Would you buy real estate right now?

[Geila]

Or would you stay in the stock market?

We plan to move in about 4 years to a small town with a much lower cost of living; it's 3 hours from where we are now. We have $150k available to invest in a home (which we would rent out until we move), or we can leave it in the stock market where it has been performing extremely well. We can rent out the house to cover the mortgage and then some as it's in a very nice neighborhood. Purchase price would be around $375k.

Of course, it's all a gamble since we don't know where the stock or real estate markets will be in 4 years. Just wondering what folks who have invested in real estate in the past might think. We've never really wanted to be landlords, this just seems like maybe it might be a good time to cash in some profits and invest in a house. Our current house is paid off and our retirement is fully funded. No kids, so no need to save for college, etc.

[Tybee]

Or would you stay in the stock market?

We plan to move in about 4 years to a small town with a much lower cost of living; it's 3 hours from where we are now. We have $150k available to invest in a home (which we would rent out until we move), or we can leave it in the stock market where it has been performing extremely well. We can rent out the house to cover the mortgage and then some as it's in a very nice neighborhood. Purchase price would be around $375k.

Of course, it's all a gamble since we don't know where the stock or real estate markets will be in 4 years. Just wondering what folks who have invested in real estate in the past might think. We've never really wanted to be landlords, this just seems like maybe it might be a good time to cash in some profits and invest in a house. Our current house is paid off and our retirement is fully funded. No kids, so no need to save for college, etc.

I think it is impossible to answer unless there were so many more factors known about your situation, where you are going, what is special about a particular house you have found, what kind of support is available int he new town to manage property for you, how much more you will have left in the market, whether you are busy with jobs, how the local rental market functions, etc.

One thing that jumps out is this:" We've never really wanted to be landlords, this just seems like maybe it might be a good time to cash in some profits and invest in a house."

For me, that would not be compelling enough to put myself through all the hassles of buying and maintaining a rental property for someone else. Good rental properties are not necessarily the properties that you would want to move to in 4 years-- so would you be doing all this just to break even on the house or keep it from sitting empty?

You could take profit and put it in something else if it is a profit taking move, and then sell your house when you are ready to move in 4 years and pay cash, and avoid all of this intermediary business, as it will be a job in itself.

Those are my off the cuff thoughts.

[iris lilies]

I want to echo Tybee in that a house that you want to live in is not often a good rental property. You have to run all of the numbers and you have to be knowledgeable about the numbers.

Four years is a ways away and your plans can change. I would say by your house a year out from selling the one you live in.

[Tammy]

I like index funds. Safe and liquid and no one lets their dog pee on them. 😄

[razz]

Not being nosy but why wait four years if so many factors indicate that such a move is a good one right now?

My experience - I was going to wait another three years before I left my beloved farm after my DH passed but the thought came, "If then, why not now?". I sold and moved. It was the smartest decision I could have made. Real estate prices for farms were at their peak, my newly built house was perfect in a neighbourhood that I love, and urban real estate soared after I moved in.

[SteveinMN]

There are so many more factors out of your control if you buy the house and rent it for four years: you may have to carry the mortgage for a few (or several) months in lieu of tenants; you could (despite your efforts) get a non-paying tenant (and/or a destructive one) and have to incur the expense of kicking them out (from afar); the house could need major repairs (roof, furnace, etc.) during your ownership and you won't be nearby to get bids from contractors or oversee the work; the real estate market could collapse again; something could happen to the economy in that small town which would affect the demand for housing (particularly that house, if it's above the median rental price in that market).

If you don't really want to be a landlord, I don't recommend signing up for a four-year hitch as a landlord. You could consider rental-management companies which evaluate prospective renters, handle routine stuff like lawn care and snow removal, and can call tradespeople for small fixes (refrigerator dies, A/C inspections) -- but they take a percentage off the top of the rent. The rent you can charge in that market and the expenses you have to clear (mortgage, utilities, savings for repairs, etc.) may not provide enough room for that expense. And even buying the house will feature different "numbers" than your own residence: when I bought the place I rent out, I could not homestead it (not my primary residence) and even the mortgage interest rate was higher (because it was an investment property). You really need a realistic idea of what the house is as rental property and if it's so singular that it makes a great rental and the home you really will want above all others in four years.

Personally, I'd keep my money in equities.

[Yppej]

No.

[Ultralight]

I just have a knee jerk reaction of utter dislike about buying pretty much... anything! So no.

[Teacher Terry]

I wouldn’t do it until ready to move. Being a landlord sucks. We have done it.

[dado potato]

Location, location, location.

