Purchasing a House (20 Years Old...). Advice?

C

CalPoly10

macrumors regular
Here's my situation. I have about 3 more years of College left in Central California, and I've been working various internships for 1 year (taken a break from school). I've saved up about $25,000-$30,000 in the mean time.

I pay about $600-$700 for rent in my area, and figure that the money goes to waste. That's $7200-$8400/year that gives me nothing of worth.

I've been looking at homes in the area to purchase. There are enough students that renting out bedrooms is absolutely no problem.

I know of a few 5 bedroom houses that will be on the market for $500,000 in the Summer. I also have a family friend who is very wealthy, and an aspiring businessman. I know that I don't have enough money for a downpayment on a home, but I believe he will loan me the money under certain conditions where I pay him back a certain percentage for every year.

The plan is to purchase a 5 bedroom house, after taking roughly a $75,000 loan from my friend. That puts me at a $400,000 mortgate, which equates to $2400/month in mortgage payments.

I can rent out the house for a total of $3250/month, including my personal payment. After 3 years, I could resell the house, hopefully (and probably) for even more than I purchased it, and I would have brought my mortgage down about to about $320,000. If I sell the house when I graduate, than I get my original investment, my roomates investments, and the laon backer's money back.

Profit?
 
Been there, done that, quadrupled my investment :D

Bought a flat in Edinburgh for £50k with a £5k down payment in 1997. Lived in it for 3 years of Uni whilst renting out 2 rooms. My effective rent was a tiny £40 a month to make up the mortgage payment. Sold it when I graduated in 2000 for £70k. Of course it was only possible as my parents were willing (and able) to act as guarantors on the mortgage...
 
"Hopefully and probably", you should look at this. Note, the chart is inflation adjusted.

Something else you should think about... Who is going to be your guarantor for the mortgage? Lets ASSUME you will get about $3250/month from renting out, that leaves $850/month after your mortgage payment. How much are utilities, house maintenance and property taxes? How/when are you going to pay your friend back?
 
Honestly, I wouldn't touch this deal. There are way too many variables in the whole deal. IF you can rent the house, and IF you can sell it, etc. What happens when one of those renters doesn't pay? You get stuck with covering their part of the mortgage amount, which would be a bit difficult while still in school. Also, think about all those people who bought houses three years ago in CA, while thinking they would sell it for a nice profit after three years. Many of them are looking at values that are far below what they paid for the house. Granted, I think we are near the bottom on real estate, and they will probably go up in 3 years, but it is far from guaranteed.

Here are another couple of things to consider:

1) Relationship wise, borrowing money from friends and family is often a bad idea. It just puts a different light on the relationship. What happens if you don't get a job or your renters default, and you are unable to pay your friend back? IT just makes things...weird.

2) Given everything that has happened with the economy lately, you may not even be able to get that mortgage. Companies that are actually still loaning out money have severely tightened up their requirements. The days of easy financing on homes are over. Unless you have a really good job and income, you probably won't get approved for a mortgage, especially one that big. Easy and "creative" financing of mortgages is one of the things that got us into this mess.

Finally, just keep in mind that renting isn't a sin. There is nothing wrong with renting, as long as it isn't a permanent way of life. This whole idea that renting is a waste, and that everybody should own a home is another thing that got us into this whole economic mess we are in now.
 
heehee said:
"Hopefully and probably", you should look at this. Note, the chart is inflation adjusted.

Something else you should think about... Who is going to be your guarantor for the mortgage? Lets ASSUME you will get about $3250/month from renting out, that leaves $850/month after your mortgage payment. How much are utilities, house maintenance and property taxes? How/when are you going to pay your friend back?
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Well, the businessman I know would be the guarantor on my mortgage.

Utilities will be paid for by the tenants. House maintenance shouldn't be much, and I will fix most things myself. I have some background in carpentry.

The property taxes should not be in the realm of $850/month, I am thinking much less.

In fact, the average for rent is $3500/month on a 5 bedroom, I under evaluated with the $3250.

steve2112 said:
Honestly, I wouldn't touch this deal. There are way too many variables in the whole deal. IF you can rent the house, and IF you can sell it, etc. What happens when one of those renters doesn't pay? You get stuck with covering their part of the mortgage amount, which would be a bit difficult while still in school. Also, think about all those people who bought houses three years ago in CA, while thinking they would sell it for a nice profit after three years. Many of them are looking at values that are far below what they paid for the house. Granted, I think we are near the bottom on real estate, and they will probably go up in 3 years, but it is far from guaranteed.

