Buy now or wait?

Question

I am eyeing a duplex in my hometown (not LA) where I'd put down 10%. I'd have to pay for my LA rent while also paying for the duplex which total to approx 35-40% of my after tax pay. With paying for the duplex it's -$23K in the first year, then -$10K for 4 years. Cashflows at year 5. Based on appreciation it would still do well, but does not account for any potential repairs that arise outside of me buffering 5% repairs, 5% CapEx, and 5% vacancy.

I’d like to get something there as I intend to move back to my hometown in 3-4 years and see it as a place I would be long term. However with the negative cashflow, is it worth it? I also can put 20% down, which would make it cashflow but given it’s my first property I am wary of putting too much down upfront. Would love advice/thoughts or if better to wait when I can house hack instead.

Jason Zundel · Answer

In my experience, even for your first investment, go big or go home.  Whether you plan on moving back or not, focus on the investment itself and do you best to be a bit more clinical.  It's always easiest for the first investment to have it close so you can personally manage and support.  Look at the age of the home and the standard costs of repair (even new will always have something dang it) and give yourself a buffer there.  If you can afford 20% and it's a good deal, then dive in.  If you can't afford 20%, then I would be wary about starting your investments with a negative cash flow. Don't get emotionally attached even if it's in a location that you THINK you MIGHT be heading in 3-4 years.  Make the decision if it makes sense NOW.Note: This information is for educational and informational purposes only and does not constitute legal, tax, financial, or investment advice. No attorney-client, fiduciary, or professional relationship is established through this communication.

Terrance Teague · Answer

Hi Paulina,

You're clearly running the numbers and thinking long-term, which already puts you ahead of the game!

A few thoughts that may or may not help:

1. Covering LA rent and subsidizing a property that’s cash flow negative by $23K in year one is a big financial lift, especially when you're just starting out. Even though that number shrinks over time, it’s still a lot of out of pocket expense to carry unless you have strong reserves and job stability. Negative cash flow can be manageable if you think long-term as part of a bigger strategy.

2. If putting down 20% turns the property cashflow positive that’s worth serious consideration. It reduces your monthly burden, which would make me feel better.

3. Since you plan to move back in 3–4 years, waiting to house hack could make a lot of sense. You’d reduce your living expenses, gain experience managing tenants, and buy at a time when you're actually in the market physically, giving you better control and options.In my opinion you’re thinking about all the right things, so trust your gut and enjoy the process!

Paulina L. · Answer

Thanks, appreciate the advice and thinking of age of home to standard repairs timeline. As for if it’s a good deal, with 20% down, it cashflows very low. In a promising scenario, it would cashflow ~$100. I am using 15% buffer for CapEx, repairs, vacancy. Rest is in mortgage/insurance/interest at ~$2900/month. Rent is $1500-1800. No PM if I manage it (I fly to my hometown every 2 months). CoCROI is 2.3% in best case scenario, cashflow is $160/month in best case scenario. Fully only an appreciation play. Am I analyzing this wrong? Should I look at other options for better CoCROI?