Newb Reality Check

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Newb Reality Check

Brittney Lynn
Valley Stream, NY · Member since 2014 · 24 posts · 1 vote

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!!!

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Most Popular Reply

Tyler Weaver
Investor · Cincinnati, OH · Member since 2008 · 319 posts · 243 votes
12y

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.

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  • Account Closed
    Dallas, TX · Member since 2013 · 4k+ posts · 744 votes
    12y

    I wish you good luck. Living rent free you should have a good down payment save up.

    Joe Gore

    0Reply
  • Scott E.
    Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
    12y

    Hi Brittany

    You're not crazy to want to live rent free, but these #'s don't exactly accomplish that. While I agree with where your mind is at in comparing truly renting to homeownership, I think you need to just keep searching for a deal that cash flows better. A better scenario looks something like this:

    -Find a place for ~$450k where your payment is ~$2k / Month.

    -Rent one side out for $2k / Month, covering your entire mortgage

    -Live "rent free" in the other side

    In this example you just build up a bunch of reserves with whatever cash you have left every month (because you probably will have depleted your reserves in aqcuiring this home). The savings can go into an emergency fund for vacancies, repairs, etc. Once you build up enough cash, you can buy another.

    0Reply
  • Brittney Lynn
    OP
    Valley Stream, NY · Member since 2014 · 24 posts · 1 vote
    12y

    Hi @Scott E.

    I know... you are right! It just seems so hard to find something that will let me live rent free in NYC when I factor in the 50% rule. The closest deal I found if I had all the units in a triplex rented out was a negative cash flow of $150. If I moved into the smallest unit I would be paying $1300ish. I have only been looking in places that meet 'MY' standards. I havent looked yet but I bet I could find a cash flowing property if I looked in more of the sketchy neighboorhoods but these places dont have the amenities that 'I' need - they may be perfect for tenants but I think I am a bit biased because I am looking at the property as a home for myself first and an investment second.

    0Reply
  • Brittney Lynn
    OP
    Valley Stream, NY · Member since 2014 · 24 posts · 1 vote
    12y

    Just thought of something...

    Should I be partnering with a real estate agent to help me find properties in the areas I am looking rather than scouring the redfins, zillows and trulias?

    0Reply
  • Scott E.
    Contractor · Scottsdale, AZ · Member since 2010 · 2k+ posts · 3k+ votes
    12y

    @Brittney Lynn Yeah you don't want to settle for a sketchy neighborhood that you are uncomfortable in just to make the #'s work..

    Keep looking, and sure an agent could help. It's not like you would be paying them anything to represent you. Just make sure you find somebody who has experience working with investors and acquiring multi's.

    Without an agent, another great source for finding properties is realtor.com. They have a good site and a phone app that is very user friendly.

    0Reply
  • Brittney Lynn
    OP
    Valley Stream, NY · Member since 2014 · 24 posts · 1 vote
    12y

    Thanks Scott. I just set up some alerts from the site!

    This might be an obvious question.

    The properties in the areas I am looking are kinda 'stale'. With the spring coming up, should I anticipate more properties coming on the market or does that only apply for apartments?

    0Reply
  • Tyler Weaver
    Investor · Cincinnati, OH · Member since 2008 · 319 posts · 243 votes
    12y

    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.

    1Reply
  • Brittney Lynn
    OP
    Valley Stream, NY · Member since 2014 · 24 posts · 1 vote
    12y

    Thanks Anon!

    NYC is a tough place to find something that works for investing if you dont have oodles of money.

    Evaluating each property as if I dont live there is exactly what I've been doing! I pulled rents from craigslist and took the average based on the area and still I am finding things that are about ~$200 cash flow negative.

    I would look outside NYC if I was in a different stage of my life or just solely looking for an investment property but I must find something owner occupied for the next couple of years.

    0Reply
  • Andrew Potievsky
    New York City, NY · Member since 2014 · 12 posts · 11 votes
    12y
    Originally posted by @Tyler Weaver:

    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.

    Hi, you mentioned there are many cities that offer 10%+ cap rates. Are any of these close to NY (2-3 hour driving)? If so, can you please share a few?

    0Reply
  • Caesar Nguyen
    Real Estate Investor · New York City, NY · Member since 2013 · 13 posts · 14 votes
    12y

    I know how you feel Brittney. I'm in the same process myself.

    With the inventory so low right now, I think it is definitely better to partner up with an agent to find property that is within your criteria.

    Keep us posted with your progress.

    Good luck!

    0Reply
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