Home buying dilemma

[JR]

I would appreciate any advise from experienced members. I am facing a dilemma buying our first home. This is our current situation:

Just finished fellowship, 1 year and 4 mo into practice. We moved to a high cost of living/high tax state to start my first job and professionally I feel it has worked out great. Married with two kids, one just started school last year and the second will be starting in one year. Wife not working, as we have decided it is best for the kids to have her around at least one more year (instead of a stranger) until they are both in school, rather than having a net extra income of maybe $50-60K. No family around to help unfortunately. So our present income is ~ 300K, can potentially increase to ~ 350K next year. We both desire to be closer to family, less or no state taxes and lower cost of living. At the same time, our lifestyle now is great, with plenty of time for the family and new hobbies, more than easy call schedule limited to my specialty, residents in-house to take care of urgent problems, excellent public school system, very low crime, progressive and multicultural environment for the kids to be surrounded of. Have actively tried to find a different job at another state, but have not found a better opportunity yet, and might not find a better deal than what we have. Financially, our net worth went from ~ $75K to $300K since started working here. Contributing the max to 401K with matching and additional core contribution by my employer; to a 457b; to personal and spouse Roth IRAs (backdoor); and ~ $10K/year to 529 College Saving Plan to get the max state tax deduction. We have ~ 60K in cash.

So, now that we have decided we are going to stick around for at least the next 5 years: a 4 BR 2 bath <1 acre average house built in the 90's, usually in need of some renovations (definitely not a "doctor's house") runs for around $600K, with property taxes ~ $13K/year. I wouldn't want more house than that anyways. We have been renting a condo built in 2008 for $2500/month plus utilities (another $200). These condos have sold for $320K to $350K in the last year, with historical prices $300K-$320K, yearly taxes of ~ $7K. The rent in this area is very difficult to find due to the great public school system. 2-3 BR houses rent for > $2900 and older condos are renting for $2600.

It would make financial sense for us to buy after the second year of renting here. I have run the numbers by a couple of online tools. I hate the idea of buying the aforementioned $600K houses in the mist of a sellers market. I think I would rather buy one of these condo units like the one we are currently renting, since we are perfectly happy in one of them, even as tenants. I believe I can get it for ~$300K (Zillow estimates them at ~ $310K), putting at least 20% down or $65K, would hope for a 3.5% or better 15 year fixed mortgage with P&I payments of $22,800 per year. HOA fees are $270.

Questions:

1. Should I buy the condo now and look at it as a potential RE investment if we buy a house in the future, perhaps in a better market? Right now if we had to rent it for $2600, it would give us a NOI of ~ $17K/year with a cap rate of 5.7%, not great. Moreover, I calculate a very negative levered cash on cash return. Perhaps this could be much better in 5 years?

2. Or, does it make more sense to wait and see if the market gets better (doubt it) or just buy the $600K houses in this district?

Fortunately for me, my wife is happy either and the kids just want to have a dog

Sorry for the long post, but I wanted to give as much insight into our situation as possible.

 

 

 

[Peds]

buying is a lifestyle, not investment.

buy what you want.

you can afford either option (its 2x your income, very respectable).

i would say you can always buy the condo later....but why be a landlord with a full time job and kids?

[Dont_know_mind]

It sounds like you are 1 year advanced from the chap from a previous thread that was responded to recently:

https://www.whitecoatinvestor.com/forums/topic/living-in-a-hot-housing-market-do-i-buy-now-help/

Maybe read that also. Someone told me once, buy what you can afford and maybe that is not bad advice.

If you buy a condo and you need a house eventually, then you are still short at least half a house. Also it may not be an accurate hedge. The condo may go down and the house you want may go up in your time period. So then you will feel even more pressured about not buying the house.

Basically, if your problem is that you are short one house then it may be better to address that directly. Invert the situation: what is the worst thing that could happen : in 3 years, you are still renting, the 600k house is now 1.2m. Suddenly, that 600k house is a bargain and the concerns you had are not really that important. Or you buy a condo for 300k and in 3 years it is 400k and the house you want is 1.2m. Or you buy the 600k house and in 3 years time it is 400k. I guess if you wanted to be fancy you could assign probabilities to each of these outcomes. But at the end of the day we don't know what the true probabilities are and we could well be wrong.