Residential real estate is dropping in some elite spots... one theory is Chinese buying has been in decline. I think a location with declining property values would be terrible for the strategy of buying and being a landlord for 4 years.

Is there a location where the residential property market has gone through a decline, and has begun to rise again? If so, does the community offer amenities and quality of life that you would appreciate for a minimum of 13 years?

AARP, using a quantitative method, determines an annual Livability Index, and promotes discussions about "Age Friendly Communities". In the category of Smaller (Population 25K to 100K) cities in 2018, the top scoring locations were:
Fitchburg WI
Sheboygan WI
La Crosse WI
Lafayette CO
Silver Spring MD
Sun Prairie WI
Bismarck ND
Brookline MA
Harrisburg PA
Portland ME

In smaller towns than these in northern WI, Zillow lists 2 BR ranchers on half-acre lots, at around $99 per square foot. Mind you, the purchase price does not include the ongoing financial and emotional costs of being an absentee landlord.

[Rogar]

Or would you stay in the stock market?

I agree with much of the other's advice. However, if you are looking at financial security and it's either all in on stocks or all in on real estate, I'd be thinking about some diversity of asset classes.

[Simplemind]

After going through all I did with my parents properties, I would never want to be a landlord again. I know one day we will be downsizing due to the physical challenges of the property. My MIL is still with us and we wouldn't consider moving until she is gone. But I'm on Zillow several times a week checking out what is available just so I can get an idea of where we want to go. The older I get the more close community is important to me. In my younger days property in the boonies would have attracted me. Not any more.
I have toyed with the idea of purchasing a smaller home now and renting to my son until we are ready to move but I don't want to have him feeling like he would be stuck there if something else opened up for him before I was ready.

[Tybee]

I will say that I totally get wanting to buy real estate, and in our 20 years of marriage we have actually bought and sold eight houses, and three of those were rentals or flips, so I have certainly not always taken my own best counsel, and I love to buy real estate, so to be honest, I might buy something, but I would not see it as either buying real estate or staying in the stock market, if that makes sense.

But yeah, knowing us, we might buy the house 3 hours away if we loved it and loved the town and thought things were going to get more expensive there.

[Geila]

Thanks for the responses everyone. To answer a few questions:
1. The time frame is really to do with Dh's work timeline. It could be as early as 3 years or as late as 5.
2. We have lots of family in the area including a family member that would serve as property manager who actually likes doing that kind of stuff and already manages other properties.
3. The thought behind buying now is that we would have a house all ready for us when the time comes. We did several scouting trips and found one house (that didn't sell immediately because it was priced too high) but that has everything we want and is in one of the best neighborhoods. The price has been lowered a few times and we think we could buy it at a reasonable price since there's not as many buyers now.
4. We would not be selling our current house until 2-3 years after we move for several reasons, including making sure the move is the right choice (we've both lived our whole lives in the Bay Area and Dh's work is heavily tied to the bay as well). We would rent out our current house during that time; this is a very strong rental market where we live. We have up to 3 years to sell for capital gain purposes.

A couple of you mentioned that a house you want to live in is not necessarily a good rental and I want to ask why that is. The house in question is definitely one that I would want to live in. What would make it not a wise rental property?

[iris lilies]

Thanks for the responses everyone. To answer a few questions:
1. The time frame is really to do with Dh's work timeline. It could be as early as 3 years or as late as 5.
2. We have lots of family in the area including a family member that would serve as property manager who actually likes doing that kind of stuff and already manages other properties.
3. The thought behind buying now is that we would have a house all ready for us when the time comes. We did several scouting trips and found one house (that didn't sell immediately because it was priced too high) but that has everything we want and is in one of the best neighborhoods. The price has been lowered a few times and we think we could buy it at a reasonable price since there's not as many buyers now.
4. We would not be selling our current house until 2-3 years after we move for several reasons, including making sure the move is the right choice (we've both lived our whole lives in the Bay Area and Dh's work is heavily tied to the bay as well). We would rent out our current house during that time; this is a very strong rental market where we live. We have up to 3 years to sell for capital gain purposes.

A couple of you mentioned that a house you want to live in is not necessarily a good rental and I want to ask why that is. The house in question is definitely one that I would want to live in. What would make it not a wise rental property?

you have to run the numbers, make the business case, to see if it is a money making proposition.

Since you tied, in your initial post, your stock market investments to this rental idea, I assume you are viewing it as a moneymaking effort.

[Geila]

I will say that I totally get wanting to buy real estate, and in our 20 years of marriage we have actually bought and sold eight houses, and three of those were rentals or flips, so I have certainly not always taken my own best counsel, and I love to buy real estate, so to be honest, I might buy something, but I would not see it as either buying real estate or staying in the stock market, if that makes sense.

