OT: Calling all real estate wizards

[deano]

The missus and I are looking at some life changes - the pandemic is shuffling the deck among our friends and there are a number of vital friendships (and one of our jobs, for voluntary reasons) that we can't count on being a part of life here for the 2021-2022 year. We've got little kids and no family in town and as we see our friends one by one finally start to move their young families back where they came from, we're eyeing making the same move to be near family. In many ways, it's a path to financial freedom: real estate has been kind enough to us here that we would have some options: a) we could buy a home right out with no mortgage because home prices are that much more affordable where we would be moving - that's a massive burden off, even if the dollars and cents tell you investing is more profitable in the long run; you're free to invest what you'd have been paying on your house b) we could take advantage of low rates and plunk a nice sum into our other investments and really catalyze our retirement and college savings,, through more time in the market etc. c) I really don't like the idea of parking a bunch of money in the likely real estate markets we'd be moving to for structural/economic reasons.

What do any of y'all wizards think of owning a "second/investment" home rather than a "primary" residence? I understand a lot of people do this when they are in unaffordable markets like NYC or SF and rent out their "second homes" for supplemental income. What do you think of this strategy when a buyer doesn't want to be hitched to property in, in this case, a cheap Rust Belt town? You buy a place somewhere you really want to be in the long run and enjoy it as a rental property and occasional vacation property, and conduct your life where your people are otherwise renting and so on.

[sine]

Before I begin, I'm no wizard. I'm someone who has seen markets go up and down a few times in more than one country.

So.

Much depends. Finances, jobs, location, etc. Plus where you want to live 20 years from now might change in 5 years.

Saying that, the current "second/investment home" real estate market......at least in places I'm looking (western NC).....is red hot. I'm seeing desirable properties list at high valuations and go under contract in days. One 55 acre property near Chimney Rock has a shit for a house (bulldoze it) but the property has a sizeable pond, stream feeding that and other interesting natural features. Awesome views. Under contract in a day.

So, as this is a sellers market and investing in vacation/investment property is tricky in the best of times, one has to be very careful. I think the upside/downside ratio is not favorable in this current environment. I've seen it before. The tail end of the herd can really hurt.

[robin3mj]

Couple thoughts, but be advised I am not a professional.

Whether you agree with the history and underlying policies or not, current US tax laws are very favorable to owning one’s home. Unless you plan on moving to a place where you truly believe RE prices will decline over the time horizon you plan to live there, it may behoove you to buy there, and put some cheap debt on the house. Not at 80% leveraged, but enough to take advantage of some mortgage interest and SALT deductions, free up your remaining cash-out for investing, which you could hope/expect to generate higher returns than your interest rate.

Secondly, I have been a long distance landlord in the past, somewhat unwittingly, and it is no picnic unless you either have solid resources on the ground near your rental property or are willing to pay someone to do so for you.

[rwsaunders]

Vacation rentals are one of the riskiest real estate ventures that you can involve yourself with. When the economy recedes, the vacation home bankruptcies blossom, although that is the time that people with excess cash that want a second home, go shopping. Small apartment complexes (4-6 units) in stable neighborhoods are usually solid, longterm investments. Single family home rentals, not so much.

Vacation home example: my friend owns two units on Kiawah Island; a home and a condo, the home which he plans to eventually move into 1/2 of the year. He bought the condo 9 years ago for almost 30% less than the previous selling price...market collapse. He's held it as a pure rental and used the appreciation to help fund his home purchase. He just sold the condo for a 20% gain as he's concerned about another market bust...not much gain over 9 years, but the rental income has essentially paid the freight. The home is another story in another league. It also was a bankruptcy purchase and he's rented it out for 4 years...big money for golf tournaments and multi-family vacations, but his theory is that you have to be able to watch 20-25% of the value sit idle while the rent pays the expenses. He's testing the waters and has the house listed for 25% more than he paid for it. If someone grabs it, he'll go on the hunt again.

He's retired and he has the time and money to play. You have to ask yourself if you have the time, money and stomach to play, as there is a level of risk that you are taking when the rental market goes soft. He thought that he'd get his arse kicked this year when the pandemic started, but the opposite has occurred, at least for the short term. He's smart enough to know that it's only a matter of time until things tighten up for him too, which is why the condo is gone.

[vertical_doug]

I am a firm believer in the KISS method (Keep it simple stupid).

You buy the smaller place in the new location for less, take a mortgage, your excess cash jumpstarts the college funds and retirement savings sounds like a winner to me.
I am not a fan of real estate in general since it has high friction in transacting, unless you are a professional in the market and manage costs yourself, a good junk of return disappears into costs/commission/upkeep.

This gives you some flexibility in being able to buy any hiccup in real estate. Right now, I think you are chasing which usually is not a way to make money in real estate.