People are afraid of downturns, and that can certainly hurt you if you are too leveraged, but I think being short in a buoyant market can hurt you as much or more. I had the painful experience of putting off buying a house because I thought it was too expensive and wanted to wait for a downturn. I regret not purchasing at 1.4m as I ended up having to buy a comparably worse place 3-4 years later for 2.6m. That wasn't my first property though, but it definitely taught me the psychology behind why people buy at the top.

Price is all relative. Being short 1 house is painful if it goes into full on speculative frenzy mode. Half of my posts are in response to this question as I had this nasty short squeeze experience with housing, so feel free to look up my previous posts. I am probably biased due to my previous experience. Others may have a different view and you have to figure out what is right for you after weighing up the positives and negatives for your particular situation. If after weighing up the risks and benefits of buying a house, you decide to, then find a way to enact that plan.

 

 

 

[lost]

JR wrote:

if the market gets better (doubt it) or just buy the $600K houses in this district?

 

 

 

 

Click to expand...

The best market is when you are ready to buy. Do not time the market.

[ENT Doc]

Are the condo and house in the same school district? Do you think you'd be perfectly happy there when the kids are teenagers?

If indeed they are in the same school district and you are happy now and will be in the future in the condo I have a hard time believing buying the house is a good idea. The HOA fees get you something - insurance, capital fund for future improvements, etc. so it's not like that money is being thrown away. You buy that $600k home you're guaranteed to be worse off on several levels. First, you have to put more down as a down payment. You mentioned you had $60kish in cash - where's the other $60k for the 20% down for the home? Or are you planning on getting a Doc loan? Second issue is that you'll pay more every month in mortgage, insurance, and utilities, and more spontaneously for capital improvements. Third, you get to pay more in taxes for the exact same benefit of sending your kids to the same good public school as the condo owner. Lastly, the opportunity cost of the above cash flow issues is not to be ignored. Real estate typically doesn't have robust returns, even in areas with good public schools. My parents' house has gone up at a 4% CAGR over 30 years, and it's in an exceptional school disctrict. Think you can't beat 4% with the buckets of added cash flow created by the condo purchase? I'll bet you could.

[adventure]

JR wrote:

runs for around $600K, with property taxes ~ $13K/year

Click to expand...

Holy cow that's a lot of taxes. Glad I live where I do, I guess.

[StarTrekDoc]

OP, glad you're settled down and now debating the merits of investment and longer term planning while living like a resident 150+K savings per year clip --- nice.

1.  Have you really settled down?  You're happy, but are you still looking on doximity for those near family opportunities?  If truly settled down-- with confirmed right schools for these little ones and confirmed stable office setting; then you can really proceed with your calculations of the 5 year plan.

2.  Condo - the returns are fine for both ownership and conversion to rental property --- confirm the rental market is sustainable and does sound like it.  Cash flow positive and depreciating item.  Condos are slow appreciation units compared to SFH, but the payoff in a stable, good tenant is worthwhile.  It does sound like enough house for the next several years while you really build up significant funds for the next step -- SFH ownership.

--we did the incremental steps Condo- SFH - keeping the condo as rental; and procured further residential units as we built a balanced real estate and equities portfolio.

You'll have the income flow to support the next home purchase in 2-3 years.

[JR]

Thanks Peds. Sometimes what we want is not necessarily good for us.

[JR]

ENT Doc wrote:

Are the condo and house in the same school district? Do you think you’d be perfectly happy there when the kids are teenagers?

If indeed they are in the same school district and you are happy now and will be in the future in the condo I have a hard time believing buying the house is a good idea. The HOA fees get you something – insurance, capital fund for future improvements, etc. so it’s not like that money is being thrown away. You buy that $600k home you’re guaranteed to be worse off on several levels. First, you have to put more down as a down payment. You mentioned you had $60kish in cash – where’s the other $60k for the 20% down for the home? Or are you planning on getting a Doc loan? Second issue is that you’ll pay more every month in mortgage, insurance, and utilities, and more spontaneously for capital improvements. Third, you get to pay more in taxes for the exact same benefit of sending your kids to the same good public school as the condo owner. Lastly, the opportunity cost of the above cash flow issues is not to be ignored. Real estate typically doesn’t have robust returns, even in areas with good public schools. My parents’ house has gone up at a 4% CAGR over 30 years, and it’s in an exceptional school disctrict. Think you can’t beat 4% with the buckets of added cash flow created by the condo purchase? I’ll bet you could.