But yeah, knowing us, we might buy the house 3 hours away if we loved it and loved the town and thought things were going to get more expensive there.

Tybee - have you done well with real estate investing? Several family members have tried to invest in real estate by buying multiple properties and have not done well at all. Lost most of them to foreclosure because they bought right before the recession or used those interest only loans that were popular then. I know lots of folks do well, just not sure how well the average person does. I'm not sure what separates the successful investors from the unsuccessful ones. Maybe enough capital to withstand market and financial fluctuations?

The town in question has a strong real estate market right now, from what I've seen (well-priced houses selling in one day), and I imagine it will get more expensive. But the job market is not great due to its size. So it's kind of a 50/50 situation.

[Teacher Terry]

We have had many homes and sometimes made money and sometimes lost. We probably would have done better in the stock market.

[Tybee]

Generally, a house that is a good rental property returns a certain amount after you have covered all your expenses. It makes you a certain amount of reliable income. It will be dependent on the area--so in SC where we lived, you would look for 3 beds, 2 baths because you want to rent to a Marine family-- you want to be in certain neighborhoods convenient to the bases, you want to be near certain schools, etc. Up here in Michigan, I really have no idea, except that we could not afford a house in town, which would be a good rental. I suggest you go to something like the MrMoneyMustache real estate forum and read some of the post there, the stickies where they talk about expenses and cash flow. I would read a couple of books on investing in real estate. I would look at Frank Gallinelli's What Every Real Estate Investor Needs to Know About Cash Flow, which has some great formulae where you can plug in the numbers on the property that you are looking at. If the house does not meet the guidelines (for example, one guideline is the 1% rule, that you can rent it out for 1% of value per month, so that you pay 300,000 for the house and you rent it for 3000 a month--and that is just one starting guideline) then you do not buy it as a rental property.

Whether you buy it as your own property and keep it rented to keep it sidelined for you, with someone else there paying utilities, etc., is another question.

The house we rented out was in that latter category. It was in another state and it was already rented out.

The tenant stopped paying rent. Then, the tenant broke in after he was no longer there and stole our tools. Then, the tenant took his parents prisoner at gun point and holed up in the house.

(Can you tell I am not a fan of owning property in another state?)

If I were to landlord again, I would get a property manager and I would have nothing to do with the tenants.

One problem with getting the house you love and then renting it to someone else is that it may become damaged by them. Or, it could work out fine.

We flipped two houses and that worked out okay--one we lived in while fixing it up, and one we didn't. We did not make a ton of money on either but it was fun and interesting and creative and I really enjoy working on houses. But it was also stressful when it came to selling, and I took less money so that I could get the money out of it to give to one of my kids, who needed it for a downpayment on his own house. So we have not made much money in houses but we have always had nice places to live and covered our costs and moved on to the next property, no huge regrets, I guess.

Our situation is so different than yours--if I had 850 equity in Bay Area house and 3 more years until I could move, I would not not buy the other house; I'd put the money in something safer if I was worried about the stock market, and I'd do my buying in 3 years when I was ready to go.

Another book I would highly recommend for you guys is The Happy Couple's Guide to INvesting in REal Estate, by Chakib and Jihan Jaber. It has another take on the whole question and they actually recommend traveling to a different area to invest, exactly what you are doing. It's a fun read and very thought provoking.

But read, read, read!! There is so much out there, and it's so easy to do the background reading and you may find you want to do something or you don't, just from what you learn in your reading.

[Tybee]

A simplified distinction-- people invest in real estate for income, and they invest in real estate for appreciation. It sounds like you are seeing this possible purchase as the latter?

[iris lilies]

Not really. I assume both real estate and stock market can go either way. I guess I'm really wondering if real estate would be just as likely to produce a decent return. We will need a house in about 4 years, if the odds are about the same, would it make sense to buy one now when we have the cash for it?

I don't know. Is that a moneymaking effort? I'm confused now.

p.s. When I bought the house we're in now, it was certainly not to make money. It was a money pit. I did it to help my parents. Dh and I have put a lot of money and work in to it and just by luck and chance, we now have about $850k equity in it. I have zero experience in real estate investing. Same with stock market. We just kept putting money in, we gained some and lost a lot, and now it's miraculously added up to quite a bit. All luck and chance. Zero talent or skill.

There is no monolithic “real estate” investment. Each property needs to be analyzed for investment potential.


If you aren’t so much into looking at it as an investment, then the comments about long-distance landlording and impact on your life are more relevant than making a business case.

