Denver area real estate advice?

[Pixelshot]

My son was just accepted into a school in Denver in the Cherry Creek neighborhood which we want him to attend (long story). We currently live in southern Denver (Parker) so we're considering a move to be close to his school to avoid a soul-crushing commute. (since we both work from home, the school is our only location-limiting factor).

For those of you familiar with the Denver area, you'll know that Cherry Creek is a very expensive neighborhood. Yet, we want to be close enough to bike to his school. Dilemma. We have enough income to buy an expensive place. Our budget is probably under 500k, but we could go higher if the numbers made sense. Yet we don't want to get into that large of a mortgage and limit our cashflow options. We own our current house and plan to rent it as part of a retirement strategy.

I'm seeking two areas of advice.

1) Am I crazy to even consider this? I want to be close to the school, but it'll cost us over 500k to buy something there (even the most modest place that would fit our family of four). Even a couple of miles away the prices are still in that range. The market seems so inflated yet projections say Denver will continue to grow for the foreseeable future so the market will probably stay strong. (the Hale neighborhood is especially appealing with a large urban development underway)

2) What if we will likely move in two years (his school location will shift a couple of miles to the east)? We will probably hold the house and rent it as well. Will the numbers add up or are we getting too far into land lording to sustain it??

[Pixelshot]

Thanks Slow2FIRE. Yes, we own a townhouse which we bought for 240k a year ago. The value is up according to the sales in our area.

I guess I'm a little surprised at the suggestion to rent rather than buy. We rented for years before moving here and it always felt so icky to throw money down a hole instead of using that money to build something (equity). For your Boulder home, It seems that even if you're not breaking even, it's still a good option. Even though you're not covering all of your costs, you're still getting ahead in the equity, right?

[ysette9]

http://jlcollinsnh.com/2013/05/29/why-your-house-is-a-terrible-investment/

"Icky" is not a strong foundation for making financial decisions. You are not throwing away money while renting, you are buying a very important service: a home for yourself and your family. After food and water, there is very little that is more important than a safe place to live.

Buying and then turning around and possibly selling again in two years most likely makes no sense due to transactional costs. Check out the NYT's rent vs. buy calculator to be sure. Don't let yourself fall into the trap of doing what everyone else does or make decisions based on irrational feelings that negatively impact your financial well-being.

[ysette9]

How about this: if you were to put 20% down on a $500K house and finance the rest at 3.5%, you would be paying $1,167 every month in interest alone. Does that not give you the same "icky" feeling as renting?

To make it a wash, instead of buying, you could find someplace to rent for $1,167 a month and then take the extra $630 a month you would have been putting towards principle and invest it in Vanguard instead. Added bonuses for you include not having to pay property taxes and not being responsible when the washing machine explodes or the toilet leaks.

On a related note, I totally understand the appeal of having a rental property where the rent covers the mortgage (P&I, or even the property taxes and insurance). We were in that position for a couple of years. Fundamentally that thinking is flawed though. You have to consider the opportunity cost of the money you have tied up in both the down payment and the monthly cash flow servicing that rental property. Don't forget about vacancies and repairs! If you were to instead invest that money in a passive investment vehicle you may get better returns. You also may not. That is why it is critical to run the numbers first and make sure you are at least hitting the rules-of-thumb like the 1% rule that says the monthly rent should be 1% of the purchase price. I sincerely doubt you would be able to get anyone to pay $5K a month to rent a house in the Denver area, even in Cherry Creek. Houses might rent for that much in my neighborhood, but I live in Silicon Valley.

[Pixelshot]

Thanks. Just a note that the rental prices for a similar home are pretty much even with the mortgage prices, perhaps even higher. I would be paying around 2k a month to rent a place smaller than a 2k/month mortgage can buy me in the same neighborhood. Down payment can be as low as 3% which gives me a higher interest rate (and more money in interest to the bank) but doesn't tie up that much cash relative to 10% down.

[Pixelshot]

Just to clarify - we would likely move within two years but KEEP the property as a rental. When I put all of the data into the NYT rent vs buy calculator, the brake-even rent price is $1524 which is not even close to the range of rentals in that area. Rentals are likely 1800 minimum up to 3k.

Yes, we're buying a service as a renter, but at a premium. The owners own the house and rent it for a reason, because it's cheaper to own.  I guess I'm missing some important parts here in the rent vs buy argument. What am I missing?