Click to expand...

Thanks ENT Doc. These are exactly the things I've considered when I lean more towards just buying the condo. We'll be in the same school district anyways and we'll have a better cash flow, that could otherwise be invested and/or become the future downpayment if we move on to a different property. I also have a problem with buying a SFH for $600K in my market when it is not a property I plan to stay in for a long time (more than 5 years), that I don't see appreciating much more, in a state with insane property taxes, and that will be hard to sell for any profit or turn into a rental. Moreover, I don't have the $ for a 20% downpayment for probably another year.

[ENT Doc]

JR wrote:

ENT Doc wrote:

Are the condo and house in the same school district? Do you think you’d be perfectly happy there when the kids are teenagers?

If indeed they are in the same school district and you are happy now and will be in the future in the condo I have a hard time believing buying the house is a good idea. The HOA fees get you something – insurance, capital fund for future improvements, etc. so it’s not like that money is being thrown away. You buy that $600k home you’re guaranteed to be worse off on several levels. First, you have to put more down as a down payment. You mentioned you had $60kish in cash – where’s the other $60k for the 20% down for the home? Or are you planning on getting a Doc loan? Second issue is that you’ll pay more every month in mortgage, insurance, and utilities, and more spontaneously for capital improvements. Third, you get to pay more in taxes for the exact same benefit of sending your kids to the same good public school as the condo owner. Lastly, the opportunity cost of the above cash flow issues is not to be ignored. Real estate typically doesn’t have robust returns, even in areas with good public schools. My parents’ house has gone up at a 4% CAGR over 30 years, and it’s in an exceptional school disctrict. Think you can’t beat 4% with the buckets of added cash flow created by the condo purchase? I’ll bet you could.

Click to expand…

Thanks ENT Doc. These are exactly the things I’ve considered when I lean more towards just buying the condo. We’ll be in the same school district anyways and we’ll have a better cash flow, that could otherwise be invested and/or become the future downpayment if we move on to a different property. I also have a problem with buying a SFH for $600K in my market when it is not a property I plan to stay in for a long time (more than 5 years), that I don’t see appreciating much more, in a state with insane property taxes, and that will be hard to sell for any profit or turn into a rental. Moreover, I don’t have the $ for a 20% downpayment for probably another year.

Click to expand...

Yeah, not sure I'd buy either if only there for 5 years.  If you're planning on staying for the long haul and are perfectly happy in the condo I think it's a no-brainer.

[q-school]

Dont_know_mind wrote:

It sounds like you are 1 year advanced from the chap from a previous thread that was responded to recently:

https://www.whitecoatinvestor.com/forums/topic/living-in-a-hot-housing-market-do-i-buy-now-help/

Maybe read that also. Someone told me once, buy what you can afford and maybe that is not bad advice.

If you buy a condo and you need a house eventually, then you are still short at least half a house. Also it may not be an accurate hedge. The condo may go down and the house you want may go up in your time period. So then you will feel even more pressured about not buying the house.

Basically, if your problem is that you are short one house then it may be better to address that directly. Invert the situation: what is the worst thing that could happen : in 3 years, you are still renting, the 600k house is now 1.2m. Suddenly, that 600k house is a bargain and the concerns you had are not really that important. Or you buy a condo for 300k and in 3 years it is 400k and the house you want is 1.2m. Or you buy the 600k house and in 3 years time it is 400k. I guess if you wanted to be fancy you could assign probabilities to each of these outcomes. But at the end of the day we don’t know what the true probabilities are and we could well be wrong.

People are afraid of downturns, and that can certainly hurt you if you are too leveraged, but I think being short in a buoyant market can hurt you as much or more. I had the painful experience of putting off buying a house because I thought it was too expensive and wanted to wait for a downturn. I regret not purchasing at 1.4m as I ended up having to buy a comparably worse place 3-4 years later for 2.6m. That wasn’t my first property though, but it definitely taught me the psychology behind why people buy at the top.

Price is all relative. Being short 1 house is painful if it goes into full on speculative frenzy mode. Half of my posts are in response to this question as I had this nasty short squeeze experience with housing, so feel free to look up my previous posts. I am probably biased due to my previous experience. Others may have a different view and you have to figure out what is right for you after weighing up the positives and negatives for your particular situation. If after weighing up the risks and benefits of buying a house, you decide to, then find a way to enact that plan.

