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Author: petrus36 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76420  
Subject: Smart idea or Not? Date: 7/17/2012 11:29 AM
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I am 52 and my partner is 56. We are looking to retire in about 8 years. We currently both have great jobs which allows us to bank about $75,000-$100,000 a year towards retirement. We would like to retire to Southern California, specifically the Palm Springs area. We are wondering if would be smart to buy a place now (for about $350,000) and rent it out until we are ready to retire? Assuming we could cover our monthly expenses, and hopefully take advantage of the real estate downturn in prices, or are we better off just investing the money in stocks and bonds? Any suggestions?
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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70846 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 11:35 AM
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It sounds as if you are well aware of the risks involved. Your strategy seems reasonable. You probably know the hassles of being a landlord. Renting the property has tax implications. You will want to consult a CPA or tax expert.

Perhaps others can tell you what the rental market is like in Palm Springs.

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70847 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 11:45 AM
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As Paul said, you seem to identified the issues. To which I would add these thoughts -

All real-estate markets are local. Even within Palm Springs I am certain some areas will appreciate more, some have had more price depression, etc. I happens the county I live is in Q1 of 2012 had an average house sale price less than 50% of the Q1 2007 price. Our specific neighborhood is is down between 10% and 15% form Q1 2007.

At some point in the next 8 years, I fully expect inflation to happen - when that does, interest rates will rise - affects mortgage rates. Depending on how fast interest rates rise and the amount of inflations equity prices may or may not increase.

Personally I would view the issue this way -- is investing in Palm Springs real-estate a good idea or not - i.e. forget your retirement plans. And don't forget second homes and rentals today generally have higher down-payments and interest rates.

Gordon
Atlanta

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Author: hockeypop Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70848 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 12:02 PM
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FWIW we looked at buying a place in South Florida about 18 months ago. We are about 8 years from both retiring and thought to rent it.

After 20% down and a very hard look at average occupancy rates, upkeep, sometimes community fees, and other expenses it turned out to have about a 3.5% return on the money invested.

Now, it could appreciate in value, or 18 months ago it probably depreciated a little from what we looked at. We had worries for condo's of community association's going bankrupt because of foreclosures and problems of tenants who might not stay (since this is a distance from where we live). Then again I'm not sure we'd want to live in THAT particular property in 8 years, OR, given grandchildren and children, that we'd still be interested at all in the area.

As a TIP-like investment 3.5% was good use of cash with the assumption that there will be appreciation in properties, you are appreciating a leveraged investment (unless you live in it forever), and some guess that rents will go up too. It also gave us an asset that probably appreciated along with the overall community in which we think we want to live, thus insuring that we could afford the market.

What will stocks do? I've pessimistic the next three to four years, but they "should" outperform over 8-10. But that's a risk too.

The negative possibility of bad tenants sometime in 8-10 years and the time or money it takes to manage one property from a distance eventually made me pass.

But for me it was close. Be very thorough in your financial due diligence.

Hockeypop

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Author: petrus36 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70849 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 12:07 PM
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Thanks all. That is why it is such a tough choice. We most likely would NOT want to live in the place after being a rental property for 8 years, but again, who knows. The question for me is, are we better off investing that money monthly in tax free bonds, or other investments rather then having the expense of the second home, and possible costs involved, late tennants, repairs, no occupancy, etc? I think maybe I am too nervous to take the chance when we need this money to grow over the next 8 years, since we have remained relatively stagnant the last 10 years in our portfolio.

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Author: sykesix Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70850 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 1:33 PM
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Thanks all. That is why it is such a tough choice. We most likely would NOT want to live in the place after being a rental property for 8 years, but again, who knows. The question for me is, are we better off investing that money monthly in tax free bonds, or other investments rather then having the expense of the second home, and possible costs involved, late tennants, repairs, no occupancy, etc? I think maybe I am too nervous to take the chance when we need this money to grow over the next 8 years, since we have remained relatively stagnant the last 10 years in our portfolio.

As you hinted, the real question is what is a reasonable expected rate of return for your real estate investment? If you can answer that question, then every thing else falls into place.

And if you are looking at real estate as an investment rather than a place to live (which you are, for now) then there is really no reason to limit yourself to Palm Springs. You can invest in real estate anywhere that makes sense.

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Author: gdett2 Big gold star, 5000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70851 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 1:36 PM
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petrus36,

I agree(as almost always!) with Hockeypop on this one.

If you were talking this year or next year, a house can be a good move.

