When entering a expensive market, should I look at an affordable condo or something bigger with a space I can rent out?

Question

Basically I am a 26 yr old civil engineering student who will graduate by Christmas and my girlfriend is a high school teacher.  We are going to be living in either Calgary, Alberta or Kelowna, British Columbia (Canada)  I have looked at a lot of online listings and done a lot of number crunching but am quite clueless.

Does it make more sense to buy a condo that I can pay off in ten years or buy a starter home for about double the price and have a rental unit to supplement the mortgage?  I will be graduating with less than 10k of debt and am very frugal, as is my girlfriend.

I am very ambitious and love out side the box ideas.  I am also looking for this to be the first step of eventually owning my dream home.

I know this is on par with asking "How do I raise a child in 100 words or less?"  but now that I am close to graduating, I am getting very excited about the possibilities

TL;DR:  Am I better starting off with a condo or a house with a rental suite?

Account Closed · Answer

Justin Franz - I'm in the same boat, but here in the DC area.  I ultimately would like to get a duplex, but that just isn't very reasonable in my geographic location.  I'm currently looking for townhomes with as many rooms as possible that I could rent out.

Justin Franz · Answer

Thanks for all the input guys!  I wish I could get the kind of rental that you can get in Jersey, Scott.  It's good to have a lot of options I suppose, its an exciting/interesting time to be a first time home buyer.  It seems like buying a starter home with a suite to rent is probably the most common sense way to go.  I think the 2% is almost impossible where I will be living, but its great to build up knowledge and be able to act with a bit of confidence when an opportunity does come around.

Scott Allan · Answer

I am in Northern NJ market of Hoboken and Jersey City.  To get 2% rental, you will need to buy in the lower income areas.  Section 8 will get you higher rents and your higher demand on returns are all relative on how the market trades.  From an investors perspective and ROI or Capitalization Rate standpoint, your higher ROI's will be in higher risk markets.

For instance, in parts of Jersey City where there is some crime, you will get a 12% ROI on pro forma and I am seeing a lot of ACTUAL double digit ROI's in reviewing my clients year over year statements.  In Hoboken, where it is a high end market flooded with Wall Street, bankers, etc, you risk is far less.  Net Yields on single condos are about 6% at the most.  A $500,000 condo for instance will only get you about $3,000 a month in rent.  In Jersey City for a 2-family home, you can buy a renovated home for $160,000 and rent them out for $2,600 a month.

At the end of the day, you have to be comfortable with where you are investing.  There is a ton of competition in higher end markets right now and Cap Rates / Yields are being driven down with increasing rents creating an increase in prices.  You need to work with an agent who can specifically tell you where the market is trading at in different categories, ie..multi family, single family, duplex, etc... Hope this helps, but I see a ton of upside right now in some upper end markets.

James H. · Answer

I would not want to live in a unit that fit the 2% criteria. You might consider just buying a reasonably affordable house that you can rent after you move on to the next house when your careers are paying more. That is kind of what I am doing although I did buy a little cash rental last year on the side.

Justin Franz · Answer

Thanks for all of the advice, I am obviously brand new.  Both of the markets I am looking in are college towns with high demands for rentals.  To buy a full duplex is not an option, I've never even seen one listed, to buy half a duplex would be the same ore more as a condo.  To buy a house with a LEGAL rental suite is pushing $400k in both those markets.  A two bedroom condo that would be desirable to renters down the road would be 180-220k.  I am a bit of a handy man with lots of friends and family who are trades people so I am also looking to put some sweat equity into whatever I buy.  Both my girlfriend and I will be making about 60k for the first couple years after I grad.

The interesting thing about Kelowna is that it is a big vacation rental market in Canada.  A LOT of people rent out condos to students during the school year and do vacation rentals during the summer ($1000 or more a week).  Is this an attractive option?

I guess after doing research until my head spins it comes down to buying a condo and paying it off quick, or buying a house with a suite and paying it off over a longer period of time, with the help of a renter.

This was my first post on this website after hearing it come up over and over again for the last month or so I've been doing research.  I would like to thank you all again for the timely and helpful advice!

Scott W. · Answer

& you've got to find an empty duplex; some, obviously, just have 1 side up for sale (dual owners).

it's a great way to start your career.  but like @ken kim said, we'd need to see some data.

@ scott williams makes great points & obviously has a lot of common sense. I would listen to him.

Scott Williams · Answer

If you can afford the duplex as Scott W. said them, imo go with the duplex. With the duplex you get the tax advanage's of a rental and no homeowners ass. fees plus you control your neighbors best of luck

Ken Kim · Answer

Does the 2% rule work in the major top 5 US cities?

For instance, a $230,000k multi family unit, plus 20k in rehab cost.  Usually these rent in the range of 2-2.5k.

The 2% rule would call for a 5k rent or am I doing th emath wrong.

Scott W. · Answer

best way for you guys to start off, I'd suggest buy a duplex. Live in one, rent out the other.  one day, when you move out & buy a home for yourselves, rent out the other half.

try to get at least 2% of your purchase price plus rehab costs for your market rent.

if you're going SFH or condo, this will be tough. others on here preach this rule but the reality is, it is very hard to do or you will be in the ghetto & not have less appreciation. stay away from condos with association fees if you can.

Just try to get as close to 2% as you can.