It doesn't make sense for me to wait for the "bottom" if buying a 2 family...anyone agree with my logic? (flocking, sale)

[Humboldt1]

Way to throw in ASSume. Very mature.

I hope I don't end up bailing you out. 2 Years of PITI is good, but no guarantee.

I am in Chicago, not Florida.

If the place is worth $550K, it will get $550K. Clearly, it is worth less, whatever it sells for. Things sell for what they worth, not less. This is a fallacy of homebuyers and buyers in general.

With the financial crisis hitting Wall Street the hardest, I fully expect to see further declines in New York real estate, even some of those more expensive properties in which the investment banking community lives.

It is good you have separate utilities, but lets do the numbers:

$2400 P&I
+Taxes
+Insurance ($200/mth or so?)
+PMI? (maybe not if you are in some special program, but generally required with less than 20% down)

You generate $1600/mth, which helps you make your payment. Maybe a better example would be if you were to rent out both units for $1600 each, so $3200/mth. Does it cashflow or not based upon this? If not, don't buy. Remember, to work in 5 to 10 percent vacancy adjustment as well as 10% to cover building maintenance.

If this adds up to more than $3200/mth after accounting for vacancy and maintenance, it is not a good deal.

I have no idea what taxes go for in New York but I am sure others do. Do you have to pay PMI with your loan program?

Is there any sort of association fee you have to pay?

I am actually thinking of doing something similar in another 1 to 2 years to utilize FHA 5% program to buy 4 flat, but I have significantly more reserves than you (10 years PITI in cash) and I have already been doing this for 3 years (1 townhouse and 4 unit apartment building rented that I own). I also have 800 empirica. You will need at least 750 to get best financing terms available.

I put 20 percent down on both of my properties and still have equity in both, though it has gone down.

I am just concerned when I hear that you will most likely have negative equity in the house in the next 1-2 years. Don't expect values to go up from now for the next 4-5 years. We are still waiting on bottom price-wise. Sales always lead prices 6 months or so and even sales have not hit bottom yet, though some believe we are getting closer.

[mookie3333]

Humboldt,
You are right that 2 years PITI is no guarantee. NACA is a good program in that you pay no PMI, but $50 per month for 5-10 years into a "neighborhood stabilization fund" that can be dipped into to cover up to 3 months mortgage payments in case you default. 5-10 years is a long time, but $50 is close to nothing compared to $200-300 monthly PMI.

I said the place is worth $550k because the seller is trying to get rid of it quickly. They bought the house in 1966 and have no mortgage payments, probably paid less than 50k for it back then, and don't have the time and heart ache to wait around for a 100% offer. This is why they accept any reasonable offer from a seller as long as finances seem reliable. I told the seller I will close in 30 days with NACA, that's why they went with my lowball offer, which is 88% of asking. First time around, the house went into contract for 510k. Also, the Zillow's Zestimate is over 620k, even though this value to me is hardly ever accurate.

I do think real estate will drop more, but exactly like you said, in the more expensive communities where investment bankers lived- typically high-end Manhattan condos. The outer boroughs, with regular buyers, have already had prices drop ~20% in the past year or so, this is why I am not sure they will drop substantially anymore.

$2400 is including taxes and insurance- This particular property has annual taxes of ~2600/year and I have an insurance quote of 1200 per year. Again, this is included in the $2400 payment. All I would have to pay extra would be common area electric and water. This shouldn't amount to more than $100 per month. So renting out both units for $3200/month does generate quite a substantial cash flow of 700/month. The thing about NACA is that they require you to live in the home for as long as you have a mortgage with them. Without NACA, 3200/month collected in rent would probably be a break-even with 3200 in expenses, assuming 10-150% vacancy, investing in that route might result in a small loss.

One other part I didn't mention- I am single and not married so if times really get hard, i can move into the basement (which is counted as living space) and rent the first floor. Although it is illegal to live in a basement, this is an extreme plan B in case I needed it.

