To BUY or Not To BUY, that is the Question?
As most of you know I own a 582 sqr foot condo about six blocks from my work downtown Seattle. I bought in June 2006 and enjoy it here!
At this time Im about to buy a 4-plex house, but its in the small town of Colfax WA (near my hometown of Pullman). The key is that it cashflows by $300 bucks a month (with a conservative estimate, otherwise it would be $400 to $500 not including common expenses per month). My brother would live there and manage the property (and we would own it 50/50). We would get FHA financing and put only 5% down (really only have to put down 3%).
The best part of this investment is that it is right on Main street and zoned Commerical Real estate, while there are several residential houses nearby in the core of town. The next store or commercial area that gets developed is this region. So apparently its a gold mine! Colfax recently approved addional zoning to expand the outer edges of the city and will create the need for more businesses.
So my question to all of you is, would you take this investment?
At this time Im about to buy a 4-plex house, but its in the small town of Colfax WA (near my hometown of Pullman). The key is that it cashflows by $300 bucks a month (with a conservative estimate, otherwise it would be $400 to $500 not including common expenses per month). My brother would live there and manage the property (and we would own it 50/50). We would get FHA financing and put only 5% down (really only have to put down 3%).
The best part of this investment is that it is right on Main street and zoned Commerical Real estate, while there are several residential houses nearby in the core of town. The next store or commercial area that gets developed is this region. So apparently its a gold mine! Colfax recently approved addional zoning to expand the outer edges of the city and will create the need for more businesses.
So my question to all of you is, would you take this investment?
Comments
The purchase price would be a major factor to me. As extreme example, if the price was $500K, I wouldn't risk it. But I wouldn't hesitate if the price was $50K.
The purchase price will be $175,000 and the rental income is $1660 per month.
Have you included some element of vacancy in the numbers? You should probably make some industry standard estimation of vacancy (whatever that turns out to be) and include that.
Also include maintenance, insurance, tax increases, etc...
I'm not saying it won't cash-flow, just suggesting that you ensure you're including all costs and not assuming the best case regarding the income potential.
I'll second this. It's very common for such agreements not to work out very well. Especially since you'll be splitting 50/50, except your brother will be doing the majority of the work.
I avoid that F'in speed-trap like plague.
It's simple: if you would have come out ahead after 5 years, assuming a 2% annual deprecation (a very conservative assumption over the next 5 years), and subtracting the carrying costs (e.g. taxes, mortgage, maintenance, insurance, etc) from expected revenue, then go for it.
However, there is no point in buying if you would wind up coming out in the hole if you assume asset deprecation.
Interesting opportunity,
Other than agriculture and the university, not much of an economic base in the area. Are some of the renters WSU stoon'ts? For what it's worth, my significant other's mom sold her 3 bdrm 2 bath home in Pullman for $209,000 last December. The Realtor she worked with told her that she sold at the top of the market.
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Colfax, Washington
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It's good to consider the what-ifs. It's not fun trying to manage property long-distance if for some reason your brother wanted to move somewhere else. You need to hammer out with him, in writing, an agreement with contingencies and laid-out plans, ie if he wants to move, he gives you 6 months notice and you both agree to put the building on the market. And I assume that in exchange for his rent he will be peforming all of the management and maintenance duties (another detail to be included in the written agreement)? It would be a shame if a stupid piece of land with some sticks of wood on it caused a rift between you and your brother. A written agreement should help alleviate this risk (but not entirely).
The one other concern that came to mind is if you ended up having WSU students renting there--college students can be extra-hard on a place, as there is more wear-n-tear with people moving in and out so often. That could eat into your profits with additional costs for drywall repairs, painting, trim replacement/repair, and carpet replacement (which I assume you and your brother would probably hire out).
I have good friends in Kennewick who had a four-plex rental unit (they lived in a SFH a few miles away), and after dealing with one too many druggie tenants, they threw in the towel and sold it because it was too much stress and hassle for them. YMMV
I don't have a strong feeling either way on this one. But go into it with your eyes open.
