The Money Mustache Community
Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: sb_NoVA on July 15, 2014, 10:23:44 AM
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I live and work in Northern Virginia. My primary residence is a very small townhouse/condo, primary mortgage is paid off, but has a HELOC with $40k balance @ 1.99%. I took the HELOC to payoff the mortgage and avoid refinance costs.
In 2012, I purchased an anti-moustachian property in the same area for $410k, 20% down, 3.375% 30 year fixed, 2 car garage townhome, 3000sq ft including garage. I lived in it for few months and decided to move back to my condo. The house is worth $500k now. It is rented for $2300/month and renters maintain the house reasonably well. My monthly expenses (Interest, tax, HOA, Insurance) are $1440 (I don't count principal as that is going directly to my equity). I reserve $100 per month for maintenance, so total expenses are $1540. Rent is $2300. Thus, my monthly income is 760. Annual income is $9120. Annual ROI - $9120/$80k = 11.4%. Over time this % increases as Interest payment diminishes in a mortgage and rent goes up. Clearly, this property flunks 1% rule.
After reading more about 1%, 2%, and 50% rules, I started digging up more around my area and discovered that if I sell this property and invest 1 hr out west in Charles Town, WV or Bunker Hill WV, I can get rentals which would be closer to the 1% rule. I could sell my rental, take the $200k equity and pick up 3-4 townhomes (or even more) at $150k each with 25% down and I could collect about $1500/month rent on each of those properties and meet the 1% rule. Quality of renters might be an issue and these properties will end up taking more of my time as well. I wouldn't mind quitting my full time job in the near future and focus exclusively on rental real estate. I do plan to get my license this year.
About me:
I am single, age 30, and have about $200k in stock market (taxable and tax-deferred). Cars are paid off. I'm a bit risk averse when it comes to primary residence - I wouldn't want to use HELOC on my primary residence for investments.
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Hi,
I'm a fellow NoVa resident. Congratulations on what has turned out to be a nice home purchase! I have not researched your prospective locations, so I can't comment on those specific rental markets (I might look into them myself!). But your overall plan to find better cash flowing properties is sound, and would likely provide a little more diversity than having a great deal of equity wrapped up in one property.
For what it's worth, I have a rental property in Falls Church that also fails the 1% rule. I'm holding it because appreciation on that property is greatly outpacing what I would get in increased cash flow elsewhere. As an example, 4% appreciation on your house = $20,000. But that's a gamble, and I don't have a crystal ball for what will happen to home values in Ashburn. Just something for you to consider when making your decision about selling and reinvesting elsewhere.
Note that you do not need a license to be a real estate investor, that is a completely different animal than getting a license to sell real estate. If you want to sell real estate as a job, fantastic. But you do not need to become an agent or get a license to buy, hold, or sell rental properties as an investor.
Good luck!
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Great to hear from a fellow resident. My thoughts are inline with yours, rental investments in major metropolitan areas are more for appreciation than cash flow. 2013 has been a very strong year for local real estate.
On the other hand, housing has barely recovered in Eastern WV. I did lookup some properties on Zillow/Redfin and last month I drove around a few neighborhoods. Will do more research.
My desire to get real estate license is more of a preparation for a lazy retirement job like Mrs MMM. I'm not really hands on with power tools like MMM, but I do enjoy walking people through finding homes that fit their needs.
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I know people around here love cash flow but appreciation is really king (as long as cash flow is positive or is not an issue given your stash). Places like WV and Detroit have higher cash flow because home prices are low. But remember that also you are making let's say 20% of maybe $15,000 invested per house. That's only $3,000 per year. Multiply that by 10 and you now have a part time property management job making $30,000 a year. That may sound good to some people but that does not sound good to me. The prospects of appreciation is much less in these depressed areas due to slow economic growth.
It is much more desirable to invest in an area of high growth and pay a reasonable or better than market price for it and hold while the growth and improvement happens. You will make much more money on leverage than by cashflow. That's where the big money is made. Cash Flow is important but mostly as long as it is positive and you have good prospect of good appreciation, I'd take that over 1% properties in depressed areas.
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Sdremngr - Looking back, I agree whole heartedly. However, let's not forget that the emphasis on cash flow and ROI is what prevented me from buying a property in 2006 and I'm very thankful for that. Focusing on appreciation alone can't help us through downturns.
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I don't follow the 1%, 2%, or 50% rule by any means. We follow the southwest model. We invest in class A properties many of them were primaries since my husband is active duty military. We self manage them when we move out due to orders. We also buy pure rentals living off my husbands income (following an abridged mustachian principles) and investing mine. Although the profit margins are smaller, we have no vacancies, limited expenses (newer houses), self management (no management fees), PLUS we get appreciation in rent AND house value. I talk more about my strategy and self-management on my blog/website.
When we first got started we bought our first 2 pure rentals as close to the 1 and 2% rule. We invest out of the area in the hopes of getting better returns as Virginia Beach just wasn't doing it for us. We ended up in Charleston. I found that even though we were making great returns. 90k renting for $1150 and $99k for $1250, the 3% taxes, 1% insurance and 1% HOA killed us. Even though I was able to self manage and had lower "costs". I still paid for being long distance. Just the past week I paid a plumber $250 for caulk something my husband could have done if he wasn't 3k miles away.
Personally I am a BIG fan of living as close as possible. We invest all over because military "home" is as relative as the set of orders.
While I don't "only" invest for appreciation, it is an important part of the equation. I got my masters in South Texas remember talking to my team partner, an accountant. He told me houses didn't make sense. They didn't pay more money than they cost when adding the "big" purchase. While there is a lower cost of living for houses, it is because house values has not appreciated. Neither have rents really. At the same time roof,water heater, etc need to be replaced.
Therefore I try to buy houses in areas that the area appreciates so my "costs" to fix up increase less than my rents, so my cash flow increases at a large rate than my expense.
My parents own a house in Maryland (where I grew up). If we ever get stationed out there. We are TOTALLY buying a house. As I feel its ag rest market based on growing up and living there for 20 years.