Buying a house that will never cash flow?

Question

My lady and I are moving to Columbus next year and will be buying a in the $450-$500k range. With 10% down, PITI will be about $4,000/month which is around 25% of gross earnings per month.

Comps right now for 2-3 BR houses and condos are in the low $3,000s.

When we are ready to move to the suburbs in 4-5 years I’m not sure rental comps will jump $1,000 more.

At that point we can either sell, Airbnb, or hold and rent at a loss until rents catch up and/or maybe interest rates have dropped by this time.

I’ve also been considering putting this money in the market and just renting.

$50k down, call it 4% appreciation per year, after 4 years on $500k is about $80k. After taxes, closed costs, etc would be $60k unless we 1031.

If I put that $50k in the market, maybe I’d earn $16k after 4 years figuring a 8% return.

Is there anything I should be thinking about here?

Rachel Kokosenski · Answer

Agreed - if you are comfortable being an on-site landlord for at least a year, I suggest you look at 2-4 unit multifamily options. With the new FHA loans offered where you can put just 5% down, it's a great way to enter the market! You may even find that the other rents will more than cover the monthly mortgage payment, thus allowing you to live rent-free and start accumulating a nest egg to roll into another property!

Remington Lyman · Answer

What about doing a house hack in a duplex?

Jonathan Marsh · Answer

That's a great point I didn't think about. Closing costs when buying plus agent fees when selling will be another $30k+ I need to account for. That's 2 years of assumed appreciation right there.

To be fair, the goal is to hold for as long as it makes sense.

Christian Ehlers · Answer

I agree with Chris that your primary residence needs to meet you and your lady's needs more than being just an investment, but of course it's good to think of those things too.

I would suggest buying instead of renting and putting money in the market because even if you do earn $16K from your investments you are going to pay WAY MORE than that in rent over 4 years...   I don't know rents for your area but if it's $2K/month for 4 years that's $96K you can't get back.

Get the house/condo/whatever, take the appreciation, the loan paydown, the tax benefits and don't only focus on cashflow.

Carlos Ptriawan · Answer

about to say the same, it is best market for cash flowing and duplex househacking, so it is one of the best thing that the city can offer.

Jonathan Marsh · Answer

The priority is living in a turnkey house/condo we like in a good neighborhood. The icing on top is that when we are ready to move out to the suburbs it will not be seen as a liability I wish I didn't have.

While househacking is cool, and I'm already a landlord of two turnkey houses in Austin, I do not have the time to rehab a new place or the desire to live in a B+ neighborhood.

Peter W. · Answer

You haven’t given us goals so we can’t really give good advice. Only homes in my market which make sense are starter homes in B-B+ areas. (I don’t really look at lower areas). Bigger homes don’t rent for high enough to cover the mortgage. If your pal is to build a real estate empire and use low down payments plus moving to build then the property you buy needs to work as a rental.

If you are trying to not “waste” money on renting that’s another story. I think primary homes rarely turn into a good investment. I bought my primary 5 or 6 years ago for 195000. It’s worth probably 300-330 now.  I bet if I sold my “profit” would be negligible: new paint, new floors, new lighting, asbestos abatement, new kitchen, new fencing, new bath, new window between the kitchen and living room, landscaping, closing fees on opening, closing fees on close. I’ll need new stairs and to refinish the deck before selling there is another 2k-3k. Maybe come 20k + saved 200-400 a month on rent which is another 20k or so. I guess it was an okay investment.

Christie Gahan · Answer

I'm a little confused.  How big of a home do you want?  Comps for 2-3 bedroom houses and condos are in the low $300s but you are planning to be in the $450k to $500k range?

Sam Yin · Answer

@Jonathan Marsh

I think you are looking at this from the wrong/in efficient perspective.

To your OP, there are other benefits of owning you missed. For example, based on the scenario you laid out, you will be tax exempt if you sold, so there is no need to stress on the 1031x and it's timelines. You also need to factor in principle paydown, depreciation, write-offs, etc...

Above all, as others mentioned, for a primary, you should concentrate on buying a place that works for your needs. If this was primarily for an investment, then perhaps find a different type.

Buying a house that will never cash flow?

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