Here are another couple of things to consider:

1) Relationship wise, borrowing money from friends and family is often a bad idea. It just puts a different light on the relationship. What happens if you don't get a job or your renters default, and you are unable to pay your friend back? IT just makes things...weird.

2) Given everything that has happened with the economy lately, you may not even be able to get that mortgage. Companies that are actually still loaning out money have severely tightened up their requirements. The days of easy financing on homes are over. Unless you have a really good job and income, you probably won't get approved for a mortgage, especially one that big. Easy and "creative" financing of mortgages is one of the things that got us into this mess.

Finally, just keep in mind that renting isn't a sin. There is nothing wrong with renting, as long as it isn't a permanent way of life. This whole idea that renting is a waste, and that everybody should own a home is another thing that got us into this whole economic mess we are in now.
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I will have absolutely 0 problem renting the house out. Where I live, people are always struggling to find housing. Houses are rented out the DAY they are posted for rent.

The man who will loan me the money for the house (downpayment) would also be the guarantor on my mortgage. He has extensive credit history, and has a line of credit in the tens of millions right now. I don't think it would be an issue.

Furthermore, I doubt I will have problems getting a job. I am an Engineer, and I have honestly had so many job offers that I can't keep up. I've had 3 internships in the last year, all very well paid. The companies have all asked me to work for them once I graduate.
 
CalPoly10 said:
Well, the businessman I know would be the guarantor on my mortgage.

Utilities will be paid for by the tenants. House maintenance shouldn't be much, and I will fix most things myself. I have some background in carpentry.

The property taxes should not be in the realm of $850/month, I am thinking much less.

In fact, the average for rent is $3500/month on a 5 bedroom, I under evaluated with the $3250.



I will have absolutely 0 problem renting the house out. Where I live, people are always struggling to find housing. Houses are rented out the DAY they are posted for rent.

The man who will loan me the money for the house (downpayment) would also be the guarantor on my mortgage. He has extensive credit history, and has a line of credit in the tens of millions right now. I don't think it would be an issue.

Furthermore, I doubt I will have problems getting a job. I am an Engineer, and I have honestly had so many job offers that I can't keep up. I've had 3 internships in the last year, all very well paid. The companies have all asked me to work for them once I graduate.
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I have no doubts you can rent the house very quickly. The problem with being a landlord is making sure they actually pay everything. Your mortgage company won't care that you have renters who didn't pay you. You will have to come up with the difference in rent and utilities. I'm not saying every renter will be a problem, but problems do happen, especially with so many parties involved.

So, the person loaning you the money for the downpayment will also be the co-signer on the mortgage? I would be really uncomfortable with that arrangement. But, I suppose that is just me. One of my general rules in life is I don't borrow money from friends or family, and I don't loan money to friends an family. There have been too many relationships ruined by that sort of thing.

As far as the job: Think about this. Microsoft and Google, two companies which have never had layoffs, have laid people off in the past few months. This economic situation is causing strange things to happen. Yes, engineering (depending on the type) is a pretty stable and employable field, but that doesn't guarantee anything. Even if you do get a job, it may be in another part of the state, or in another state entirely. Being a landlord when your tenants are in the same town, or even in the same house is a hassle. Being a long distance landlord is huge pain in the neck.

Look, you have done an amazing job. Most 20 year olds don't have nearly $25k in savings. Heck, most 40 year olds don't. But being in school and dealing with all the transitions that come along with that in the next couple of years is enough to deal with. I would prefer to keep it as simple as possible, without having to worry with mortgages, renters, etc. Look at it this way: Keep plugging away with rent, and continue to build your savings, and when you do graduate, you can buy a house on your own. No renters, no landlording, no hassles.

One other note: Check out the Dave Ramsey show. He continually has people calling in who can't sell their homes for what they owe, because it has lost 20-30% of its values. Or people who can no longer afford their house because they got laid off.
 
I think you are still stuck in last year when the economy was still going well and you are "hoping" things will work out. :eek:

Unemployment rate reach 9.1%

My point of the $850/month you have left is very little compared to what you owe to your friend. How/when are you going to pay him back. You "hope" the housing market will keep going up like a few years ago when you sell it in 2012? Or "hope" you can find a decent job right away after you graduate in 3 years and save up for another 1+ year before you pay him back?