I hear you about negative equity. Fortunately I don't plan to sell anytime soon, like many other people do. I don't understand why people buy a property, keep it for 4-5 years, and then sell. After all, you have gained close to no equity as most of the payment was interest. I will keep this property indefinitely, so you are right that it may come down in value a little in 1-2 years, but the overall trend would be an increase in value in the long term. The only way that wouldn't happen is if the "saga" of New York City came to an end, and that is something that I, nor anyone else, can predict! At least I will be in the same boat as 8 million other homeowners if something were to happen and New York lost its appeal.

Also, I know you are in Humboldt, I was speaking of florida because thats where SKB is from. Just out of curiousity and for comparison- How much does a duplex or triplex go for in that suburb of Chicago?

[Humboldt1]

That sounds like a great program, if you can avoid PMI.

I already live in the basement of my apartment in order to maximize my cashflow. I will continue doing this until I find the next property, in which I will allow myself more living space.

I have property in Itasca, a suburb of Chicago and Humboldt Park, a neighnorhood in Chicago.

Humboldt Park 2 and 3 flats go for $150-$400K, depending on the building. The areas gets more expensive the further east and west you go. For more on this go to Chicago forum.

Itasca is fairly affluent and has few apartment buildings, almost all single family homes, townhomes and a few condos. Average townhome is about $275K and the average single family is around $400-500K.

Good luck in your purchase. You may have negative equity the first few years but it sounds like you are in this for the long haul and will be fine.

I too am a buy and hold real estate guy though I have started to think about unloading my Humboldt Park property in the next few years as the market improves as I am tired to dealing with late rents and problems from renters there. I prefer to rent to people who can actually write checks that don't bounce. In Humboldt Park, I literally have them sign their paychecks over to me pay rent in addition to cash. In Itasca, I have never had a check bounce in 3 years on rents and it is always paid on time.

[traveler4444]

You will only see the bottom in the rear view mirror. It will not be in front of you. If you want a house and are willing to live in it for at least the next five years, buy what you want now.

[esmith143]

It does not cash flow but close. I'd question the premises:

- maybe there's something wrong with the property. Make sure you do proper inspection. I don't believe in fairy tales, and the case of an old couple willing to give up 85k or more of their retirement savings just because they can't be bothered to sell the thing for market price, does sound like a fairy tale to me.

- maybe your $1600/month rent assumption is overly optimistic. Also, if things turn to worse, rents will go down and it will be harder to find tenants.

- keep in mind that there are large fixed costs associated with getting a house. It will cost you around 30 thousand in commissions to sell the thing. All of your principal payments for the first few years, and possibly some appreciation as well (if any), will be eaten by commissions when you decide that you had enough as a landlord and move into a place of your own.

- there's no way your mortgage P&I payment could be $2400. Right now, NACA web site advertises 6% 30-year fixed with no down payment. 465k mortgage at 6% is $2788/month. Add $220/month taxes, $100/month insurance, and you arrive at $3104/month carrying costs, not including utilities or maintenance. You'd be barely cash-positive if you could rent out both units for 1600 with zero vacancy.

- Don't forget that you have to pay taxes on any rent you collect from tenants. It offsets mortgage deduction. Extreme case: you rent out both units, you collect 3200/month in rent, you spend most of that money on interest, property taxes, etc; you don't get any mortgage deduction, on the contrary, you have to pay taxes on whatever's left in your pocket.

P.S. Don't do it. Look at it this way: you'll be effectively renting out one half of the property to yourself.
- You're taking on a new permanent job as a landlord of a duplex. The job will not pay anything (carrying costs cancel out monthly rent), it is possible that you'll have to put extra 100-200 bucks a month into the property. It would be very expensive to quit.
- Your initial stake in the property will be exactly zero, most likely it'll immediately go below zero.
- You will be forced to rent one 3-bedroom unit from yourself for $1600/month. Instead of throwing away 800/month on a studio, you'll be throwing away 1600/month on 3br.
- The only upside is that you're counting on future appreciation to give you enough equity to pay off commissions and make some profit.

