Rent vs. buy (in Washington DC)

[cbee6390]

Posting here as this thread seems more active...

Here's the backstory:
http://forum.mrmoneymustache.com/real-estate-and-landlording/late-20s-in-expensive-city-considering-buying/msg1228294/#msg1228294

Considering putting the 30K in Wealthfront or Betterment and moving in with the boyfriend or continuing living with parents... but allure of my own place is strong (esp. in a city where real estate market is just going up and up and up - and where we often weather recessions well because of fed gov). And, if BF and I decide to move in together in a year or two, I can rent out the place.

[Gondolin]

Very interesting. Here's my take as someone in a very similar situation (20's, DC, same income level, similar NW, moving into a rental with gf this month).

30-40k will be a bare bones, absolute minimum 10-15% before transaction costs down payment on a reasonably sized 500-600 sq foot 1 BR in most neighborhoods. I'm sure there's still some better deals out there but, that seems to be going rate.

Is DC one of the "safest" housing markets in terms of value preservation and appreciation upside? Yes.
If I was sure that I would be in the city for the next 10 years, would I try to buy? Yes.
If I had $2 million to burn would I buy a pair or rowhouses TODAY? Yes.

My point is that there's value to be had but, the barrier to entry is very high and in many ways the potential financial gains are offset by the illiquidity of the investment and how overleveraged you would be.

That said, if you're SURE you'll be staying 10+ years then the payoff is likely there (pursuant to full mathematical analysis) but, and this leads to my main point, how sure are you?

The crux of this equation is not the financials - it's the state of your relationship with your SO.

How certain are you both that your careers will stay in DC? You're both committed to raising kids in the areas and staying 10+ years but, you're not sure if/when you're going to move in together? Seems like the cart is before the horse. Buying a place together that is large enough for you both to live in appears to me to be a superior option to buying a tiny place for yourself and then, a year later, having to rent that place out to cover half the rent in the new apartment you share with your SO. But, it doesn't sound like you're ready for that.

Moving in with your SO and paying reasonable half rent is what I'm doing. Then, if things progress well, and you two decide to stay in the city long-term, you can buy a place together. At that point you'll have more financial resources, more certainty about the course of your careers, and will be able to make a better joint decision about what you want in a home.

Buying now just locks you in big financial burden and limits your options later. The financial opportunity may be there but, the risks, especially re: your personal life, may be just as big.

Anyway, PM me if you want to share more details or talk further.

[mozar]

I lived in the DC area most of my life and here are my thoughts. In such an expensive market, I would wait to buy until after you have kids. The elementary schools vary so much, the school lottery is just that, a lottery and you don't know what your needs will be. Or buy where you want to buy now and just know that you'll probably want to live closer to your parents when you have kids.
But its generally not a good idea to buy if you plan on moving in a year. You need to live in a place two years to get to keep capital gains. And 5 years to come out ahead financially. And being a landlord isn't easy. It's hard work.

[BlueHouse]

I lived in the DC area most of my life and here are my thoughts. In such an expensive market, I would wait to buy until after you have kids. The elementary schools vary so much, the school lottery is just that, a lottery and you don't know what your needs will be. Or buy where you want to buy now and just know that you'll probably want to live closer to your parents when you have kids.
But its generally not a good idea to buy if you plan on moving in a year. You need to live in a place two years to get to keep capital gains. And 5 years to come out ahead financially. And being a landlord isn't easy. It's hard work.

Being a landlord in DC is even more difficult.  DCRA gets involved and then it's all a crapshoot.  I became an accidental landlord when moving from VA to DC.  I would not have done it the other way around.  Working with DC government is just too difficult unless you're willing to devote a lot of time to it.

[cbee6390]

Just to clarify - this apartment would be *mine,* not SO's and mine together. I plan to be in DC longterm (10 years+) regardless of SO :)

Thanks - reading responses now...