3 years is a long time. Never spend money you don't have now and hope things will set it's course. It's one thing to lose money on a house, but it's another to lose a friend especially because of money. Good luck on whatever path you choose. :)
 
steve2112, I knew you were a Dave Ramsey person just from the advice you gave in your first post. I'm originally from Nashville, and he knows what he's talking about.

To the original poster, I've been where you've been and my father is a Realtor and currently owns over ten properties he rents out for income. We discussed buying something when I went to school and using roommate income to offset expenses. It sounds like a great idea, but as others have mentioned there is a lot of risk involved. We ended up not doing it and we were looking at a much lower priced market than you are in currently. I did rent out a couple of places and served as the "property manager" of sorts. It was never simple. Roommates flake, they lose their job, the car breaks down, etc. etc. I even had one come in after getting married over the weekend and he wanted the new wife to move in right away and be put on the lease. :eek: Also consider the story of my friend here in Dallas. He and his wife bought a big house in an effort to save their marriage (make a new start) and ended up divorced within months. He thought, no big deal, Dallas is a great market for roommates. In the last three years he has burned through people like crazy and it's been one problem after another. One roommate broke crazy and physically attacked him. Another committed suicide in the house. Several have just left him in the lurch without paying for anything. One pleasantly stole a bunch of stuff on his way out.

The thing about being a landlord/property manager is it magnifies risk. When you are doing that with your own money and you're prepared for the difficulties with an emergency fund then you have a great chance for success. From the sounds of it your friend/benefactor is taking all of the risk in your situation and as others have said that can wear thin on a relationship. Just be careful and decide what is more important to you, the friendship or the business opportunity.

By the way, there's a part of your plan that I don't understand. You say your friend is going to loan you the money for the down payment and then co-sign the loan as well. Would that not mean that when you sell it three years later he is entitled to a part of the profit made. He's taking all the risk and he just gets his loan paid back? :confused: If he's truly the savvy businessman you describe it doesn't sound like he would do such a lopsided deal.

One option you might have is to pitch the idea to him as an investment and work out a salary for you to be the property manager. Then you live rent free and get paid for making sure the house stays full of tenants and is well taken care of.

Just my .02$, it's free advice do what you want with it and best of luck.
 
Lots of negativity in this thread... yeesh.

Here's the facts: if nobody ever took risks, nothing would ever change. We wouldn't have electricity, cars, computers... in fact, we'd probably still be living in our own filth and eating raw meat.

If you think this is a viable opportunity, I would go for it. Be sure you're well aware of the risks and benefits involved first, really consider if you're willing to accept the negative potential outcomes, and if you still want to go through with it, then do it.
 
The way I see it, there is no reward in no risk situations. Sure, I could sit on my savings, keep it in a CD gaining 3%/year, and keep working until I'm 50. Or, I can take chances while I'm young.

Selling the house in 3 years is an option. I don't need to do that. I can hold it for a bit longer, however long infact. The friend I know with the money is a business partner first, and a friend second. The downpayment on the house is going to be a loan. I will pay him back in a set amount of time, and it has nothing to do with ownership in the house. It will be our own private agreement.

If I move from the area in 3 years, I can hire a property managing company to take care of the place and collect money from the tenants. I will pay the company the $300/month they charge as well.

I just see the mortgage being paid by people like me...people that are renting. That whole idea is great. I am not paying my mortgage, someone who cannot afford purchasing a home is.

In 10 years, if I still own the place, I would bet that property values have risen, the home will be close to paid off, and I will have paid off the $75,000 initial loan. At that point, I'll be 30, and I'll have a house in my name. No payments. I can turn around and sell that house for $700,000 (assuming things turn around at a steady pace).

That's $700,000 in the bank from a $100,000 investment.
 
CalPoly10 said:
I just see the mortgage being paid by people like me...people that are renting. That whole idea is great. I am not paying my mortgage, someone who cannot afford purchasing a home is.

In 10 years, if I still own the place, I would bet that property values have risen, the home will be close to paid off, and I will have paid off the $75,000 initial loan. At that point, I'll be 30, and I'll have a house in my name. No payments. I can turn around and sell that house for $700,000 (assuming things turn around at a steady pace).

That's $700,000 in the bank from a $100,000 investment.
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You plan on paying the house off in 10 years? A $500,000 house? Good luck man. A 15 year mortgage on $400,000 at 5% equates too about $3,150 per month. If you do a 30 year you'll save about $1000 a month.

