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Investment real estate... WWYD?
We have a bit of money coming to us in a few months. My family background is in real estate, I grew up with us owning rental stuff (apt buildings, commercial mostly) and this money will come from the proceeds of a development project on property that's been in a family trust for 20+ years.
The money is enough for some form of investment and my parents have suggested that we look into real estate possibilities. It's not enough to just buy an apartment building and sit back, but it is enough for a start in rental houses, to buy and flip properties, or to buy a vacation property and rent/use it. There are pluses and minuses to each of these ideas.
If you could choose between: buying rental houses in a college town with a strong rental market, buying and flipping houses in the same town (which continues to have relatively high growth rates and a fairly strong market), or buying a condo at the beach, 3 hours away, what would you do? And why?
And yes, I do know more about real estate investments than I'm saying here and of course we will continue to get professional advice. But I'm just wondering if anyone on here has any insights or suggestions - I think it's good to get advice from all over, and this isn't something I can ask my friends and coworkers about. Thank you for any ideas or suggestions!
Re: Investment real estate... WWYD?
I also recently came into money. It was also enough to buy property. Instead, I put in the stock market without a moment's hesitation.
IMO, real estate is not an investment. It is a cost, much like owning a car, just with a longer depreciation period. Everything will break, the question is when. There's a good deal of discussion among economists about how much of real estate "appreciation" is just prices keeping up with regular inflation.
We own 2 rental properties currently. They were not intended to be rental properties - they are our private homes that we had to rent because we could not sell. Our losses last year were stunning. Repairs to one home: $5,000. Repairs and improvements to the second home: $12,000. The latter was caused by the exceptionally wealthy, "pillar of the community," school-booster-club-supporter tenants from hell in the very nice home linked in my siggy. Do you have that kind of liquid cash available at all times? The houses rent for a couple hundred above their mortgages, but that's a drop in the bucket compared to routine maintenance and damage from tenants.
I would not tell anyone to get into residential real estate. Every single person I know IRL who's a landlord as a side job despises the constant headaches, the constant hassle, the search for responsible tenants. There are two nesties on here I know of who enjoy, or at least don't mind, being residential landlords.
Your parents' experience with commercial property is vastly different than residential. Commercial seems like a much better venture to me than residential, though given the choice, I'd still invest in the stock market over real estate.
Of your choices, here's why I wouldn't do each of them:
College rentals
Have you fully contemplated the damage that will be done to your properties year after year? I live in a college town right now. Yes, the rental market's good. But I can tell you that even my graduate-level classmates are idiots when it comes to taking care of property. They still have wild keggers, they still get drunk and accidentally knock out a window, the carpet is still trashed at the end of the year, the lawn is still a weedy, rutted disaster. What will your profits look like when accounting for that kind of wear and tear?
My neighbor moved out and rented to undergrads. The tenants thought that you were supposed to turn the water off at the base after every flush. (Unbelievable that a college student would think this, but true.) Eventually air built up in the lines and caused thousands of dollars in water damage when the house flooded. (That's not a technical description, for sure lol.) And, btw, he had moved 6 hours away and had to coordinate repairs from there.
Buy and flip
I bought property to flip when I was 23. How much ready cash do you have on hand? Do you have double the contractor's estimate available? It will always, always, always cost more than you expect. If you do this, hire multiple inspectors, not one; there is always another problem lurking. Have you spent a good long while watching Flip This House and Love It or List It? I'll say it again: there is always another problem lurking.
Vacation property
MIL owns a beach house. To let me quickly rattle off the downsides:
1) Unless you're on the west coast, your home is not safe from total and complete destruction from hurricanes. We have friends where not only was their home totally destroyed, the land their house sat on no longer exists. Yes, that's right, the land their home sat on was reclaimed by the ocean. People joke about California falling off into the Pacific? Well, it's really happened in places on the Gulf Coast. Other friends have had to rebuild their beach home three times.
2) Insurance companies are not writing new policies on the Gulf Coast because of hurricanes. See #1. Check that they are in your area. If you can get insurance, it will be astronomical. On our 1200 sq ft, builder basic house that is NOT beachfront, the insurance is $4k/year. Compare this to further north in the state where a similar home would be insured for about $800.
3) Will you make enough from the occasional rental of the vacation house to make it worth keeping the utilities, internet, cable, etc on year-round? To cover the cost of completely furnishing a second home? Do you care? You may not, just have to consider it. Will you use it more than 1 or 2 weeks a year to make it worth your while?
4) Will you have a company manage the property for you? If not, are you willing to jump in the car at a moment's notice to drive 3 hours to do maintenance? Are you prepared to spend most of your vacation time there spent in weeding the beds, replacing linens that some kid spilled red Kool-Aid on, replacing air filters, etc?
Here are some previous posts on vacation rentals. One, two
So yes, I've been burned by real estate repeatedly. And sure, you can dismiss me as the crabby, jaded lady on the nest, but I promise you my experiences are not abnormal. Good luck with whatever you decide. I'd at least consider the market - with a significant lump sum, you can get into some incredible funds.
My Pinterest
The Googlesites Paint Bio
Thinking of doing cosmetic updates to a dated home? These were our costs.
DH and I both work in real estate. I'm solely residential, and DH has worked in every facet of real estate. We have a rental property that was previously my primary residence. It's a bit of a hassle but nothing hateful.
Given the choice you laid out, I would buy and flip properties.
We don't have money to purchase an investment property so take this for what it's worth but we've definetly daydreamed about purchasing a rental vacation property if we could. Ideally we would purchase a property in a resort area that's within driving distance of our current house and rent it out for the majority of the year and reserve a week or so for ourselves in the summer.
In our fantasy land it's the perfect solution since we don't get a ton of vacation time from our jobs so it's not like we would be able to use it all the time anyways. And we despise going to the beach during the major holidays like memorial day, 4th of july etc, because of the crowds so we wouldn't mind having to skip those weekends and rent out the house. And it would be extra income assuming we could rent it for more than the mortgage, taxes, etc.
But in reality I know it's not that simple, you have to actually worry about getting a tenant, then getting a good tenant that's not going to destroy the place, then there's fixing things that will inevitably break, collecting the rent, etc. So I guess we would really have to weigh the pros and cons if we ever did have the opportunity to purchase an income property.
Lastly the idea of renting in a college town does not appeal to me at all, unless I could only rent to faculty. My BIL is currently in college and they turned what would be a gorgeous apartment into a complete dump. No permanent damage but a lot of cleaning and painting is going to need to happen before it can be rented to somebody else.
We have 2 residential rentals and I am a neutral or better landlord. We've had a condo and SFH for several years and it has been a complete breeze so far. We break even every month between rent and costs, but the depreciation on our taxes has been excellent. We have never gone one day without tenants. We got into it because of my uncle, who has had several properties for over 30 years. He said that in that time, he's only had 1 year of bad tenants, and that was under the supervision of a PM. Just like anything in life, some people will have great experiences and some will be bad.
That said, I would not pick any of your choices. Flipping is a completely different world from renting. I would never want to rent in a college town. The house is less likely to be well-cared for, and will turn over almost yearly. I also have no interest in a vacation home. You are taxed very differently on a home you stay at even a few weeks per year. I would rather spend the money on hotels or condos and have the flexibility to travel anywhere.
I think real estate can be an excellent investment. Once our properties are paid off, the rent will be almost total income. Even with repairs, it will be a significant addition to our retirement. My advice would be to purchase a newer family home, in a nice town, with the best chance at attracting long term renters. It's not fail-proof, but that's what has worked for us so far.