 

 

 

Click to expand...

you are certainly one of the wealthiest posters here.  but i wonder if you view your primary home as more of an investment than most do?

explain to me how the expensive house with associated property taxes and maintenance costs helps if you keep living in that house for years and years.  i understand if you are willing to move every few years how the appreciation can benefit you and especially if you move before maintenance bites you.  but i think most people here are in for the long haul when they buy an expensive house.

even if you want to invest in real estate, i would think that you would want to leverage your money and put as little down on your primary residence so that you can maximize your multipliers.  from previous posts, you have an appetite for risk that is also fairly uncommon here.  i am eager to learn from your experiences.

thanks in advance.

 

 

[Dont_know_mind]

q-school wrote:

Dont_know_mind wrote:

It sounds like you are 1 year advanced from the chap from a previous thread that was responded to recently:

https://www.whitecoatinvestor.com/forums/topic/living-in-a-hot-housing-market-do-i-buy-now-help/

Maybe read that also. Someone told me once, buy what you can afford and maybe that is not bad advice.

If you buy a condo and you need a house eventually, then you are still short at least half a house. Also it may not be an accurate hedge. The condo may go down and the house you want may go up in your time period. So then you will feel even more pressured about not buying the house.

Basically, if your problem is that you are short one house then it may be better to address that directly. Invert the situation: what is the worst thing that could happen : in 3 years, you are still renting, the 600k house is now 1.2m. Suddenly, that 600k house is a bargain and the concerns you had are not really that important. Or you buy a condo for 300k and in 3 years it is 400k and the house you want is 1.2m. Or you buy the 600k house and in 3 years time it is 400k. I guess if you wanted to be fancy you could assign probabilities to each of these outcomes. But at the end of the day we don’t know what the true probabilities are and we could well be wrong.

People are afraid of downturns, and that can certainly hurt you if you are too leveraged, but I think being short in a buoyant market can hurt you as much or more. I had the painful experience of putting off buying a house because I thought it was too expensive and wanted to wait for a downturn. I regret not purchasing at 1.4m as I ended up having to buy a comparably worse place 3-4 years later for 2.6m. That wasn’t my first property though, but it definitely taught me the psychology behind why people buy at the top.

Price is all relative. Being short 1 house is painful if it goes into full on speculative frenzy mode. Half of my posts are in response to this question as I had this nasty short squeeze experience with housing, so feel free to look up my previous posts. I am probably biased due to my previous experience. Others may have a different view and you have to figure out what is right for you after weighing up the positives and negatives for your particular situation. If after weighing up the risks and benefits of buying a house, you decide to, then find a way to enact that plan.

 

 

 

Click to expand…

you are certainly one of the wealthiest posters here.  but i wonder if you view your primary home as more of an investment than most do?

explain to me how the expensive house with associated property taxes and maintenance costs helps if you keep living in that house for years and years.  i understand if you are willing to move every few years how the appreciation can benefit you and especially if you move before maintenance bites you.  but i think most people here are in for the long haul when they buy an expensive house.

even if you want to invest in real estate, i would think that you would want to leverage your money and put as little down on your primary residence so that you can maximize your multipliers.  from previous posts, you have an appetite for risk that is also fairly uncommon here.  i am eager to learn from your experiences.

thanks in advance.

 

 

Click to expand...

Q-school, I'm still pained by having to buy an expensive house at the top of the market cycle. I was wondering afterward how it happened as it is really a rookie error and I had spent quite a while thinking about property market cycles locally. My wife really wanted to buy a house in this particular location though, and it was causing quite a few arguments between us, so I bought.

They say writing about difficult experiences helps you to work through it and make sense of it. So I like replying to these questions about whether or not to buy a house. I have no idea whether it has any positive effect on the people posting the query. No one has actually come back and said they actually bought anything, so as far as I know they are still hanging around waiting for a cheaper house and may get blown out of the water by a residential property spike as I did. Anyway, it helps me to make sense of my experience and I hope it helps someone in some way. They say "a man hears what he wants to and forgets the rest", so even if I knew something worth imparting, I think most people will see/interpret what they want to.

From the perspective of wealth creation, I don't think of my house that I live in as an investment. I wouldn't calculate it in my net worth and I don't assume it will be worth more in 20 years. I don't have any debt on it. I could if I saw some great opportunities take some leverage on it.