How are you going to pay your friend on his loan? I have severe doubts that anyone would loan $75k and not take payments on it for a minimum of 3 years. You'll have to be paying this guy monthly or quarterly, in addition to your mortgage payment. He'll want interest as well. To pay it back to him in 5 years its $1400 a month if you assume a 5% interest rate, if you do it over 15 (which I doubt he'd accept), it would cost you about $600 a month. He's probably not going to take a lump sum at sale, especially if you're talking about 10 years. I also doubt that he'd take a 5% interest rate or that the bank would give you a 5% interest rate.

So, if you assume a 5% interest rate all around, your get a $400,000 15 year mortgage and you're partner takes a 5 year payoff schedule, you're in the hole for about $4550 per month, not including any utilities, taxes, insurance, or other needs.

Even if you assume a 30 year mortgage at 5% with a 15 year period of time to pay off the loan from your partner, you're in for about $2750 a month not including any of the above, which will cost you more than a few hundred a month. This is making the huge assumption that your partner will loan you $75k for 15 years at the rate of 5%.

On a 30 year you would still owe about $380k at the end of 3 years and on a 15 year you would still owe about $340k.


Ultimately, if you really really want to do this you need to sweeten the deal for your partner. No one is just going to loan you $75k, not without substantial payments and interest or a percentage of the sale of the house.

This is certainly possible, but I think you underestimate the headaches associated with renting a property, keeping tenants, getting paid by tenants, maintenance, etc. As well as the cost of insurance, property taxes, and various other items.
 
Very important if you have not done this already. Building inspection for termites!!! Make sure everything works lights, taps shower etc
 
Demosthenes X said:
Lots of negativity in this thread... yeesh.

If you think this is a viable opportunity, I would go for it. Be sure you're well aware of the risks and benefits involved first, really consider if you're willing to accept the negative potential outcomes, and if you still want to go through with it, then do it.
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Not negativity, just real life experience responding to someone who asked for advice. In truth, what you said is really no different than most of us who have responded. Do your research, make a choice, and be willing to live with the consequences. Some of us simply added our own stories/experiences to better illustrate our opinions.

However, the difficult part about the OP's situation is he's not the only one taking the risk. CalPoly10 if your friend does co-sign on the home loan and, heaven forbid, something does go wrong then the mortgage company won't just come after you, they will go after him equally as hard.

I'm not trying to discourage you. Your thinking about real estate investing being a good way to make money is correct and your enthusiasm is awesome. However, please know that people who are usually successful in these type of ventures have some capital set aside to help when problems do arise. If I understand your plan correctly, all of your savings will go into the down payment and you won't have anything set aside for emergencies.

There's nothing wrong with taking risks, but there's a big difference in taking calculated risks and "throwing caution to the wind." This is a huge decision. Don't rush into it and do your homework. Talk to other investors in the area, speak with realtors, mortgage advisors, etc. etc.. And have a plan for what to do when something goes wrong, not if something goes wrong.

Again, good luck, I wish you the best.
 
CalPoly10 said:
The way I see it, there is no reward in no risk situations. Sure, I could sit on my savings, keep it in a CD gaining 3%/year, and keep working until I'm 50. Or, I can take chances while I'm young.
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Just one piece of advice, that no one seems to follow - start small. I started with a 1970s house which I bought for cash for $25k (was on the market for $35k) - fixed it with basics like paint and carpet and a few things - for $1500 or so - and now it rents out at $750/month. After taxes, maintenance, etc - it's a nice 18% return so far. I am happy with that.

It's a lot easier for renters to pay $750 than $3250 - of course there are rich renters but in this economy, I would rather stick with scenario that a $750 payment is easier to make than $3250

I would rather buy *low* priced homes (after analyzing rental data in that area of course) This way even if no one rents it, I don't owe anyone anything. Everything is paid for - you sound like you have a good plan but make sure you plan for a worst case scenario - please. You sound like a very optimistic person, which is great, but such people rarely plan for the worst.. and inevitable, when it does happen - everything just crashes.

Good luck with your venture though, hope everything works out great. :)
 
Little confused here.. how did you get the $2400/month payments for the $400,000 loan? I am assuming a 30 year loan, and even if it is at 5% - it comes to $2800 approximately a month. Property taxes on a $500,000 home would be around $500 a month - so total payment would be $3300 a month.

