About a year ago, my hubs (30) and I (26) bought a great house in one of Denver’s “hottest” neighborhoods. We bought the fully renovated house for $382k (3br/2ba), which we knew was overpriced, but we justified that it was worth it and we could afford it. We realize it was not a mustachian move, but we don’t regret it at all because our quality of life is great, it is exactly what we wanted and we have really enjoyed living there (I know, face punch). Lately, though, we have been thinking about our next step. We are not ready to move, but we anticipate that our current house will not fit our needs/lifestyle forever. We want to stay in the great Denver neighborhoods, but we can’t stomach that getting a house that’s fit for a family in 5-8 years from now would certainly cost over $500k in ANY Denver neighborhood. So, our plan is to buy a fixer-upper in an up-and-coming neighborhood now (~$200k-250k), rent it out, renovate it over time to be our dream house, and when we’re ready for more space, move into it and sell our current house. We don’t think a fixer upper will be hard to rent out because the neighborhood we are eyeing is right next to a small university. In our plan, by the time we’re ready to move into this house, the neighborhood we buy in will also be one of Denver’s “hottest” neighborhoods, but we will have gotten in early to avoid getting priced out and spending way too much on it, plus not needing it to be "move in ready" as we would if we waited until the last minute. This will also hopefully help us avoid lifestyle inflation by having a second house already secured.
We realize our plan requires us to become landlords, but we are not necessarily looking to get into rental property as a long term side gig, except for this one house. Our main motivation is to make a smart choice that eventually pays off and increases our happiness, not necessarily maximize rental income. It’s definitely a bonus that we’d add some cash flow to our existing incomes in the next few years as well. Our lender approved us for a mortgage, and we’re starting to save up our pennies for a 25% down payment.
The advantages of our plan as we see them are:
• We could secure our future dream house now, while we’re young DINKs (engineers). We would then have plenty of time to renovate it into exactly the house we want over the years.
• We would take advantage of good interest rates available now.
• We would get into a “hot” neighborhood ahead of the curve, allowing us to stay in the city when we otherwise would probably be priced out.
• We have time right now to be picky and find the exact house we want, rather than later when we NEED a new house before x happens (baby arrives, I decide to stop working, we don’t like our neighborhood anymore, etc).
• All the advantages of owning rental property (someone else paying for our equity).
The disadvantages of our plan as we see them are:
• All the disadvantages of owning rental property (wear and tear, taking on the side job of being a landlord, repairs/maintenance, etc).
• Risk associated with trying to anticipate what the future holds.
The specific questions I have for you experienced landlords and homeowners are these:
• Is our plan a good one? Are we being ridiculous to try to find something cheap that will greatly appreciate over time? Is it asinine to assume there will even be something that will serve as a good rental now that would be a good family house later?
• One option we have is to open a HELOC from our existing mortgage for up to ~$42,000. Is this something you would advise? Our lender said it can be a really great tool with tons of flexibility, and a way for us to still beat the interest rate increase before we save up 20-25% down payment. He said the adjustable rate isn’t that big of a deal because it’s a small sum of money (compared to an entire mortgage). What do you guys know that my lender isn’t telling me?
• I read about the 50%/2% rule on MMM and elsewhere. Do any of you have rental properties in Denver or similar cities, and can you speak to which rules of thumb I should be making an effort to uphold?
• Do I deserve a facepunch for even thinking about having two mortgages?
Thanks in advance for your time and I'd really appreciate any feedback, positive or negative about if this is a solid plan.