I am a big fan of capital appreciation in real estate though. I see the development cycle as such (but my interpretation could be incorrect): government acquires land for infrastructure (airport, hospital, highway, rail line). There is delay and usually multiple delays in starting construction. I like to buy after the second or third delay or I go back to when is the latest that they have to start, because they will usually commence the project if they have acquired the land. The developers will usually not get in until there is a solid start date on the project. I would try to get in around 5 years before I think the latest time the project can start. You can buy after the project is announced, but then you are competing against land bankers and on-sellers who will try to get options to parcel up land to on-sell to large developers. My main holding in this area currently is a 7.5 acre block of land that has been rezoned industrial. I bought it in 2009 for 950k, before the project was solid. The government announced in 2014, they would start construction of major infrastructure in 2018. I thought about buying another parcel for 3m in 2015 but didn't. I had an offer for the one I have for 5m earlier this year. I am hoping for 7.5-10m in 2-3 years when the developers are more serious about stitching together parcels.

So I like to buy land, perhaps with a small dwelling on it and basically wait to offload to developers. I think there are many other ways to make money though in real estate at any other part of the chain. You could buy from the developer - they will take my 30,000 square meter block, subdivide it, build storage sheds and then sell it to retail. So you could buy it then and it would have a rental return. Or you could buy it in 20 years if you think it will be rezoned high density residential and on-sell it to a developer who wants to buy a few parcels to build a hotel or highrise.

I like vacant land at the beginning of the process though a) for the simplicity (don't really need to deal with tenants) b) for the negative gearing. I don't currently have debt so I don't have negative gearing from interest, but I do have significant negative gearing from property tax. In this case the property tax is 50k/year recently and will probably be 100k/year going forward. So it is pretty cashflow negative.

Currently, outside of the home, I have around 8m in property (5m vacant property, 3m other residential properties), as I sold an investment property a few weeks ago and discharged the remaining debt. And I have net income which is virtually zero on this portfolio. Which traditionally people would be aghast about and everyone tells me I should sell the negative cashflow vacant property, but to me this is gold as it is still going up and I pay half the tax rate on the capital gains instead of the full rate on rental income. In the meantime the negative gearing reduces my yearly tax bill. So I would rather have capital gain if possible than rental income. But that is just my preference. Other people build capital by developing residential/commercial blocks, renovations, market timing, or just buy and hold. This can all work also. You don't need many home runs though to build major wealth. I figure you only need 2 or 3 in a lifetime. If it's just a single though, you might need 9-12.

I think I have taken some risks, but I think it would be a self-serving narrative/story to say that this was an essential part of my investment success. I think the risk taking is probably part of another personality trait that has been useful and that is openness to new experiences. Some famous investors/entrepreneurs (Steve Jobs, Ray Dalio) have said that meditation has helped them a lot and I can see how this might be very helpful in just clearing your mind and seeing possibilities. I think if you can see possibilities and try them out whilst controlling your risk, then you can do great things.

Like gambling and being an entrepreneur - there is a higher incidence of gamblers but this is certainly not why they succeeded. I think the same with risk taking, yes you need some but not too much and perhaps the important thing is openness to trying different things and risk control. A lot of people seem to go close to blowing up. But I don't think this is essential, and perhaps the main lesson major losses teache us is that you could be wrong. If you can learn this lesson (fallibility) some other way than going close to blowing up, then this is better.

I think people don't talk about their mistakes much. They must either make them and not talk about them or have missed major opportunities that they were not aware of. I have certainly made some major errors. But so must other people, because when I look around me, I only know 1 other person in my cohort  with a higher net worth at my age (43). This fellow was very bullish about residential property before the upturn though and got into various things like commercial development, multifamily and multiple SFH's. I think he was more open to trying out different things than what I was and he has amassed a pretty impressive portfolio. I think the other thing that helps is starting earlier. I read Warren Buffet bought his first stock when he was 12ish through his father who ran a stockbroking business. Probably making and learning from your mistakes when you are younger helps, but I guess this is too late for us to implement.

