Newb Reality Check

[Brittney Lynn]

Hi Guys!

I am looking to break into the world of home ownership very soon and have a few questions.

I currently live rent free (woohoo) at my moms house on Long Island. Prior to that I was living in NYC and paying $1700 on a tiny one bedroom.

I know that everyone talks about cash flow here on Bigger Pockets but am I crazy for just wanting to pay as little as possible to live in this great city?

As I am sure you know, it is very hard to find a cash flowing property in New York City that is not in a sketch area. I have been looking in decent areas but cannot find anything that will cash flow at the BP golden ratio of $100/door.

I am also not yet ready to leave this city so my plan is this:

Find a duplex, live in one side and rent out the other. The numbers I am about to quote are just generally what I am finding but as an example:

House is $500,000

Principal & Interest is $2200

Each unit rents for $1500 so that would be $3000 per month. Applying the good ol' 50% rule I can expect to collect $1500/month. Now because I am living in one of the units lets halve that to $750 in collected rents per month.

If I now subtract the rental income from my principal and interest payment

$2200-750, I am left with a payment out of pocket of $1450. To all the investors out there this is bad because it is essentially negative cash flow.

The way that I look at it is when I was renting, I was paying $1700 a month to rent. If I buy a duplex, I am essentially only paying $1450 in 'rent' and at the same time building equity and hoping the property appreciates, raise rents etc.

Further down the line, I would eventually leave this property or sell it, or continue to live in it to pay 'cheap rent' in NYC and buy something out of state that does in fact cash flow but for my first property I think my goal is to simply pay less than I would pay if I was renting.

This would be my first property and at the same time I am VERY anxious to get out of my moms house!

Am I nuts for looking at it like this?

Thank you!!!

[Tyler Weaver]

One problem with 'nicer' neighborhoods/properties ESP NYC is that your competing with investors with different motivations bidding up the price.

You have investors with money just looking for capital preservation and growth, they might not ever NEED any cash in their entire lifetime so they can buy in solid NYC neighborhoods knowing that in a long term span the price will at some point go up. You are also competing with investors who are of the mentality that if they cash flow even or at a small loss all is ok because NYC real estate will certainly appreciate.

I purchased a similar rent free property around 2006. (Market timing fail...). While the property made for a great place to live and a good rent free environment it was not necessarily the one I would have purchased solely on investment merits. That being said it basically cash on cashes 100% because I got an FHA mortgage with like 3% down.

So if your going to do this here is my recommendation. Evaluate each property as if you were no longer going to live there. Factor in property management etc. If you can make satisfactory returns as a rental, then being your own customer is an acceptable move. Given you are living there, you will have more options on lower down payments etc that may cure some of the downfalls (lower returns of a house that's "nice") of buying a home as an investment.

Now if you have enough to cover the down payment on a 500k property, you could move out of the city to somewhere where you can get a property at a 10%+ cap rate. Self manage and make a whole living, or more realistically a basis of a living, out of it as opposed to living rent free. There are many interesting cities in Americas flyover states where this is possible.