Author Topic: Advice- to purchase or not to purchase?  (Read 1891 times)

narwhale

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Advice- to purchase or not to purchase?
« on: January 15, 2015, 01:12:44 PM »
My wife and I are young professionals who live in an extremely expensive city. We have been able to pay off our $45k student loan/car debt over the past few years and have scored a great deal on an affordable rental. Now, we are maxing Roth IRAs, saving money and looking toward the future which might include graduate school for me and having our first kid.

A few years ago, my wife and I discovered a lovely walkable, diverse city near her hometown that is seeing a renaissance of sorts in its downtown areas (as a lot of cities are). We stop by every few months when we are visiting family and often remark how fun it would be to buy a small home there. Being that interest rates are (still) so low, we have been discussing the idea more seriously the past few weeks. Homes range from $70k-120k, and rental income should cover the mortgage with a $200-$400 margin, depending on the property. The question is, do we take the 20% required for down payment (not primary home, so investment property) out of investments/savings to purchase? Net worth now is still fairly low at around $85k, but we have very steady jobs and low expenses for at least two more years (expenses around $2200/month income around $5700). I see it as giving up something now (when markets are up) in order to reap benefits later as 1) interest rates will rise in the future 2) I really do think that millennials and others want better, urban communities, and we want to be on the front end of that trend if possible. 3) it is a way to diversify and create a small positive cash flow outside of regular employment.

Anybody have thoughts or a different perspective?

iamlindoro

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Re: Advice- to purchase or not to purchase?
« Reply #1 on: January 15, 2015, 02:00:15 PM »
So, the good:  Your thoughts about why a particular area might be a good investment, and your knowledge of the area:

The bad:  Sounds like probably the actual numbers.  Have you run them taking into account maintenance, vacancy, insurance, property management if any, and property taxes?

Basically, we need way more info, but for a property in the 70-120K range, you'd *want* to be making $1400-2400 in rent per month, and at an absolute bare minimum, you'd need to be renting at 700 (for 70K) to 1200 (for 120K) per month, and those numbers would be pretty cutting it a little close and prone to costing you money in the long run.

What are the actual expected rents on the property?  Property Taxes?  Utilities which the landlord must pay for your area?

Another Reader

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Re: Advice- to purchase or not to purchase?
« Reply #2 on: January 15, 2015, 02:17:57 PM »
Get back to us on what millenials want after you have that first kid.  Once the first one is a toddler, that's when the flight to the suburbs starts. It's not just millenials, the baby boomers did it too. 

As far as the rental numbers go, google the one percent rule for rentals, or just look through the investment real estate threads here.  Arebelspy has compiled a nice list of books at the top of this thread for you to read before you consider writing any checks. Buying a property in an area you know very little about is not fun, it's very risky.  Hang out where you are thinking about buying and consider joining the local real estate investing association there.  I'm all for diversifying into rentals, but you do not have the knowledge and experience you need yet. 
« Last Edit: January 15, 2015, 02:20:04 PM by Another Reader »

narwhale

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Re: Advice- to purchase or not to purchase?
« Reply #3 on: January 15, 2015, 06:54:00 PM »
@iamlindoro Thanks for the thoughtful comments and questions, (unlike Another Reader below). Yeah, I've run numbers that include property taxes and insurance. Vacancy is something to consider, but I have looked at rates in the city and projections for rentals; population trends look good and vacancy rates are low. The several feelers I've put out (about half dozen) about rentals on similar properties in the same neighborhoods have come back rented, which is another good sign. I've reached out to a buddy or two who own similar-age homes in the area for a general idea of maintenance costs. Also, I'm familiar with the 1% rule and that standard should be met for the majority of that range (70k-120k).

@Another Reader. I appreciate your effort at offering advice, but I could do without some of the condescension.

Another Reader

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Re: Advice- to purchase or not to purchase?
« Reply #4 on: January 15, 2015, 07:09:50 PM »
Not trying to be condescending.  Your first post did not show a level of knowledge where I could in good conscience advise you to start writing checks.  A lot of people on this forum do not have a realistic understanding of what being a successful landlord requires.  Your second post shows you have done a lot more work than most people. 

Why don't you post an example of a property you are considering, with all the numbers?  Not sure where this city is, but there are a lot of places in the Midwest where you can make the cash flow numbers work.  There are a lot of landlords here that will look at the numbers and tell you what they think.  I would simply caution you not to massage some bias into your analysis.