I have been mulling over my next move and I am thinking perhaps I will engage in some dumpster diving in equities. I am still down (-80%) on my equity portfolio (which I have had since 2001), after I blew it up in around 2014 (from around 1.8m to 300k), so I am going to allocate 300k to buying junk at the bottom of the next bear market. This involves multiple things that could go wrong though, including that there may not be one for a while and various execution errors that I may encounter. But I figure that my only real edge as a retail investor in liquid assets is buying when institutions liquidate. Junky stuff can go up 10x in a year at the end of a bear market. Unfortunately, this is a form of market timing also and my track record on this is poor. So I will only allocate 3% of my portfolio to it. I would really like to at least break even on my equity portfolio though after almost 20 years. Anyway, hopefully, I can redeem myself there or call it quits. I expect when I do cash in on the negative cashflow property, I will probably replace that with a world index ETF or something like that, so I should be able to make up the loss quite easily at some stage.

In terms of waiting for a property crash, I am really keen on buying a large commercial retail building with redevelopment potential during the next downturn. Or vacant land again near an infrastructure project that has been delayed with a pending start date. Or even coastal property at the right price. I have no gearing so I could comfortably buy 3m by just using the loan facilities I currently have. Or take out further loans on any property acquired up to 8m and still have 50% gearing overall.

Unfortunately, what I have done is not easily replicable and there are many ways it could go wrong at any stage in execution, so I don't recommend it to people. It is easy to describe, but perhaps harder to do. But I think if you can find something that you believe in, investigate it and it works then that could be a home run. And I reckon you only need a 2-3 home runs in your life to be extremely wealthy.

Q-school, do you mind if I ask what your current asset allocation is and gearing level ? Also, what are your thoughts about the idea of dumpster diving at the end of a bear market (buying B-grade stocks after at least 6 months of an equity bear market where the S&P has gone down at least 20%) ?

[q-school]

Dont_know_mind wrote:

q-school wrote:

Dont_know_mind wrote:

It sounds like you are 1 year advanced from the chap from a previous thread that was responded to recently:

https://www.whitecoatinvestor.com/forums/topic/living-in-a-hot-housing-market-do-i-buy-now-help/

Maybe read that also. Someone told me once, buy what you can afford and maybe that is not bad advice.

If you buy a condo and you need a house eventually, then you are still short at least half a house. Also it may not be an accurate hedge. The condo may go down and the house you want may go up in your time period. So then you will feel even more pressured about not buying the house.

Basically, if your problem is that you are short one house then it may be better to address that directly. Invert the situation: what is the worst thing that could happen : in 3 years, you are still renting, the 600k house is now 1.2m. Suddenly, that 600k house is a bargain and the concerns you had are not really that important. Or you buy a condo for 300k and in 3 years it is 400k and the house you want is 1.2m. Or you buy the 600k house and in 3 years time it is 400k. I guess if you wanted to be fancy you could assign probabilities to each of these outcomes. But at the end of the day we don’t know what the true probabilities are and we could well be wrong.

People are afraid of downturns, and that can certainly hurt you if you are too leveraged, but I think being short in a buoyant market can hurt you as much or more. I had the painful experience of putting off buying a house because I thought it was too expensive and wanted to wait for a downturn. I regret not purchasing at 1.4m as I ended up having to buy a comparably worse place 3-4 years later for 2.6m. That wasn’t my first property though, but it definitely taught me the psychology behind why people buy at the top.

Price is all relative. Being short 1 house is painful if it goes into full on speculative frenzy mode. Half of my posts are in response to this question as I had this nasty short squeeze experience with housing, so feel free to look up my previous posts. I am probably biased due to my previous experience. Others may have a different view and you have to figure out what is right for you after weighing up the positives and negatives for your particular situation. If after weighing up the risks and benefits of buying a house, you decide to, then find a way to enact that plan.

 

 

 

Click to expand…

you are certainly one of the wealthiest posters here.  but i wonder if you view your primary home as more of an investment than most do?

explain to me how the expensive house with associated property taxes and maintenance costs helps if you keep living in that house for years and years.  i understand if you are willing to move every few years how the appreciation can benefit you and especially if you move before maintenance bites you.  but i think most people here are in for the long haul when they buy an expensive house.

even if you want to invest in real estate, i would think that you would want to leverage your money and put as little down on your primary residence so that you can maximize your multipliers.  from previous posts, you have an appetite for risk that is also fairly uncommon here.  i am eager to learn from your experiences.

thanks in advance.