[Geila]

Tybee - thank you for all the great info. It gave me a lot to think about. If the 1% rule applies, then the house would not make the cut, but then I don't know very many situations where that would work out. 1% of value is quite a lot.

The idea of researching it all does not appeal to me, so I'm taking that as a good indicator that it will be best to wait until we're ready to move. It makes it easier that another nice listing just went on the market at a much better price, so I'm feeling better about letting the other house go. There will always be nice houses. I remember reading that about the stock market too, somebody said, "There will always be opportunities." and it makes me feel better when we miss out on something big. Dh and I are not big risk takers so we miss out on a lot of opportunities. On the other hand, we lead a relatively peaceful life.

But I've bookmarked the two books you mentioned just in case. It might make for some good reading as general education.

iris lilies - you're right, it's not really an investment so much as a wish to have a house I can move to when I'm ready. We have 3 pets and it's hard to find rentals that would allow that many pets, so my thinking was that having a house of our own would make that a non-issue. And if we could make some money at the same time, well, that would be just dandy. But we don't have the personality for landlording, and with it being a seller's market in that area at the moment, it goes against the advice of buying when everyone is selling. If the market continues to rise and housing is much more expensive when we buy, well, that's just life. How long did you think about buying before you bought your Hermann house?

[razz]

Gella, you are wise to know yourself so well.

[iris lilies]

I looked at real estate online for quite a few years before I settled on Hermann. We bought a few months after seriously looking and it was the same house we looked at months before. We were looking for a weekend house however and we didn’t decide to move there until sometime after we bought it.

we are still two years-ish away from moving.We just had our first proper meeting with our architect 10 days ago.

[Geila]

How exciting! What made you decide to move?

[iris lilies]

How exciting! What made you decide to move?

we have 1 acre at our Hermann house. We are big gardeners. In the city we have tiny plots of land and have strung together several over past decades to bet enough harden space.

pluse, all of our closest friends have moved. We still have many friends here but the A-Team is gone.

[jp1]

you have to run the numbers, make the business case, to see if it is a money making proposition.

Since you tied, in your initial post, your stock market investments to this rental idea, I assume you are viewing it as a moneymaking effort.

Since Geila also talks about wanting to make this their permanent house my thought was (and I'm possibly projecting here since I assume we're talking retirement) "if Mr. Geila was retiring today would they buy this house?" If yes, then the question of renting it out just becomes "will they potentially suffer all sorts of crud from having renters in the house between now and the time they want to move into it themselves and can they handle minor financial woes associated with owning rental property?" Current value vs. four years from now value seems less important if the goal is "Geila and Mr. Geila want to live in this house but just can't move today."

All that said, I personally have very little desire to be a landlord. We haven't settled on where we want to move for retirement but even if we had it would take a REALLY awesome piece of real estate to convince me to buy a home in that city today and rent it out until we were ready to retire and move there. For me I'd rather keep my assets growing in simple assets like stocks and take the risk that it would cost more when we were actually ready to retire and move.

[flowerseverywhere]

A lot depends on luck. A good house in a good location can be a very good bet. However , never forget there are many things out of your control. People have mentioned troublesome renters.

We had had a lovely house in a nice town. We sold it having no idea in three months after we moved a major brewery in our town would close. The young couple that bought the house were townies with no intention of moving, but they could have been in a pickle if they had to move as they were probably upside down for a period of years.

You noted the advantages of family to help manage the property and know the rental possibilities. That is a big plus instead of just being an absentee landlord. Would it be an economic hardship if for some reason it was vacant half the time? It can happen.

In your heart you probably know what what you want to do. We have never owned more than one home at a time as we were risk adverse after the unpredicted brewery closing incident. But on the other hand we had tremendous appreciation in another house by sheer luck. A few years after we bought the house we live in, shopping area with a beautiful grocery store, a few nice restaurants, movie theater complex and huge gym was built about a mile away with very easy access by foot or bike for us and some neighboring houses have been sold for a nice profit. The area previously had some struggling businesses that were converted in the process to profitable ones. We don’t intend to go anywhere, but sometimes you are in the right place at the right time.

[catherine]

Tybee, that is a crazy experience with your tenant who broke in and stole and even held a hostage in your house!! That's another great point for Geila--you may think you have a great tenant until.....

In our case we wound up with a squatter we didn't even know we had--the people on the lease had sublet one of the rooms in MIL's house to her, and she simply didn't get out when everyone else did. In fact she refused to leave, and it cost us thousands in legal fees/lost selling time to evict her, and all the while we were not allowed to go anywhere near the house, even when drug dealers were making drops to her on a daily basis.