[ysette9]

Do you want to be a landlord? Do you envision your FIRE path including real estate? If that is the case, then great. When doing your research on how to make those numbers work so they are good investments you may find that there are better deals to be had in other geographic locations. ARebalSpy (arebalspy) is a very active poster in these forums who achieved FIRE through a bunch of real estate rentals. He has a number of threads and can provide great insight into how to do this successfully, and in particular how to identify a good rental candidate. Some people (ahem, me!) are too lazy to deal with all the fuss of being a landlord, but others do it and achieve better-than-stock-market returns as a result. You can (not guaranteed) get those better returns because it is not passive investing.

My point being, if you want to get into the rental business then by all means do so. Just make sure you are doing it because it is a conscious decision that it is the path you want to take, versus falling into it by accident because you wanted to save ($1800-$1524)*24 months) $6624.

[ysette9]

hah! I just noticed that there is a lovely sticky in this subforum on how to evaluate whether a rental is a good idea financially. If only I had seen this for my previous post. :)

http://forum.mrmoneymustache.com/real-estate-and-landlording/evaluating-a-rental-property/

[Pixelshot]

Thank you ysette9! Looking at this now. 

I do think I'm a good candidate to landlord my way to FI. I have time (stay at home dad), some cash reserves for repairs, and have spent many days behind a hammer and saw. I guess the upshot is that if I buy a house in the area I want to do so in a way that provides me more options (to improve it and landlord it later). But, it's a lot less scary to do at a lower home price. If the prices were 200k or under, I'd be much more comfortable with the risk.

[ysette9]

Cool that you have the time and skill set to manage a property. Doing a trial run with your town home could be a good idea. We did that with the town home we had purchased new after a job move made us decide to move (into a rental) and rent out first place out. Even though it was only three years old it did have a couple of issues that made me very pleased we had a property management agency. There was the notable early Monday morning time when the garage door wouldn't open and the tenants couldn't get to work. With both of us having our own jobs to get to, I definitely didn't want to take care of that. I get the impression that our landlord spends all of her time going from rental property to rental property doing maintenance and repairs.

[Pixelshot]

Thanks for the advice. Yes, we will be putting up our townhouse as a rental which was in part the reason for our purchase in the first place. It's a small place (compared to what our budget could afford) so the risk is low. The catch is that we'll have to decide to rent or buy the next place before I have any experience being a landlord. I have friends who do it so I think i'll be ok (and the house is in pretty good condition so risk is lower). Also, since it's a townhouse covered by an HOA I don't have to worry about exterior issues like snow removal and roof replacement.

As to the other questions from @Slow2FIRE about cashflow. We're in a good spot cashflow wise so we could make it work. This would all be a much easier decision at a lower price point, but it still could make sense. thx

[the_fixer]

The housing market in the Denver metro area sure has been crazy in the last ~5 years.

Real estate has become so expensive in this area it is like tulip mania... multiple offers way above listing from frenzied buyers. Hard to believe it is sustainable long term.

My Personal feeling is
Builders are starting to catch up to demand for new houses
Interest rates are going up meaning people will be able to afford less house
Rent rates are trending down slightly
Rental vacancies are up

Maybe rent for a while, see what the market does, see if you like being a land lord?

You are temporarily renting to allow your kid to go to a school you want not because you can not afford to own. It will be temporary and it sounds like you will be moving for another school in a few years.

But if I knew what I was talking about I would have purchased a dozen houses back in 2012 instead of just 1 :)


   

[waltworks]

Just rent for a couple years. And read up on how to actually make money on rental RE, because it's pretty clear you are not going to based on what you've posted so far.

I'd sell the townhome now, too, before you lose your capital gains exemption, unless it's just an awesome rental for some reason.

-W

[fishnfool]

To me this plan makes little sense, are the school's in Parker that bad?

If you really want to buy by the new school, I would sell the townhouse.

[Pixelshot]

To me this plan makes little sense, are the school's in Parker that bad?

If you really want to buy by the new school, I would sell the townhouse.

The Parker schools are good. The school our son is attending is also good but not exactly what we need. The reason for moving to the new school is specific to our son's needs, which I would rather not explain. Suffice it to say that it is a priority for our family, over the money issues, so I am trying to make the best financial decision even though it is not ideal. On top of that, my wife is close to accepting a job which has an office she will be using occasionally near the school.

We have put our current house up for rent so we'll see what happens. We are going to be renting a new place near(er) the new school on a month/month arrangement until we find something that makes sense.

Thanks to all for the very useful info.

[clarkfan1979]

It depends on your income. I have relatives that bought house in the Denver area for 410K about 2 years ago. They put about 30K into it and it's worth about 475K. Their combined income is around 225K, so they can afford it comfortably. They also put 20% down.

[adamcollin]

I would have gone for the second option.