[rec head]

Secondly, I have been a long distance landlord in the past, somewhat unwittingly, and it is no picnic unless you either have solid resources on the ground near your rental property or are willing to pay someone to do so for you.

I'm close distance landlord and even that can be a pain in the ass. I second, third and forth that you have someone solid to rely on near the rental home. Even if that is a management company. You need to trust them. I started to list reasons but I could go on and on.

[j44ke]

I can tell you that if you go to a rural area and buy a house as a second home/rental property, you may get back your purchase price but only a fraction of renovation costs. Our county had a flash of sight-unseen sales at $10-20k over asking in June and July, but once that dies down, then it will be back to “bought for $250,000, put $75-100,000 into it for kitchen, plumbing, open plan live/dine, and paint, then struggled to sell for $255,000”. That’s just the way the country seems to work.

[Clyde]

I am no wizard however did play the one rental game when we were considering a move to Greenville. We made a little on the sale, however it was not worth it to be on call for dinky repairs then a complete heat pump at $5300 + the $1000 spent trying to limp it along. Then a $2500 tree removal bill certainly ate into our satisfaction rating. One and done for us. And I am pretty handy with most household stuff. Fast forward to the inspection for sale and another $12k down the tube for a crawl space repair that seemed to magnify in the 3 years we owned the place, and granted it was a wet spring but jeez. And anything turned up in inspection has to be repaired by a licensed contractor so that knocks me out of the game. This was for a house built in the 40's or so and you think that most stuff from that era is done pretty right....but termites and other construction in the area that changes topography can have quite the impact. North Main in Greenville, where there are million dollar houses around the corner. That giant sucking sound out of your wallet, well, it sucks. Tread carefully.

[ides1056]

I have three rural rental properties and do the work myself. It has been a mixed bag over the decades. I was more interested in the land, and the biggest financial gain has been sales to the State Division of Fish and Wildlife of 275 acres which was a total win.

I would not be a buyer at this point.

[jimcav]

"enjoy it as a rental property" made me laugh. I've had to rent our former home many times with navy moves, and was always trying to buy where we moved.

Now that there is a max on mortgage interest and real estate tax deduction, it isn't as good to own more than one home. Our last time this happened, we didn't live in the home 2 out of the last 5 years, so the capital gains tax takes really effect for our sale. With the real estate taxes, maintenance costs, and lower deductions, we'd have done better just selling when we moved (or within 3 years certainly) and investing that money.

We've done okay on 2 of 3 periods with more than one home over a 24 year navy career. However, 3rd of 3, was a real kicker: buying in 2006 and having the market tank and then getting a transfer in 2008. Had to rent that home for 3 years to get to even think of selling, while we rented. Our former home, now rented, was long distance misery. After 3 years, we still had to sell at a loss, and if it weren't for the HAP for military I'd have literally had to pay someone to buy my house. As it was I lost my down payment.

So then we rented for 7 years before buying again. I actually love working on houses, and if I could, I'd buy a smaller house NOW to rent and work on, with goal of one day moving into it when the kids are on their own, but where we live I can't afford another house :(.

The research triangle area housing market of NC is usually in high demand. We have family near DC, and I've considered something small for airbnb type of idea. Someplace like that with multiple draws (DC, university, gov't work, military) creates a near constant draw of visitors/transitory personnel; but then you have something like COVID-19, which may shut down some 3rd tier colleges, and will certainly impact tourism, so it is a tougher call to make on the "certainty" of the short term (or even longer term) rental market in many areas.

I'm not clear what you meant by 2nd home if you don't want to own in your "rust belt" destination? Anyway, I'm from Indiana, and never wanted to return, but when my dad passed I helped my mom get a smaller house (after failing to convince her to move near me) and bought a cool old 6-acre horse property with goal of working on it and maybe retiring there. I sold it immediately after my mom passed. Too much work and no other draw besides her.

As someone above mentioned, where you think you may be in 5 or 10 or 20 years may not unfold as you think. I think there are likely great places to live in the midwest. From what you said, unless you have a very trusted person to manage your current NC home, I'd sell. Then, IF your new destination has some good long term draw like it is a university town, has good primary/secondary schools etc, then I'd invest in a smaller, cheaper home in you new location and invest the rest.

good luck, there are certainly worse dilemmas to have

[deano]

I'm not clear what you meant by 2nd home if you don't want to own in your "rust belt" destination?

Great insights in your story, though by that I was referring to the phenomenon of people, typically in unaffordable markets, who rent where they conduct business, but buy elsewhere where they want to be long term and rent that property (perhaps as a vacation property,) and themselves enjoy it. Always having a home base, in a way. I wouldn't be a long distance landlord on our current NC home - too much to go wrong on an 80yo bungalow!

