Author Topic: Does it make sense to buy a rental, but live in someone else's rental?  (Read 3704 times)

retireatbirth

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Hey guys,

First post in this forum. I'm in my early 30s and currently own no real estate. I'm interested in taking advantage of the current low interest rates and leveraged investment that real estate offers.

Unfortunately, I live in NYC so much of the real estate here is not affordable to me. I'm single so I prefer to live in some of the more close-in desirable neighborhoods which I can't afford to buy in. I could, however, afford to buy a property in some of the less expensive (still nice, but family-oriented and further out) neighborhoods and then rent it out.

I haven't done too much research into this yet, but I figure I could buy a $200k - $300k property. My net worth is about $115k right now. It'd be months before I buy so my net worth would be up around $150k I suppose.

Does this make sense at all?

former player

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It can make sense.  For instance, you could be paying a rent in the place you are living which is low in relation to the value of the property and receiving a rent on the place you are renting out which is high in relation to the value of that property.

You need to take care that the rental you buy will make you a decent return while being easy to manage.  Transaction costs mean it should be a property you want to hang on to for several years, unless you are renovating with an eye to selling.  Personally, I'd always want a rental to be somewhere I'd be reasonably happy to live myself in case that became necessary, which might mean somewhere you could see yourself retiring to.

TheGrimSqueaker

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Hey guys,

First post in this forum. I'm in my early 30s and currently own no real estate. I'm interested in taking advantage of the current low interest rates and leveraged investment that real estate offers.

Unfortunately, I live in NYC so much of the real estate here is not affordable to me. I'm single so I prefer to live in some of the more close-in desirable neighborhoods which I can't afford to buy in. I could, however, afford to buy a property in some of the less expensive (still nice, but family-oriented and further out) neighborhoods and then rent it out.

I haven't done too much research into this yet, but I figure I could buy a $200k - $300k property. My net worth is about $115k right now. It'd be months before I buy so my net worth would be up around $150k I suppose.

Does this make sense at all?

It makes fairly good sense from an investment perspective, if you can get a good rate of return on the property and do most of the work yourself. NYC is not known for cheap plumbers, electricians, or general contractors. I find my margins and cash flow are far better when I can avoid the costs associated with a property management company. This requires that I live close to my investment property, simply to keep an eye on it. Over the years, I've had partial or total ownership of a house, a condo, a duplex, and a 5-plex, all of which I managed as rentals.

Before putting in an offer, figure out what your interest rate would be on a loan. You'll get a lower rate for an owner-occupied home than you will for a rental, so it may make sense to briefly live in the property-- say for about a year-- and then go back to renting. This will give you a chance to fix the place up if you need to.

The other thing you need to do is to run a cash flow analysis. Calculate your operating costs, including property tax, and compare it with your estimated rental revenue. You'll have to guess at some of the expenses, and you'll be high on some but low on others. Do it Fermi style: list as many expenses as you can think of, and make guesses at each. If your sample size is large enough, your wrong guesses will cancel each other out, and your total estimate will be fairly close. When you're done with that, add a 10% contingency. This contingency is not your reserve, or money you save and hope to not spend. It's money you *will* spend, but you don't know on what.

Most rental real estate is cash flow negative before depreciation when there's a mortgage against it: you're putting more money into the investment than the rental revenue covers. After depreciation you can often claim a loss at tax time, but you're still feeding money into the property especially if you've got a vacancy. My former business partners and I called it "tax flow to equity" when the equity in the propert is increasing proportionately with the money you're putting into it. But you should be in a position to expect and afford this kind of spending. You'll also need cash reserves to deal with sudden "oops" factors such as a new hot water heater or emergency repairs.

malacca

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Yes. Yes. and Yes.

It makes sense in many aspects.

1) You may be living in a market you can't afford - but still want to be invested in RE.
2) You might move around a lot. The best aspect of renting is the freedom. Your properties can stay put and generate enough to pay your rent wherever you happen to be.
3) Returns on lower end RE is usually better than higher end.

