Temporary negative cash flow for long-term home? Please Advise!

[Kelly Nolan]

Would it make sense to buy a home, rent for 1-2 years (negative cash flow), with the intention of making it our primary residence thereafter? Please advice. Is there anything I need to think about here?

We found a home that we love in the bay area and is a good value (not for a short term investment, but as a family home. Ready to live in but with some simple cosmetic work, it will look amazing). However, we currently own our apartment and we're not in an urgent rush to move (but def can if it makes financial sense). Is it worth buying now given that interest rates are low and homes like this come around pretty rarely (i'm very familiar with the area). We have the money to buy exactly what we want now.

Here are some details: If and when we rent our current Apt at about $4500/month, we'll break even with our apt mortgage/all fees.

The home we like is in a steady growth market of 4-6% per year, but not in a high appreciation area (though who knows with all the IPOs this year in SF...but I don't want to speculate). Costs $1.55m. We'd put 20% down.  Our monthly mortgage (including insurance and all that jazz) would be $7500/month. We can rent for $6000/month. That's an 18k per year that we are paying + maintenance. We could move in immediately, but if we owned both, seems better to get the higher home rent than the apt.  Would this ever make sense to do? (I'm not so worried about tenants/evictions in this year, because it's all high-income families)

While we are ok with waiting 1-2 years to buy, we can probably find something else in our price range that we like but won't be as great of a value (most on the market are either turnkey or needs to be gutted completely, which we won't do).  Not sure what will happen to interest rates in the future and I expect a steady growth rate to be conservative, but of course, risk of that it could be higher. But not lower.

If we do wait 1-2 years, we're not planning to buy anything else in the meantime, because we will need to money for the down payment.

[Jeff Pollack]

Hey @Kelly Nolan, I've live in the Bay Area (18 years on the Peninsula) and have flipped a few houses in Walnut Creek, mostly in the Northgate area. Your plan is not crazy if it fits your goals. Sounds like you are not in a huge hurry to exit the day job and certainly don't need a class C/D apartment building in a tertiary market to spin off what in the end is peanuts in cash flow (if things go well). Your plan sounds more geared toward generating long term wealth and finding your long term primary residence. 

While some Bay Area markets, including Walnut Creek, are definitely softening its tough to pick a bottom. If you are planning on moving in and living there a long time it's not a big deal to bleed some cash for a short time before moving in. In the grand scheme of things it does not matter that much. The Bay Area is not fly over country. We have a trend that goes back a few decades that says prices double every 10 years or so. When your house is worth $3m+ in 10 years and you can yank out hundreds of thousands of $ tax free via a rate-term refi or HELOC, its not gonna matter that you lost a few thousand when it was a rental.