I should probably just take advantage of cheap financing when we move, buy where I am going to land, and so on, but in the background I'm wondering about trying to hedge against the Silver Tsunami which is expected to release tons of homes on the market where my family is from. I am not sure about holding in older markets, though housing could continue to boom for another ten years or so and I'd miss out on participating in that market.*

*I don't try to time other markets ... I'm not sure exactly why I countenance it on real estate, but that's the thinking.

[ides1056]

I lived in NYC for 27 years and never wanted to buy there. Bought in Western MA instead where I wanted to live: water was abundant, land affordable, people were leaving.

I figured that someday people would appreciate the value of living in the middle of nowhere.

[Tom]

Anecdotal on the topic of long distance landlording. I have no experience, but one of my previous managers was IT in the Marines and when he moved to upstate New York they kept the house in Northern Virginia and rented it out to a Marine family. When it turned over he went down to freshen it up for the next rental. He added an unscheduled week to his planned week down there because the place was beat up so badly. He came back and said among other things he had to replace every single interior door. He was shaking his head because he thought that an ex-Marine renting to a current Marine might get a little respect. He put the house on the market right away even though he said he was going to take a loss on it. He decided it wasn't worth the time, aggravation and further expenses.

[SlowPokePete]

From Spike Lee's movie, "Do the Right Thing...''

"He reminds me of my least favorite peoples, my tenant and my ex-husband..."

SPP

[jimcav]

Great insights in your story, though by that I was referring to the phenomenon of people, typically in unaffordable markets, who rent where they conduct business, but buy elsewhere where they want to be long term and rent that property (perhaps as a vacation property,) and themselves enjoy it. Always having a home base, in a way. I wouldn't be a long distance landlord on our current NC home - too much to go wrong on an 80yo bungalow!

Ok, got it. My advice is do NOT buy where you go if you don't really want that long term, unless there is some other, hopefully permanent (1st or 2nd tier university, industry leader, etc) high draw to the area.

Next, where you want to be long term may change. 10 years ago I planned to retire and focus on triathlons--so So Cal was my plan. Interval years involved tears to both rotator cuffs, hip surgery, and now a cervical radiculopathy. I can't ride in tri position, I can't swim, and running has become jogging on dirt trails. I'm not happy here, but it is at least good for my kids as far as school/friends.

Obviously my planning is/was based upon my recreational activities, but my point is life happens. If you buy where you think you want to be, I'd suggest the same thing--picking a place that has a reason people go there. That way, if things change, you'll do OK on having owned it for X years and not having lived in it 2 out of the last 5 years, meaning you don't get the 500k capital gains exemption.

Over the years of navy moves, I've noticed that home depot and walmart seem to do a decent job of identifying small towns that are growing. If your list includes smaller towns that just got or are about to get both, that may be something to research.

[j44ke]

Great insights in your story, though by that I was referring to the phenomenon of people, typically in unaffordable markets, who rent where they conduct business, but buy elsewhere where they want to be long term and rent that property (perhaps as a vacation property,) and themselves enjoy it. Always having a home base, in a way. I wouldn't be a long distance landlord on our current NC home - too much to go wrong on an 80yo bungalow!

I lived in NYC for 27 years and never wanted to buy there. Bought in Western MA instead where I wanted to live: water was abundant, land affordable, people were leaving.

I figured that someday people would appreciate the value of living in the middle of nowhere.

Yeah, I was just going to say that this is very common in the NYC area. And even more common among the arts crowd. We have a number of friends whose income allows them head above water in NYC and the only reason they are there is because that's where the art world is, so they've bought houses in Beacon, New Paltz, western Catskills, the western fringes of Bucks county PA, northern MA, southern VT, etc. What we call the nuclear zone of NYC (see 1950's duck-and-cover maps with NYC as epicenter.) The pandemic has for the most part snipped their umbilical connection to the city now, and they are 100% in their country place figuring out new ways to be head-above-water without the subway, noise, crowds, dirt, roaches, etc. I don't think many of them will ever go back.

[giordana93]

let's not forget real estate taxes and insurance as costs that are never recovered and not deductible

[caleb]

@zambenini I'm not a real estate expert (by any stretch!), but Robert Shiller says prices are pretty rich right now.

Before making a choice, you may want to look carefully at the rental market in your destination. My experiences renting SFHs in about five different small towns were that finding what I thought was a good rental house was tough, and the few nicer places were renting well north of 1% of their value. If you already have a place in mind, then of course you're set.

If you're planning to return homeish for the next 3-5 years, there might be something to be said for buying a cheap but solid house with a pact to do nothing to it but paint (yes, easier said than done) and be fine selling it for a little less than you bought it for when you're ready to move on.

Good luck, whatever you decide.