I am currently renting out my residence in the midwest and using that to pay for my San Diego rent.

stupendous_stash

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It does, specially if you live in an expensive area. I am in the NYC are, though across the river and doing the same. Just figure out at which rent its better to rent vs buy on NY times rent vs buy calculator. I plug in about 10-12% return on investment assuming I will buy a two family rental with the same down payment I would have used for my two bedroom condo.

cchrissyy

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yes, this is what i do

mostly for this :
Quote
The best aspect of renting is the freedom. Your properties can stay put and generate enough to pay your rent wherever you happen to be.

money_bunny

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I rent, and I have a rental apartment near NYC.

I could very easily buy. I'm not for a bunch of reasons. The big one is when I move it's not probably staying in this area. I'm also not married, have a Girlfriend in a long distance relationship, and no plans on having children.
The hospital I work at is the only major remaining health care employer in my area. I could have a very difficult time obtaining work without a 45+ minute commute.

If we planned on having children make the school district the most important thing in NJ for us. Another blog/site I was on joked frequently about the last kid graduating High School. "The Congratulations Graduate sign comes down on Friday, and the For Sale sign goes up on Monday."

The other reason is a 250-350K house with 8-10K taxes has way more expenses than 900/mo rent. I created a spreadsheet that has what I pay in rent, and then on my live in duplex, triplex, or quad numbers what I would pay in "Rent" when I lived there with my tax benefits from owning factored in.

That's the bottom of the market by me. I am banking much more money by keeping my expenses low and my investing high.



zephyr911

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I rent, and I have a rental apartment near NYC.

I could very easily buy. I'm not for a bunch of reasons. The big one is when I move it's not probably staying in this area. I'm also not married, have a Girlfriend in a long distance relationship, and no plans on having children.
The hospital I work at is the only major remaining health care employer in my area. I could have a very difficult time obtaining work without a 45+ minute commute.

If we planned on having children make the school district the most important thing in NJ for us. Another blog/site I was on joked frequently about the last kid graduating High School. "The Congratulations Graduate sign comes down on Friday, and the For Sale sign goes up on Monday."

The other reason is a 250-350K house with 8-10K taxes has way more expenses than 900/mo rent. I created a spreadsheet that has what I pay in rent, and then on my live in duplex, triplex, or quad numbers what I would pay in "Rent" when I lived there with my tax benefits from owning factored in.

That's the bottom of the market by me. I am banking much more money by keeping my expenses low and my investing high.
Yep, it's all right there in the numbers - clearly you made the right call.
I applied the same rationale (expenses low, investing high) last year while rethinking our life plans, but the math works out differently in AL so we just downsized and rented out our old house. The mortgage on our current 3BR is less than the rent for a 2BR apartment, and our overhead costs (taxes, maint. etc) are very low. If we ever leave town, it'll rent for 150% of our monthly costs.

OP: the key is to crunch the numbers, as you've seen from the replies. The answer is quite possibly yes, especially if you can do most of the upkeep yourself. Just make sure you do a comprehensive analysis.

money_bunny

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I did a rent vs buy post a month or two ago.  I'm actually going to try and sell while it's a hot sellers market since Co-Ops have a longer time to sell because of the extra requirements on the buyer.

NYC/NJ math is going to be different than AL math. I look at other locations in the USA and there are amazing opportunities such as 150-250K quads that are not destroyed with 2K taxes on them.

In my area of NJ I am not seeing anything that does not match the 1% rule at the least. Most of the multi-family is overpriced so that it would be very hard to make money on it.

The other thing to think about is NYC and NY and NJ have VERY strong Pro-Tenant laws. If you get a problematic person in, it's very hard to get them out.


zephyr911

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NYC/NJ math is going to be different than AL math. I look at other locations in the USA and there are amazing opportunities such as 150-250K quads that are not destroyed with 2K taxes on them.
Yep... it's part of what keeps me here for now.

zoltani

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Re: Does it make sense to buy a rental, but live in someone else's rental?
« Reply #10 on: April 28, 2015, 01:44:06 PM »
Yes, I did that. My rental was out-of-state in a low COL area, where I can get returns I would never see in the high COL seattle area. I rented in seattle because it seemed outrageous to buy. However I did buy my first home to live in last year in a lower COL area of puget sound. It was kind of an odd feeling buying our 3rd house, which is the first we actually live in!