 

 

Click to expand…

Q-school, I’m still pained by having to buy an expensive house at the top of the market cycle. I was wondering afterward how it happened as it is really a rookie error and I had spent quite a while thinking about property market cycles locally. My wife really wanted to buy a house in this particular location though, and it was causing quite a few arguments between us, so I bought.

They say writing about difficult experiences helps you to work through it and make sense of it. So I like replying to these questions about whether or not to buy a house. I have no idea whether it has any positive effect on the people posting the query. No one has actually come back and said they actually bought anything, so as far as I know they are still hanging around waiting for a cheaper house and may get blown out of the water by a residential property spike as I did. Anyway, it helps me to make sense of my experience and I hope it helps someone in some way. They say “a man hears what he wants to and forgets the rest”, so even if I knew something worth imparting, I think most people will see/interpret what they want to.

From the perspective of wealth creation, I don’t think of my house that I live in as an investment. I wouldn’t calculate it in my net worth and I don’t assume it will be worth more in 20 years. I don’t have any debt on it. I could if I saw some great opportunities take some leverage on it.

I am a big fan of capital appreciation in real estate though. I see the development cycle as such (but my interpretation could be incorrect): government acquires land for infrastructure (airport, hospital, highway, rail line). There is delay and usually multiple delays in starting construction. I like to buy after the second or third delay or I go back to when is the latest that they have to start, because they will usually commence the project if they have acquired the land. The developers will usually not get in until there is a solid start date on the project. I would try to get in around 5 years before I think the latest time the project can start. You can buy after the project is announced, but then you are competing against land bankers and on-sellers who will try to get options to parcel up land to on-sell to large developers. My main holding in this area currently is a 7.5 acre block of land that has been rezoned industrial. I bought it in 2009 for 950k, before the project was solid. The government announced in 2014, they would start construction of major infrastructure in 2018. I thought about buying another parcel for 3m in 2015 but didn’t. I had an offer for the one I have for 5m earlier this year. I am hoping for 7.5-10m in 2-3 years when the developers are more serious about stitching together parcels.

So I like to buy land, perhaps with a small dwelling on it and basically wait to offload to developers. I think there are many other ways to make money though in real estate at any other part of the chain. You could buy from the developer – they will take my 30,000 square meter block, subdivide it, build storage sheds and then sell it to retail. So you could buy it then and it would have a rental return. Or you could buy it in 20 years if you think it will be rezoned high density residential and on-sell it to a developer who wants to buy a few parcels to build a hotel or highrise.

I like vacant land at the beginning of the process though a) for the simplicity (don’t really need to deal with tenants) b) for the negative gearing. I don’t currently have debt so I don’t have negative gearing from interest, but I do have significant negative gearing from property tax. In this case the property tax is 50k/year recently and will probably be 100k/year going forward. So it is pretty cashflow negative.

Currently, outside of the home, I have around 8m in property (5m vacant property, 3m other residential properties), as I sold an investment property a few weeks ago and discharged the remaining debt. And I have net income which is virtually zero on this portfolio. Which traditionally people would be aghast about and everyone tells me I should sell the negative cashflow vacant property, but to me this is gold as it is still going up and I pay half the tax rate on the capital gains instead of the full rate on rental income. In the meantime the negative gearing reduces my yearly tax bill. So I would rather have capital gain if possible than rental income. But that is just my preference. Other people build capital by developing residential/commercial blocks, renovations, market timing, or just buy and hold. This can all work also. You don’t need many home runs though to build major wealth. I figure you only need 2 or 3 in a lifetime. If it’s just a single though, you might need 9-12.

I think I have taken some risks, but I think it would be a self-serving narrative/story to say that this was an essential part of my investment success. I think the risk taking is probably part of another personality trait that has been useful and that is openness to new experiences. Some famous investors/entrepreneurs (Steve Jobs, Ray Dalio) have said that meditation has helped them a lot and I can see how this might be very helpful in just clearing your mind and seeing possibilities. I think if you can see possibilities and try them out whilst controlling your risk, then you can do great things.

Like gambling and being an entrepreneur – there is a higher incidence of gamblers but this is certainly not why they succeeded. I think the same with risk taking, yes you need some but not too much and perhaps the important thing is openness to trying different things and risk control. A lot of people seem to go close to blowing up. But I don’t think this is essential, and perhaps the main lesson major losses teache us is that you could be wrong. If you can learn this lesson (fallibility) some other way than going close to blowing up, then this is better.

