build a life. There are more considerations here.

What is your 5 year strategy? Are you just looking to flip and make cash to spend? Or, are you short on cash and want to buy properties for 5% down and get up to "x" number of houses?

 

[Thomas Beyer]

Buying the biggest house you can afford in a location that suits your next 5-10 years (as capital gains are tax free, and you might as well live in a nice house that is also a great investment. I learned, on average, more expensive houses are nicer and/or better located than cheaper ones).

Buy as many rental properties as you can in high-demand locations. The goal is to hold on emotionally and financially. Where they are is less relevant as long as they cash-flow, cause little ownership headaches (i.e. low vacancy and impeccable property management) and the demand is strong as then values increase, in time.

 

[ShawnRea]

$50k sounds like a very aggressive gain on a house. Why not just buy some land and keep your family in one place if you think prices are going gangbusters? Unless it is a historic building (which it isn't), buildings do not become more valuable in time, they deteriorate and are only new once. The gain you are seeing is in land value.

How long do you want to keep house jumping? This isn't just an investment, this is where you build a life. There are more considerations here.

What is your 5 year strategy? Are you just looking to flip and make cash to spend? Or, are you short on cash and want to buy properties for 5% down and get up to "x" number of houses?

The only reason I believe that I would make $50k or more is that the same houses by the same builder that is 3 years old is selling for 90k more in the same area. So I am being modest at $50K, my 5 year strategy started 2 1/2 years ago when I sold my last new build and bought this investment. So within the next two and 1/2 years I plan on buying either a 2nd property to duplicate my 1st investment then refinance to buy my own house as a 3rd property in 2 years; or the other option would be to buy a new build, sell it, and do it again a couple times in the next 2 1/2 years. Either way the plan is to buy 2 full rentals with a 3rd being a home for our family....I just can't make up my mind which is safer, more secure or smarter route. The goal is basically to make the most profitable investments and have 3 houses at the end of the "5 year goal" which would be mid 2018.

 

[ShawnRea]

Buying the biggest house you can afford in a location that suits your next 5-10 years (as capital gains are tax free, and you might as well live in a nice house that is also a great investment. I learned, on average, more expensive houses are nicer and/or better located than cheaper ones).

Buy as many rental properties as you can in high-demand locations. The goal is to hold on emotionally and financially. Where they are is less relevant as long as they cash-flow, cause little ownership headaches (i.e. low vacancy and impeccable property management) and the demand is strong as then values increase, in time.

Here's something that I worry about, buying the biggest house I can afford can be done further down the road once I have more passive income coming in. Right now I only have 1 rental with tenants downstairs while I myself live upstairs and duplicating the 1st investment would bring that up to 3 rental incomes; I plan on living in the 2nd home as well as renting it out; on the other end, I can buy a new build which I don't pay a mortgage on until its complete then hope I can sell it for a good profit after a year of its completion, during that time there is no additional passive income though? I mean both are attractive, my current property will bring in 12% cap rate once I move out...is it a better investment to try and find another with similar cap rate or buy a new build with hopes that I can sell for a $50k profit just to do it again? I feel like I shouldn't be going back and forth so much on this.. but I really can't make a decision. There are way too many options and outcomes. Hoping that somebody has already experienced this and made the right decisions.

 

[Matt Crowley]

I think you need to work on your numbers a bit more and run some cash flows. Something isn't adding up. 12% cap rate using your strategy or $50k gain... Doesn't look right to me.

No such thing as passive income. Unless you park your money in a 1% savings account or a 2% bond. Everybody works for their money. Doesn't matter how hard you work.

I am not sure I agree with the biggest house philosophy, but I see the logic.

I see some investors think that the true cost of something is the monthly payments and not the huge amount of debt which actually has to be ultimately repaid...so watch yourself with buying the biggest house strategy. Interest rates will not stay this low forever.

 

[ShawnRea]

Perhaps my numbers aren't right.. I calculated a $24000 annual income on the 1st property with a mortgage of 198k. So the questions is, what would you do... buy another rental property and keep it or buy a new build now and wait almost two years to finish then live in it for year to sell it for profit?

 

[Courtney Hammond]

Only an opinion:

I think all those that have weighed in have valid points to consider. Ultimately- it totally depends on your end goal. I believe you said that your 5 year plan was to have 2 rentals then your personal home. I would say that the "safest" route would be to purchase another rental. I say this as I would believe the long term ROI would be better unless you needed the $50,000 cash.

One thing we have and are now considering is the cost of living in a main level suite on our family stress and therefore ability to run our businesses well and enjoy it. We have lived 3 of our 4 properties and I think we are done using our homes as investment/rentals and are setting ourselves up for our final home now knowing that using the money for our personal home will create life, space, and enjoyment which ultimately will increase our businesses... So there is a different ROI to factor.

I don't know where you and your family are at as far as needs. If moving to another home is a stress and ultimately going to bring you down.. Then I'd spend time considering which route gets you the fastest to a home that gives life ROI and not just financial. (But that's a personal opinion and we have :3 kids 3 and under and run 3 businesses... So that factors a lot )

Anyway- sum up:

If the family agrees and it fits- I'd go with one more rental. (Again just a personal preference - not advice)

If your family hates living in "a rental" that you own... Then buy the house.