[Tybee]

Tybee, that is a crazy experience with your tenant who broke in and stole and even held a hostage in your house!! That's another great point for Geila--you may think you have a great tenant until.....

In our case we wound up with a squatter we didn't even know we had--the people on the lease had sublet one of the rooms in MIL's house to her, and she simply didn't get out when everyone else did. In fact she refused to leave, and it cost us thousands in legal fees/lost selling time to evict her, and all the while we were not allowed to go anywhere near the house, even when drug dealers were making drops to her on a daily basis.

Catherine, I had forgotten that horrible, horrible saga-- it is unbelievable what it took to get that woman out, really an eye opener. And so unfair that you had to pay all that money and not be able to go near your own house. Kind of reminds me of that movie Pacific Heights-- maybe every potential landlord should have to see that.

But I know many people have normal, positive experiences with renting, so don't mean to be negative here.

[razz]

Renters in Canada are growing marijuana/cannabis. Privacy laws prevent landlords from knowing about this until the renter leaves or some other event triggers the awareness. The houses are later so damaged from high moisture and overloaded electrical wiring that major reconstruction is required to bring back up to code. Those houses are then noted as having grown cannabis on the real estate listing.
Cannabis may be legal in Canada but the inability to know or lack of monitoring by legal authorities for known grow-ops are reducing the rental openings as landlords fear renting and are selling their properties.
Real estate ownership has so many variables and consequences out of one's control.

[iris lilies]

The film Pacific Heights is my second favorite cautionary tale about tenants from hell.

My favorite tale (this one a true story) was circulated on Mr. Money Mustache a few years sgo. While I wont have the details right, the general gist is: a man bought a house. It had a tenant in it and the lease was up. Tenant wouldnt leave. Court battles ensued and the tenant stayed, free of rent, for about three years. He was experienced in this game. The jammed up cpurt system worked in his favor.It was thought that his attorney fees were about half of the cost of rent, which is why he continued to act this way. He had money, he just didn't want to pay it to rent.

This was in California. The film Pacific Heights was about San Francisco tenant rights. Our friend left SF in part due to escalating costs of landlording in the tenant friendly environment there.

[catherine]

But I know many people have normal, positive experiences with renting, so don't mean to be negative here.

Absolutely, but it did take the glow off the idea that being a landlord would be something we'd like to do. This falls under the long chapter: "My Real Estate Mishaps"

[pinkytoe]

Real estate ownership has so many variables and consequences out of one's control.
I think this is key. I will never be a landlord again after our unexpected experiences. For us, it was not worth the headaches. I know too that in contemplating a return to Texas that prices are mostly out of our reach in just three years time. It is sad to me that houses have become mostly investments rather than HOME. Many of the little cottages in this city are now AirBnBs thus eliminating housing stock for people who actually just want to buy a home.

[Teacher Terry]

When we lived in Kenosha we bought the house next to my parents. The owner knew us well but had moved out and rented it to this couple we knew well. They had wanted to buy the house and were mad so refused to leave. They were a very fussy kid free gay couple which we knew. The place was immaculate. We were moving from out of town and I had my 3rd child due in weeks. When reasoning failed to work we went over there with all the kids and said here’s the deal. We are moving in on Xmas eve with all our stuff. If you are still here hope you love kids and messes because we are moving in and we are not kidding. We had the keys of course. They were out when we got there.

[Geila]

Tybee and Catherine's experiences alone should be enough to discourage any would-be landlord! What a nightmare.

TT - that is hilarious!

[rosarugosa]

That is a great story TT and Geila, the vibrators on the dish drainer - oh no!

[JaneV2.0]

I had a friend who had a stately old rental in Portland, complete with Craftsman-type molding and fixtures. When his tenant stopped paying his rent, eviction proceedings began. Finally, when it looked like he was going to have to move on, his renter ripped molding off the walls, piled it up in the basement, and set fire to it on his way out the door. He hadn't reckoned with the outstanding air-tightness of the structure though, and the fire promptly went out. At least that was the story I got.

My sibling had pretty good luck though, renting their house through an agency, with no real problems.

[Geila]

That is a great story TT and Geila, the vibrators on the dish drainer - oh no!

A few days ago I started getting a bunch of property management ads on my facebook page, presumably from my post on here because I haven't looked at any online. I wonder what will show up next!

[JaneV2.0]

Oddly, I have a barrage of real estate ads incoming. Mostly $700K condominiums. Obviously, they'haven't done a deep dive. :~)

[happystuff]

When we first bought this house, it was a mother - daughter set up; a house with attached apartment. We had tenants and no problems. It was great! We eventually renovated into a one house unit. I am actually thinking of re-renovating back to a house and an apartment. We'll see.