I think people don’t talk about their mistakes much. They must either make them and not talk about them or have missed major opportunities that they were not aware of. I have certainly made some major errors. But so must other people, because when I look around me, I only know 1 other person in my cohort  with a higher net worth at my age (43). This fellow was very bullish about residential property before the upturn though and got into various things like commercial development, multifamily and multiple SFH’s. I think he was more open to trying out different things than what I was and he has amassed a pretty impressive portfolio. I think the other thing that helps is starting earlier. I read Warren Buffet bought his first stock when he was 12ish through his father who ran a stockbroking business. Probably making and learning from your mistakes when you are younger helps, but I guess this is too late for us to implement.

I have been mulling over my next move and I am thinking perhaps I will engage in some dumpster diving in equities. I am still down (-80%) on my equity portfolio (which I have had since 2001), after I blew it up in around 2014 (from around 1.8m to 300k), so I am going to allocate 300k to buying junk at the bottom of the next bear market. This involves multiple things that could go wrong though, including that there may not be one for a while and various execution errors that I may encounter. But I figure that my only real edge as a retail investor in liquid assets is buying when institutions liquidate. Junky stuff can go up 10x in a year at the end of a bear market. Unfortunately, this is a form of market timing also and my track record on this is poor. So I will only allocate 3% of my portfolio to it. I would really like to at least break even on my equity portfolio though after almost 20 years. Anyway, hopefully, I can redeem myself there or call it quits. I expect when I do cash in on the negative cashflow property, I will probably replace that with a world index ETF or something like that, so I should be able to make up the loss quite easily at some stage.

In terms of waiting for a property crash, I am really keen on buying a large commercial retail building with redevelopment potential during the next downturn. Or vacant land again near an infrastructure project that has been delayed with a pending start date. Or even coastal property at the right price. I have no gearing so I could comfortably buy 3m by just using the loan facilities I currently have. Or take out further loans on any property acquired up to 8m and still have 50% gearing overall.

Unfortunately, what I have done is not easily replicable and there are many ways it could go wrong at any stage in execution, so I don’t recommend it to people. It is easy to describe, but perhaps harder to do. But I think if you can find something that you believe in, investigate it and it works then that could be a home run. And I reckon you only need a 2-3 home runs in your life to be extremely wealthy.

Q-school, do you mind if I ask what your current asset allocation is and gearing level ? Also, what are your thoughts about the idea of dumpster diving at the end of a bear market (buying B-grade stocks after at least 6 months of an equity bear market where the S&P has gone down at least 20%) ?

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Thanks for the awesome response.  I'm not sure what gearing level is.  I'm 100% equities for current asset allocation until this past year when I found this site.  i have a financial advisor who has helped me over the past twenty years.  I feel like I haven't had the opportunity to take risks as I'm feeding my parents, my in laws, and my own family.  from an investment standpoint, I'm in the single hitting business, as you say. 

however I have set aside cash/equivalents roughly 1 million in 2017 for commercial real estate opportunities/diversification.  I'm doing due diligence and educating myself on these opportunities.  I have no idea when I will invest the money.  hopefully this year.  I'm afraid to have negative cash flow because I grew up poor and that sounds like a way to get poor again. 

in response to dumpster diving in the stock market, I have 7 figures in the active management and am ready to jump in with significantly more if there should be a large correction.  it is conceivable that if there is a large enough correction, I might abandon my plans for commercial real estate temporarily.

I'm just curious about your responses to people considering buying homes rather than investment real estate.  we've bought a lot of homes over the years.  I think ten, but I could be off (none for investment).  in the 90s, did very well.  in the 00s did very well.  after that, I would say neutral to losses.  some of it is location specific for sure.  but if you don't count it in your net worth (as I don't) then I'm not sure investment strategy should apply to your primary residence.  but I freely admit to being the village idiot here and frequently am trodding down my own path by myself.

 

 

[wideopenspaces]

If you're only looking at staying 5 years and the kids are young, I'd buy the condo ( or just keep renting it). Less maintenance and upkeep, so you'll have more time and money with your family. Doesn't sound like the house is a good investment and you don't need that much space or have the time to take care of a property that large.

[Donnie]

Rent.  You will likely be taking the standard deduction, so you lose the tax advantages of buying v renting.  Need to hold much longer (~10 years) before buying comes out on top unless inflation starts picking up.