Both good options, I think it's a lifestyle choice.

 

[ShawnRea]

Only an opinion:

I think all those that have weighed in have valid points to consider. Ultimately- it totally depends on your end goal. I believe you said that your 5 year plan was to have 2 rentals then your personal home. I would say that the "safest" route would be to purchase another rental. I say this as I would believe the long term ROI would be better unless you needed the $50,000 cash.

One thing we have and are now considering is the cost of living in a main level suite on our family stress and therefore ability to run our businesses well and enjoy it. We have lived 3 of our 4 properties and I think we are done using our homes as investment/rentals and are setting ourselves up for our final home now knowing that using the money for our personal home will create life, space, and enjoyment which ultimately will increase our businesses... So there is a different ROI to factor.

I don't know where you and your family are at as far as needs. If moving to another home is a stress and ultimately going to bring you down.. Then I'd spend time considering which route gets you the fastest to a home that gives life ROI and not just financial. (But that's a personal opinion and we have :3 kids 3 and under and run 3 businesses... So that factors a lot )

Anyway- sum up:

If the family agrees and it fits- I'd go with one more rental. (Again just a personal preference - not advice)

If your family hates living in "a rental" that you own... Then buy the house.


Both good options, I think it's a lifestyle choice.

I think this is what I was looking for.. since you have already been there. It is not the easiest to live in and rent, its a sacrifice; but worth the sacrifice I have found. Doing it again wouldn't be a huge stress factor, I just see it as part of what needs to be done if choosing this path. Thanks for your response, it give me a positive perspective on sticking with this strategy perhaps.

 

[Thomas Beyer]

Missing is your "other income" from employment for any serious suggestions. Ontario has land transfer taxes and realtors and lawyers cost money. Every time you sell or flip there are large transaction costs to consider, plus taxes (capital gain or income taxes). The true path to wealth is not flipping, but constant cash-flow allowing mortgage paydown and equity generation through time while you go work elsewhere.

Real estate is not a get rich scheme, but a get rich for sure scheme.

Having said that, if you can tie up a yet-to-be-built house and know it will be $50,000 more in 2 years when finished then that might be $20,000 deposit well invested. Why not do three of them ?

CAP rate is NOI over price. NOI is gross income minus operating expenses such as R&M, property taxes, utilities, property management, insurance etc. so on $24,000 rent that might be net $16,000 or an 8% CAP rate for a $200,000 house. Why not buy 6 more ? Refi the existing one and buy 2-3 more, then again in 5 years, then again in 5, and in time you too can write a book about your lessons learned !

 

[RE123RE]

Hi,
Not sure why the guy above doubts your 50K value appreciation estimate. Guess he never bought a new build/pre-sale. Your estimate is actually pretty good and it can easily be higher than 50K especially if it takes the builder a long time to build and closing is delayed as often happens. Builder said 2017. Assume 2018, possibly 2019.
I'd definitely do the following:
- buy now asap the new build you mentioned or better - a bigger new build. you typically only need a small deposit amount to do that, around 10%.
- buy another rental asap as well. Dont worry about qualifying. Easy as your new build above is not closing yet so there is no mortgage Therefore, the bank will not care about it negatively.
- Do not live with your tenants ever again. It unnecessarily affects your quality of life. but if you insist - live there till your new build's closing. then move to it

The best part for you - you live where you invest. This makes it much easier for you logistically, to properly manage your business whether you manage it yourself or with the help of a property management company. The last is better or at least have a maintenance guy if you want to keep collecting rents yourself.
Note:
- Do buy the biggest new build you can as intelligently suggested above. Its a good advice and in the future you will refinance it and take out even more equity you would have had you bought a smaller home. So .. you found a 360K new build? No, go bigger and buy a bigger more expensive home from same builder.
= A key point and idea behind these suggestions is to buy as many properties as you can as soon as you can. Because, as Thomas, the experience investor above, mentioned before: Do not wait to buy real estate. Buy real estate and wait.
Thanks

 

[ShawnRea]

Missing is your "other income" from employment for any serious suggestions. Ontario has land transfer taxes and realtors and lawyers cost money. Every time you sell or flip there are large transaction costs to consider, plus taxes (capital gain or income taxes). The true path to wealth is not flipping, but constant cash-flow allowing mortgage paydown and equity generation through time while you go work elsewhere.

Real estate is not a get rich scheme, but a get rich for sure scheme.

Having said that, if you can tie up a yet-to-be-built house and know it will be $50,000 more in 2 years when finished then that might be $20,000 deposit well invested. Why not do three of them ?

CAP rate is NOI over price. NOI is gross income minus operating expenses such as R&M, property taxes, utilities, property management, insurance etc. so on $24,000 rent that might be net $16,000 or an 8% CAP rate for a $200,000 house. Why not buy 6 more ? Refi the existing one and buy 2-3 more, then again in 5 years, then again in 5, and in time you too can write a book about your lessons learned !