[mookie3333]

Originally Posted by Humboldt1

That sounds like a great program, if you can avoid PMI.

I already live in the basement of my apartment in order to maximize my cashflow. I will continue doing this until I find the next property, in which I will allow myself more living space.

I have property in Itasca, a suburb of Chicago and Humboldt Park, a neighnorhood in Chicago.

Humboldt Park 2 and 3 flats go for $150-$400K, depending on the building. The areas gets more expensive the further east and west you go. For more on this go to Chicago forum.

Itasca is fairly affluent and has few apartment buildings, almost all single family homes, townhomes and a few condos. Average townhome is about $275K and the average single family is around $400-500K.

Good luck in your purchase. You may have negative equity the first few years but it sounds like you are in this for the long haul and will be fine.

I too am a buy and hold real estate guy though I have started to think about unloading my Humboldt Park property in the next few years as the market improves as I am tired to dealing with late rents and problems from renters there. I prefer to rent to people who can actually write checks that don't bounce. In Humboldt Park, I literally have them sign their paychecks over to me pay rent in addition to cash. In Itasca, I have never had a check bounce in 3 years on rents and it is always paid on time.

Humboldt1,

I found this thread from litereally 8 years ago. I just wanted to follow up. I ended up closing on this house December 2008 and kicked myself many times for buying such an old beat up house. Spent thousands of hours, and dollars repairing various parts of the house. However, financially, everything couldn't have worked out better. I rented out the other 2 units and have had 2 months of vacancy in the past 8 years. I saved up the income and bought another (old) house, in which I've started a family. The cash flow is, and has been from day 1, more than enough to cover expenses.

My advice to anyone in a similar situation - if you're young and don't have many expenses or debt, take a (calculated) risk. No one ever accomplishes anything in life without taking a risk.

[Glenn Ross]

i say go for it! But first, rerun your numbers. Then make your decision. Work with an agent who can help you negotiate a fair deal and who can recommend inspectors for you. Perhaps by the time you're my age you'll own 30 or 40 "doors."

[luv4horses]

Originally Posted by mookie3333

Humboldt1,

I found this thread from litereally 8 years ago. I just wanted to follow up. I ended up closing on this house December 2008 and kicked myself many times for buying such an old beat up house. Spent thousands of hours, and dollars repairing various parts of the house. However, financially, everything couldn't have worked out better. I rented out the other 2 units and have had 2 months of vacancy in the past 8 years. I saved up the income and bought another (old) house, in which I've started a family. The cash flow is, and has been from day 1, more than enough to cover expenses.

My advice to anyone in a similar situation - if you're young and don't have many expenses or debt, take a (calculated) risk. No one ever accomplishes anything in life without taking a risk.

So cool that you came back with a report! My first house had an apartment that I rented out and that worked out well too. Keeping your eyes wide open when taking a risk keeps things real.

[jw2]

Originally Posted by mookie3333

Humboldt1,

I found this thread from litereally 8 years ago. I just wanted to follow up. I ended up closing on this house December 2008 and kicked myself many times for buying such an old beat up house. Spent thousands of hours, and dollars repairing various parts of the house. However, financially, everything couldn't have worked out better. I rented out the other 2 units and have had 2 months of vacancy in the past 8 years. I saved up the income and bought another (old) house, in which I've started a family. The cash flow is, and has been from day 1, more than enough to cover expenses.

My advice to anyone in a similar situation - if you're young and don't have many expenses or debt, take a (calculated) risk. No one ever accomplishes anything in life without taking a risk.

mookie, thanks for taking the time to post the followup. Nice to get closures on these posts. I am happy things worked out for you!

[Mattks]

Great update! I bet it was a bit of a rollercoaster ownership, you would have been buying almost at the beginning of the housing crash right?