We have been big fans of RE investing since the early 70's. However, we never bought a piece of property for investment with any structures. The taxes are much higher, insurance is needed and you increase the possible liabilities.

One factoid: We have never been interested in condos or sub-divisions. We lived in a sub-division for a while but did not want to retire in one.

When we decided on a basic time frame for retirement and an area (narrowed to Texas), we started hunting for land. We looked for about 7 years and looked at over 200 pieces of property. Although we did look at a couple places with houses/buildings, they were mostly reasons to not buy the property.

We found this place in 2003 and bought it. I did some of the dirt work for electric lines, driveway and homesite in 2004 and started construction in early 2005. I retired a couple months later and had the house finished enough to move here in September.

This property was purchased relatively close to actual retirement. That was the luck of the draw in finding it. Taxes when we bought it were $242, under $1/acre. We rented it for more than taxes.

If we had found it 15 years earlier, we still would have purchased it. It would have been less expensive. If someone came along that was really motivated to buy it, we might have sold it and looked for another place.

Buying a "remote" home introduces a level of "worry", if you will, that we did not want to have. Buying land is something we have been doing for almost 40 years and allowed us to not be totally locked in on a particular location.

Gene

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Author: StockGoddess Big gold star, 5000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70853 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 2:01 PM
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There's an "Owning Rental Property" board - you should try a cross post there.

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Author: Hawkwin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70854 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 2:07 PM
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We most likely would NOT want to live in the place after being a rental property for 8 years

Your OP seemed to suggest that this would be your retirement home.

If not, then you likely are better off buying rental property in another market - and at cheaper price. I don't imagine (but do not profess to know) that the rental income from that home (@ $350k) will be enough to offset the mortgage payment and the related owner expenses.

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Author: TwoCybers Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70855 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 2:20 PM
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The question for me is, are we better off investing that money monthly in tax free bonds,

I am of the opinion this is worse than burying cash in the back yard. Bonds can and will loose value when interest rates rise.

Last time I checked marginal income tax rates were under 100% and both capital gains are dividends got special treatment. For a period of 8 years why not look at something like Vanguard's Wellington. It has done well over just about every 8 year period since it started in the 1920s

Gordon
Atlanta

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70856 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 2:52 PM
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Personally, I would not invest in real estate, other than for my primary residence (plus a vacation home if I had money to burn).

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Author: katiewa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70857 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 3:32 PM
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Personally, I would not invest in real estate, other than for my primary residence....

For us, our single best investment was a chunk of bare land. And we recently purchased a house to use as a vacation rental that, between appreciation and rental income, will probably be at least as good. Real estate is also probably the investment we know the most about.

Kathleen

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70858 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 4:26 PM
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For us, our single best investment was a chunk of bare land. And we recently purchased a house to use as a vacation rental that, between appreciation and rental income, will probably be at least as good. Real estate is also probably the investment we know the most about.

Congrats on a job well done. I've never been able to do anything other than lose money on real estate, hence my negative outlook on it. I realize that others can and have done well.

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Author: Dwdonhoff Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70859 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 5:31 PM
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Hi Petrus,

You don't say where *you* are currently located... but you sound amazingly similar to clients I have who've talked with me about precisely the exact same question (down to Palm Springs, no less.)

Here's my 2 cents (inflation adjusted);
Directly buying & holding residential real estate is *NOT* usually good to do on a long distance basis for a *long* list of reasons, most of which can be summed up to "lack of control."

Further, a place that is acceptable to you for your retirement residence may very likely well *NOT* be the best investment for rental purposes. Choosing a place you personally like as an ownership residence, and then renting it out, is usually ineffective and inefficient. The best rental returns are made on properties in areas that are economically attractive to renters, which tends to be culturally/economically quite diferent from what is attractive to owner occupants.

Real estate investment (especially on a direct ownership basis) is a *LONG TERM* play. It basically provides an income earning, tax-advantaged hard asset that grows at roughly the rate of long-term inflation, that provides your portfolio a safe leveragable foundation (which is why insurance companies and banks use commercial real estate for the same foundational collateral purpose.)

If your conscious intention is not actually to launch a real estate holding and direct landlording business, but you think you want to participate in the generic real estate markets, stay with REITs. There are a brazillian different flavors of REITs for you to consider & choose from... they don't have the same upsides, but they also have much less control risks.