Thanks for your response Thomas. The truth is I cannot afford to buy more then 1 at a time in either circumstance otherwise I would take your suggestion and buy more then 1 now. I love the strategy, I just do not have the finances for that level of investing "yet". My other income is good, but not enough to do the strategy you suggest.

 

[ShawnRea]

Hi,
Not sure why the guy above doubts your 50K value appreciation estimate. Guess he never bought a new build/pre-sale. Your estimate is actually pretty good and it can easily be higher than 50K especially if it takes the builder a long time to build and closing is delayed as often happens. Builder said 2017. Assume 2018, possibly 2019.
I'd definitely do the following:
- buy now asap the new build you mentioned or better - a bigger new build. you typically only need a small deposit amount to do that, around 10%.
- buy another rental asap as well. Dont worry about qualifying. Easy as your new build above is not closing yet so there is no mortgage Therefore, the bank will not care about it negatively.
- Do not live with your tenants ever again. It unnecessarily affects your quality of life. but if you insist - live there till your new build's closing. then move to it

The best part for you - you live where you invest. This makes it much easier for you logistically, to properly manage your business whether you manage it yourself or with the help of a property management company. The last is better or at least have a maintenance guy if you want to keep collecting rents yourself.
Note:
- Do buy the biggest new build you can as intelligently suggested above. Its a good advice and in the future you will refinance it and take out even more equity you would have had you bought a smaller home. So .. you found a 360K new build? No, go bigger and buy a bigger more expensive home from same builder.
= A key point and idea behind these suggestions is to buy as many properties as you can as soon as you can. Because, as Thomas, the experience investor above, mentioned before: Do not wait to buy real estate. Buy real estate and wait.
Thanks

Thanks for the response, my worries with this is that at this time I feel its safer to buy a live in investment in addition to the one I already have because I will use the rental income to offset the mortgage as opposed to paying the full mortgage on the "bigger, new build". And the wrench in all of this is I can't do both "additional rental and new build" I can only afford either or.

 

[RE123RE]

Thanks for the response, my worries with this is that at this time I feel its safer to buy a live in investment in addition to the one I already have because I will use the rental income to offset the mortgage as opposed to paying the full mortgage on the "bigger, new build". And the wrench in all of this is I can't do both "additional rental and new build" I can only afford either or.

Hi,
I understand and still strongly recommend you buy both asap. If the first of them is a rental for example which you said you can buy, then even use your visa cards or LOCs for the new build deposit (as mentioned only ~10%!)
Maybe my mortgage qualification comment was not clear..(?)
If you do not have LOC and Visas yet, work on that asap and increase your credit limits.
Remember: you put the deposit and forget about it for about 1-2-3 years until completion! - that's the beauty of new builds and you correctly mentioned the potential appreciation.
Proceed this way and your business will grow much faster!
As mentioned, don't wait till you have more money to buy, do everything possible to buy now, then wait
Thanks

 

[Courtney Hammond]

I love this thread! Mostly because of the idea bouncing! Makes me feel less crazy as I'm constantly coming up with ideas that those in my non-investment group finds crazy! Anyway- I'm winding a few things:



- buy now asap the new build you mentioned or better - a bigger new build. you typically only need a small deposit amount to do that, around 10%.

***is this true? You only have to put a deposit on a new build? And not a mortgage? That could open a few doors for us - have you used this before? If so.. Where and how did it turn out? (I've stayed away from new builds largely because we use a lot of forced appreciation to gain on our homes -ie huge fixers)

- buy another rental asap as well. Dont worry about qualifying. Easy as your new build above is not closing yet so there is no mortgage Therefore, the bank will not care about it negatively.
**** so the new build that you put a deposit on- doesn't count until you have to mortgage it? Which I assume is when it's completed? Is that right?


- Do not live with your tenants ever again. It unnecessarily affects your quality of life. but if you insist - live there till your new build's closing. then move to it

**** totally agree with this as you grow! We've managed it for a couple of years but as we get bigger and have more tenants we want more that a rental that we own.

I can't see names of who I'm responding to anymore (on my phone) but: original poster- totally hear you on the affordability point. Have you considered partners? Selling part of your established rental once you move out, or joining you in the new build? I wouldn't have a partner for the home that you end up living in, as it gets confusing but the other options might be a way to push you forward. At the same time- doing it on your own has good ROI too

 

[Thomas Beyer]

Yes real estate is fascinating as there are sooooooo many options, asset classes, locations and nuances !

If you buy a newly built you eventually have to either assign the contract or close, presumably with a new mortgage then. Some newly built homes do not allow assignments so check your contract details. Some newly built a require escalating deposits, say 5% on signing, another 5% within 8 weeks, then another 10% within six months etc. so check your contract. Other new builts require draw mortgages but those are typically not spec homes but customized. Markets also do not always go up so you may end up with a newly built in two years that cannot be sold for more than you pay for. More risk, but also more reward if all turns out well !