Add insurance to this.. and I don't see where you're making any profit :confused: Or is my math messed up (I just slept for 4 hours only lol)
 
Demosthenes X said:
Lots of negativity in this thread... yeesh.
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CalPoly10 said:
In 10 years, if I still own the place, I would bet that property values have risen, the home will be close to paid off, and I will have paid off the $75,000 initial loan. At that point, I'll be 30, and I'll have a house in my name. No payments. I can turn around and sell that house for $700,000 (assuming things turn around at a steady pace).

That's $700,000 in the bank from a $100,000 investment.
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I think this is the reason why we are negative about it. I see someone else did the math for him, so I won't bother. ;) Anyway, good luck. :)
 
I wouldn't do it. Don't buy what you can't afford. Also, friends and money don't always mix well. Also, yeah right now you're "wasting" money on renting, but you don't have to worry about things breaking and paying to fix it. You also probably don't need a 5 bedroom house being right out of college. That means higher taxes on you. You could rent them... until all your friends decide to move on and move out and then you're stuck.
 
Music_Producer said:
Little confused here.. how did you get the $2400/month payments for the $400,000 loan? I am assuming a 30 year loan, and even if it is at 5% - it comes to $2800 approximately a month. Property taxes on a $500,000 home would be around $500 a month - so total payment would be $3300 a month.

Add insurance to this.. and I don't see where you're making any profit :confused: Or is my math messed up (I just slept for 4 hours only lol)
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I get about $2150 per month at 5% on a 30 year, not including any applicable taxes doing the calculation on my TI-83. Most of the internet calculators come up with the same. Maybe the $2800 includes taxes and assumes PMI is needed?

On a 15 year the TVM calculator gives me about $3150 per month.

Doing a backwards calc I am guessing that he assumed a 6% interest rate over 30 years.

Certainly if he intends to have if almost paid off in 10 years he'll need to assume a 15 year mortgage, which I don't belive he did. Taking into account a 15 year mortgage, payments to his friend, insurance, taxes, and maintainence I don't think it would be extremely feasible, but I've been proven wrong before. Its certainly slight more possible with a 30 year mortgage, but still pretty much dependent on whatever terms his friend is willing to negotiate for the $75k loan.

It might also be somewhat of a longshot that the bank will be willing to lend you that much cash at a favorable rate, even with a cosigner.

I feel there is too much risk involved in this. There are too many variables and too much banked on future events that may or may not occur. You'd be better off waiting until college was over, using the the amount you've saved and purchasing a house that you can make payments on yourself. Then get into real estate investment and renting if that is your intent. I don't think we're close enough to a complete economic turnaround to start banking on an increase housing prices, large amounts of tenants willing to pay high prices, etc.
 
Don't cut the margin too thin, you will get some deadbeats, and students are tough on the property.

Also if you are the resident manager, you will need to get some liability insurance along with the general insurance on the home.

While doing this with an LLC would be the best, it likely is harder to get financing for that without a personal guarantee (and the minimum LLC tax in CA is $1000 a year.) So it likely is cheaper to run naked without the LLC and bump the liability insurance -- especially since any bank is going to want your personal guarantee as well as the business partner leaving the liability for renting rooms out something that covered with extra insurance.

Edit: if his name is on the leases and the title, the LLC seems like a better idea to prevent lawsuits against him.
 
If you're 20 years old, I think you should do it. There is a limited window of time in your life where you know everything, and you are firmly in it. By the time another year or two passes, you may have developed the hesitance that comes with age. And then, while you hesitate, some know-it-all youngster comes along and jumps on your deal.

So don't hesitate. Seize on your youthful optimism and jump on it.
 
ErikCLDR said:
I wouldn't do it. Don't buy what you can't afford. Also, friends and money don't always mix well. Also, yeah right now you're "wasting" money on renting, but you don't have to worry about things breaking and paying to fix it. You also probably don't need a 5 bedroom house being right out of college. That means higher taxes on you. You could rent them... until all your friends decide to move on and move out and then you're stuck.
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I am agree with this point, you don't need that 5 bedroom house and you can't afford it.
 
jizwood1 said:
I am agree with this point, you don't need that 5 bedroom house and you can't afford it.
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There is always trying to win the L.A. Lottery by falling down the stairs, stepping in front of your landlords car, or claiming discrimination by your landlord.
 
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