If you want extreme safety that performs better than bonds alone, use a 2-leg reset indexing strategy; Buy a discounted or high yield bond position with only enough of your investable money so that it "blossoms" back to 100% of your original available capital each year (i.e. if you have $100,000, and can get a 4% safe yield, then buy $96,154 of that portfolio, to have it return to $100k in 12 months.) Then with the remaining "discount" money from the account, buy 1-year call option on the S&P500 "at the money," and simultaneously sell a 1-year call option as far out as possible so that the selling credit, minus the buying debit, equal the amount of leftover capital you had from the safe-side bond portfolio (approximately $3,850-ish.)

This will give you the downside security of the bonds, with the market growth (upside only) within a range from the floor of zero (or wherever they set the buy/long option) to a ceiling cap (wherever they set the sell/short option.)

Luck!
Dave Donhoff
Leverage Planner

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Author: gdett2 Big gold star, 5000 posts Old School Fool Ticker Guide Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70860 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 5:36 PM
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ResNullius,

On property that you did not do well, was that improved property or bare land?

Having moved a number of times and not having a big choice in choosing the timing, our homes have bounced between a near-double in 5 years and break-even in about 4 1/2 years. The worst for selling/buying was 1979 because of interest pressure. 1984 was the easiest buy/sell. These were our homes though, not investment property.

I do not consider a home to live in as an investment. Most people buy a home for their personal needs, tastes and price point. They do not normally look at them realistically as an investment. Personal needs and tastes introduce lots of emotion into the purchase. An investment must not have an emotional tie and should be able to be liquidated when its value hits a target or hits a point where value increase going forward is not likely to happen.

Any investment has performance expectations. When they are not met, the investment should be sold. This applies to growth stocks, income stocks, income property, collectibles, precious metals or any other investment. You can't do that with your home unless you move everyone to an apartment.

I realize that for a lot of people, their home is their biggest single "investment" even though it does not really fit into the mold of a good investment. It is based upon where and how they want to live.

Gene

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70861 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 7:19 PM
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We most likely would NOT want to live in the place after being a rental property for 8 years, but again, who knows. The question for me is, are we better off investing that money monthly in tax free bonds, or other investments rather then having the expense of the second home, and possible costs involved, late tenants, repairs, no occupancy, etc?

I did buy a condo in a resort area about 2 years ago with the idea of retiring there. * It came with a tenant who was there the first year I owned it. Then I did a seasonal rental and then I took it back(in May) as a second home, still with the thought of it eventually being primary. It is in an area I have watched for about 20 years, is about 3 hours from my primary home and I have a son and close friend there who are willing to help when I need it.

I bought a short sale townhouse in the same area that closed in May and was on an annual lease before the first mortgage payment was due. It is covering itself. I am in the process of buying a short sale condo that I hope to have in hand before Nov so I can go with an annual or a seasonal lease.

Both the townhouse and the new condo may be rented on a nightly basis if I want to go that route. All I want from these properties is that they cover themselves.

I have stocks,etc and feel like these give me some additional diversity. I wouldn't recommend for everyone and I definitely wouldn't have done it without help right there if I need it. With each thing I buy, I do think "could I live here?" to do a final evaluation.

Just some other thoughts.





*I work about 25% time as a consultant and the lack of flights was all that kept me from moving there permanently. I am doing a business trip leaving from there in August but my daughter,SIL and almost grandson will be moving <hour from my primary home at the end of the year so that does change things again. I'll keep something thataway - at least for awhile.

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Author: ferjen Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70862 of 76420
Subject: Re: Smart idea or Not? Date: 7/17/2012 10:42 PM
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Land lording sucks. Long distance land lording sucks worse. Plan on spending a lot of your spare time over, how long was it? 10, 12 yrs? I'm personally looking for land that I can sell at a later date to play the real estate market. Maybe you can look at buying property and then building on it later or selling it later to purchase a home elsewhere in the same town? We built both our homes and we liked that everything is brand new and warrantied. To each his own...but we've found building a home is comparable to buying an existing home if you can wait a few months for the construction to occur. It's kind of fun to watch your home rise out of the earth.

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Author: petrus36 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 70864 of 76420
Subject: Re: Smart idea or Not? Date: 7/18/2012 12:18 PM
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Thanks Dave. We are currently living in Lexington, KY and plan on staying here for 8 years until we are ready to retire to Palm Springs area where I am originally from, and my parents live down there. We were thinking of buying a place in a Del Webb or senior living place, where there are a lot of people not interested in owning, but doing long term rentals. After hearing everyone’s thoughts on it, I guess we are better off just investing the money we are saving each month in other opportunities.

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