Buying investment property before first home, Should I do it?

[ep]

I've been thinking about buying a house for a while now. I live close to an area that is likely going to see home prices climb significantly as the city's subway system is going to be extended in the next two years or so. I do not own a home right now (not too far removed from college), but I have about $50k saved up and am saving ~$5k/month. The types of homes I'd look into getting are ~$350k (2bed/1bath types) that I could rent out. The reason I am not interested in buying these homes for myself to live in are because of certain transportation restrictions on my spouse that would make living there difficult (though it is very close to where I live now and easily accessible if I need to maintain/meet tenants, etc)

FWIW, I am likely moving away from the area and am interested in buying a personal home to live in in the next 5 years as well.

I'm pretty confident home values will increase significantly and think this could be a great investment and I know I have the cashflow to do so. Anything I am short on for the down payment currently I can receive support from family and pay them back within a few months. I'd like to hear some good reasons why my current plan may not be a good idea, or any other considerations I may be leaving out.

Thanks!

[KingCoin]

If the expected price increase doesn't materialize, what are the economics like as a pure buy-and-hold rental?

One caveat: public project development can go years or even decades over schedule. I'd rather buy a more reliable high yielding rental rather than speculating on price increase based on the externalities of a subway system.

[soccerluvof4]

I think Kingcoin covered it in a nutshell.  One add on,  unless "time is of the essence" and this just a deal that cant be passed up (which doesn't sound like) if your saving 5k a month , why not wait till you don't have to borrow from your folks and have a little extra stash.

[the fixer]

I've considered owning a rental while renting (currently focusing on owner-occupied duplex, a bit different). I think it can make sense under some conditions, including yours where you don't want to live in the location that's a good buy.

I second KingCoin's caution about trying to time the real estate market. I'm pretty conservative, so my approach would be to run the numbers and make sure the property cash flows on day 1. Any future appreciation I get on the property is a bonus when I sell. Lots of people got in big trouble in 2005-2007 buying properties with leverage, thinking that real estate will always keep appreciating forever; don't make the same mistake.

[ep]

Great considerations all. I've thought about the situation where the appreciation doesn't materialize, and the area in general (being close to universities and downtown) is very stable in terms of housing prices. The rental market is crazy and there is generally a shortage, so I believe I'd be safe even without the value of the property going up in the next few years.

Essentially, the subway is a great bet, but even if it doesn't materialize (which seems unlikely at this point), I think it's still a good investment that'd yield positive cash flow. And soccerluvof4, I definitely may wait and pay more down myself, but borrowing is not really an issue from family... it's more of just finding the right property and being liquid/agile enough to pounce on it when it becomes available as the market is very tight.

[MountainMan]

Don't buy rental property before running them through these calculations.

It's not good enough to "think" the property is a good buy.  Make sure it is.  Real estate mistakes are very expensive.

http://www.amazon.com/Every-Estate-Investor-Financial-Measures-ebook/dp/B004BKIEUS/ref=sr_1_1?ie=UTF8&qid=1394224423&sr=8-1&keywords=real+estate+cash+flow

[KingCoin]

It's not good enough to "think" the property is a good buy. 

Right. You can start with the 1% rule to see if you're in the right ballpark (monthly rent should be >1% of the purchase price). Watch out for HOA/condo association fees that can meaningfully change the economics, especially in urban areas.

[ep]

Good things to think about. I'm definitely not pulling the trigger til I do a lot more research... I'm just in the prelim phases of educating myself.

As for the 1 percent rule, I don't think there's a single property at all that would pass this in the entire metro area I live in. E.g. 2bed/1bath for $350k might go for $2200/month. That's about .66%. But these are the kinds of deals everywhere around me and it seems reasonable since the cash flow is about $300+/month (and basically 0 vacancy). What factors am I not considering? Is a cash flow of $300/month, likely appreciation (or at worst stability in prices), and close to zero vacancy not a decent consideration? (at least at a high level).

[CaliToCayman]

As for the 1 percent rule, I don't think there's a single property at all that would pass this in the entire metro area I live in. E.g. 2bed/1bath for $350k might go for $2200/month. That's about .66%. But these are the kinds of deals everywhere around me and it seems reasonable since the cash flow is about $300+/month (and basically 0 vacancy). What factors am I not considering? Is a cash flow of $300/month, likely appreciation (or at worst stability in prices), and close to zero vacancy not a decent consideration? (at least at a high level).

I'm going to say this with the caveat that I am a novice in understanding what a good real estate investment is, but those numbers from the 1% rule alone would have me worried. It may be that your entire area is not a good place to invest in right now, which is not uncommon. There are lots of metrics you should be looking at and not necessarily that you plan to be 300 positive every month.

For instance, what is your cash on cash return? That would be: (rental income- vacancy - opex - mortgage)/(down payment + closing costs)

I know you said the vacancy rate is zero, but are you sure? That would be a huge gamble, even a conservative estimate of 5% vacancy would leave you with $110 less a month. Also, there seem to be a lot of investors that won't give too much credence to appreciation since no one has a crystal ball and if you only get marginal or no appreciation coupled with cash flow of less than 5%, you were probably better off with an investment in the market.

[Mazzinator]

Here's a start...but i also vote for the same book already mentioned.

http://www.biggerpockets.com/renewsblog/2010/06/30/introduction-to-real-estate-analysis-investing/

http://www.mortgage-investments.com/resources/online-calculators/10-year-investment-in-real-estate/

[KingCoin]

I wouldn't do it. The cashflow leaves you too little margin for error. Financed, I'm guessing that this property will be negative cashflow when you take into account maintenance and vacancy. Even if the vacancy rate in the area is ostensibly close to 0%, you have to factor in things like the tenant's failure to pay. An eviction process could take months.

Also remember that the costs associated with buying and selling could run upwards of 10%, which takes a decent chunk out of your upside.

I'm in much the same boat as you. I ended up renting in NYC and buying investment property in another state. I tried to convince myself that buying somewhere like Harlem or Bushwick made sense, but it was ultimately too speculative.

[waltworks]

If your P&I is significantly more than 50% of your rental income, you will not make any money unless it's through appreciation. Assume 2-3%/year for maintenance costs and upkeep, assume 10% vacancy, etc. Plus if you're not going to live there, you'll pay capital gains on your profits (as someone already mentioned, it's going to cost you ~10% of the total house value to sell it when all is said and done).

If you were rolling in spare cash, and you wanted to live there for a few years, maybe. Borrowing money from the 'rents? Not staying in the area? Terrible idea.

-Walt