The first time I personally witnessed a flood was in Colfax in December 2001 or 2002. The main street was impassable.
carlislematthew - I estimated about a 5% vacancy rate, yet it has only gone unrented about 1% of the time, so this was taken into consideration.
biliruben - Thats ironic, they rent a spot right out front to the police (just kidding)...and yes there was a police officer parked right in front when I visited, lol. At least I will know they are close by if there's an emergency, hehe.
sniglet - What is your basis for depreciation??? Real estate, unlike a car, appreciates in the long run! Im running an estimated 3% annual appreciation which is the historical avg...and no they didnt have a "Seattle like Bubble" at all!
Redmondjp - My brother currently lives in Colfax and does not attend WSU, as he works in a nice resturant in Pullman as a chef. He takes on more of the physical management and I will take on more of the financial aspects. I also have many friends in the area that said that they would be willing (for a small fee) to manage, or could get a management company to do it and still make money.
I actually know the people (2 degrees of seperation) through friends the people selling it to me and getting a good deal since they retired and want to sell it. So Im getting it decently under the true market value since Im willing to make the process to go smoothly. I first started researching it in early October.
TJ - Perfect question and did take that into account. It is above the flood plane and at an elevated portion that isnt in the concrete flood overflow path.
Studies of real-estate prices over the long-term show that appreciation rates are about 0% (e.g. Schiller has done work in this area back to the 1800s). The last 40 years are an anomaly, with abnormally high appreciation rates. Worse, we have seen appreciation spike like mad in the last 15 years.
It is reasonable to assume that we will have to experience depreciation to bring us back to the norm. Further, when one considers that most real-estate downturns see at least 15% deprecation then it would only make sense to expect at least that much of a loss in this current downturn.
Lastly, if it is possible to have 20% appreciation in a single year (something we've seen recently), then there is NO reason you can't have similarly irrational depreciation in similar time-frames.
In my personal view, we will see MASSIVE depreciation over the next 7 years or so, wiping out at least 50% of the value of property nation-wide. However, being conservative I will say it would be fool-hardy not to expect at least 2% deprecation a year for the next 5 years.
But like I said earlier, if your investment would still be profitable after calculating a 2% annual deprecation, then it starts to look attractive.
Im not buying it for its appreciation, thats secondary. Its investment income and location (commercial zoning) is where it will pay off in the long run!
I reread your original post, and unless "it's in Colfax" is some sort of slang for "hasn't had above 5% appreciation over the past several years", then I don't know if you read your initial post either.
Second, I know some people who own in other hodunk towns out east, and it is their opinion that some sort of bubble has been seen there as well. I'm talking about homes with 1% annual appreciation over the last 15 years suddenly doubling in price over the last 3 years. The price may seem low at $150k, but if it was $75k in 2003 that's just as much of a bubble as Seattle saw.
My speculation is that they didn't have the absurd people chasing houses problem, but all building supplies did become more expense during the heady days of 2005. That increases the cost to build a new home, and increases the replacement cost of an existing home.
All of that is to say that "it's in Colfax" is probably not a justifiable explanation for expecting 5% annual growth. In fact, I can't believe I even had to write that last sentence. What's next? Someone around here buying in Garfield County?
Great. So if this property would still be a profitable investment when you assume annual depreciation then it is a great deal. Like I said earlier the natural state for property is 0 appreciation, so no one should ever assume there will be. More importantly, with a recession on the horizon and the massive unwinding of the global credit bubble under-way I doubt very much that anyplace in the country will remain unscathed.
Just because there hasn't been massive recent appreciation certainly doesn't indicate there won't be depreciation. In fact, some of the regions of the US experiencing the deepest real-estate downturn right now never saw the same appreciation levels that were in the frothiest markets like Phoenix, Las Vegas or Miami. Further, when the large metro areas have downturns the hinterlands typically do even worse.