[Gondolin]

I plan to be in DC longterm (10 years+) regardless of SO :)

Ah, ok. If you're crystal clear on this, then buying is probably viable. If I were single right now I'd be strongly considering buying myself. That said, if I was single I wouldn't have moved to DC in the first place so...likely a moot point.

Still not a huge fan of how over leveraged you could easily be. Is that 33k ALL of your liquid funds? Or is there an Emergency fund and extra money to cover unexpected maintenance?

[cbee6390]

@gondolin

I wouldn't buy right away - but I'm pre-approved for a year to buy up to a $350K apartment. I'd probably wait until I have about $50-55K saved up for the down payment and another $5K in emergency money. My Raymond James account also has about $4K cash in it right now that I need to transfer either into savings for the down payment, or 401K / Roth, etc.

Also - would it affect my decision to buy if my parents said they want to help with the down payment? I know I'm in an incredibly luxurious position that most aren't... and I normally wouldn't accept such a nice gift... but they keep talking about wanting to help set me up for the future, how their parents helped them with a down payment, etc...

[mozar]

If they want to give you a down payment, but they won't just give you the cash, go ahead and buy. Get that money.

[aspiringnomad]

I was in a very similar position to you financially (minus the parental help and RJ portfolio) when I bought in DC 6+ years ago. To be honest, it was an uncomfortable feeling being so leveraged and without much other net worth. That feeling lasted at least a year, but it subsided eventually. I'm still in the same place, love the neighborhood, and partly thanks to MMM have banished any thought of "needing" more space. As my income grew I was able to build up investment accounts and feel much more diversified. I think having the parental help and RJ portfolio at the outset will help provide you a lot of flexibility and maybe help you avoid that uncomfortable first year or so where you feel like all your eggs are in one basket.

Also note that in DC, as in elsewhere, there tends to be a trade-off between living in a stable, lower crime neighborhood and investment return. Despite buying my condo in 2010, and with the ever rising prices in DC, I estimate that the nominal CAGR on the value of the unit so far has been only ~3% in my stable area (because RE is leveraged, of course the equity return is higher). A couple years later I bought a rental property in a revitalizing part of NE out of foreclosure and the CAGR there has been much, much, higher.

[historienne]

To clarify - does your boyfriend already own a place?  I would not buy if there's a reasonable chance that you would move in a year.  If your boyfriend doesn't own a place already, I assume he'd just move in with you, so you'd have a longer time horizon.

To put it simply: if the numbers make sense to buy rather than rent, they probably *don't* make sense for becoming a landlord with an investment property.  If you want an investment property, look for that specifically.  Only buy if you will realistically live there for a significant amount of time.  You can live with a kid in a one-bedroom, FYI, in case that's relevant to your decision.

(Yes, I know it's not quite that simple, because if you buy as owner-occupied, you get access to better mortgage rates.  But it's a good rule of thumb nonetheless). 

[Beach_Stache]

DC is a tough area, we were up there for 10 years after college.  Bought a 3 bed 2 bath condo in 2006 (bad timing) but bought as a 3 bed b/c we wanted to expand the family and figured 3 beds would be enough to have 3 kids in.  We had 2 kids in there and it was a bit cramped and when #3 was coming along we moved out of the area to much cheaper living.  We rented out for 3 years and it wasn't terrible but we weren't making money either and finally sold this summer which was a relief.

If we bought at a different time and had the stomach to be landlords to hang onto the property I think we would have done well but I'd rather invest than deal w/those phone calls.  If you can see yourself buying a place to stay in for 10 years then I think it's a good idea, or if you can continue to rent out your property afterwards then I think you'll be good.  I don't think the housing market is going to explode but it'll probably be consistent in the DC area for the reason's you mentioned.  If you plan to upgrade to a new place in a few years or when you have kids and you don't want to be a landlord then I'd rent or stay w/your folks a few more years.  But a place as an investment property if that's your goal or the place you want to live in for the next 30 years.