Initial primary residence, then long-term rental...maybe?

Question

Hey, I’m looking to purchase a home in the DMV area (MD or VA) as a primary residence and intend on renting it out after we leave.

BLUF: From what I’m seeing, based on the current rates, home prices, and rent in the area, a long-term rental may not cash flow. Is it worth considering properties that are going to appraise more than cash flow?

More info: I will be working in Arlington and we’ll be in the property for roughly 18mo before we move out of the country (military). Our budget is about 450k or <3500/month; this is what we can afford if, when we rent it out, the rent doesn’t cover the entire mortgage. We plan on using the VA loan and to buy down points, at least 1 percentage point worth.

We’ve considered a house at a lower cost (250-350k), but they generally need some work (kitchen/bathroom renovations). This isn’t necessarily a problem, but I wouldn’t have the time to do any part of the renovations myself, so I would have to hire a team to do it all.

Then there’s the matter of a townhome/condo vs a single family. I’d prefer a single family to avoid the HOA/Condo fees, but most of that area seems to consist of townhomes. There are new builds within our budget, and they are all townhomes.

I’ll stop here so I don’t ramble. Does anyone have any experience investing in the DMV area?

New to the BP community and looking forward to learning from you all.

Russell Brazil · Answer

The DC area is an incredibly low risk market. And like any investment vehicle, low risk equals low yield.

Currently to break even with rent covering just the mortgage payment takes about a 35-40% down payment on an investor loans. If you're buying as an owner occupant, your interest rate will be about 1% lower, so you'd be closer to 35% down.

But with low risk real estate investments you typically have an appreciating asset, and high rent growth.

But if you are buying with a VA loan with 0% down the reality is 100% leverage, it will take many years and interest rate drops to get to break even. The risk of negative cash flow here comes from the high leverage though, not from the market.

Lexie De Stefano · Answer

Hi Lewis, welcome to the DMV! It's a great place as an appreciation market, and there are a few strategies that you just might make work if you get creative here. I can't really speak to DC itself, but here are a few tips on the VA/MD sides:

BLUF: At your price point, breaking even will be tough. But with some creativity--and perhaps a willingness to commute--you may be able to make it happen. Here are a few ideas that perhaps might work at your budget in this area, and happy to chat offline anytime!

1. If you've got the capital and you know some of the homes you like require renovations, perhaps it's worth checking out an FHA 203k loan program (the renovation funds are built into the loan, and you don't pay them out of pocket!) A lender will be able to speak to specifics, but it might help with achieving any needed upgrades. Otherwise, picking an option that requires minimal renovation would be great for the VA loan.

2. On the Virginia side: LTR-There are a few pockets of townhomes that may work at your price point, and from what I've seen, you may be able to break even if you play around with the numbers and are willing to drive. MTR: you should be able to cashflow or break even if you employ the midterm strategy here. (Many options with this, and I'm happy to chat offline!)

3. Maryland: there's a HUGE opportunity for affordable housing, and the MD counties are amazing at publishing the rates by zipcode, often up to 6 (Anne Arundel county) and 7 bedrooms (in PG & Montgomery Counties). You'll likely find cashflow with this investing strategy, even at your price point, because the counties are willing to pay DC rent for Maryland purchase prices. Just will need to convert dining rooms/basements into the last couple bedrooms to hit your target rent, but you can do that at the end of your time living in the home!

4. Condos will probably be the toughest to achieve cashflow and have the most restrictions. But...never say never though! A friend of mine has a DC condo that performs incredibly well with excellent cashflow! Just about the right unit and strategy to make it work.

Best of luck with your home search!

Lewis Finney · Answer

Thank you! These are all great options. We hadn't considered an FHA 203k loan, will do some research.

Russell Brazil · Answer

All investing is deploying capital in order to get a return based on the risk in the investment vehicle. Yield, or the amount of cash an investment throws off, corresponds to the risk of the investment vehicle.

A US Treasury bill is incredibly low risk, so it has low yields say 4% currently. A corporate junk bond is high risk so it has a yield of say 10-12% right now. The higher your risk, the higher your yield. This is callthe Risk Premium. The reward you get for taking on a higher risk investment.

The same happens in real estate. Low risk markets have low yields. Cap rates on DC single unit properties are about 3%. On multifamily is about 4%. Compare that to higher risk markets like say Baltimore where you might have 7% or 8%. Detroit 8-9%.

In a low risk investment vehicle your delta from expected returns is small, and in a high risk it is larger. Higher risk means higher volatility and thus a higher probability that expected returns do not actually play out as planned.

The low risk markets though tend to overtime far out perform the high risk markets. DC, Boston, San Francisco, Seattle.  Key components in risk are demand, population growth, wage growth, market stability. And that's why the low risk markets have sufficiently higher IRRs, internal rate of return. Because population growth, high demand, and more capital continue to push prices up in those markets over time.

Theresa Harris · Answer

Going for a single family instead of HOA/condo is good.

For cash flow vs appreciation, that is a personal decision.  Costs for the home are more than the mortgage, you have property taxes, insurance and for rentals vacancies.  How long do you plan on keeping the home?

Buying a place that needs a bit of work, can be a good move. If you are living in the home, you can do then renos over time.

Bryan Montross · Answer

With such a short timeline for living in the property it makes me question whether buying is the right option. It doesn't give you much in the way of exits if the market isn't doing well in 1.5 years. One thought might be to use the money you have for the house to buy a rental in an area you can at least break even or get cash flow (Do you want more appreciation or cash flow). Then rent near your work. Now you know you have a good rental and hopefully it is offsetting your current rent and paying for itself.

The only thing I might say is if you are planning to move back to the DMV when your overseas tour completes then it might be worth buying and renting while you are gone. Now when you come back you have more choices and can either move back in, or if the rental is doing well, buy another house.

Good Luck.

David M. · Answer

@Lewis Finney

You might want to check out this very long thread:  https://www.biggerpockets.com/forums/48/topics/1131066-cash-...

Cash flow historically is not the way to go to generate wealth, at least in my opinion.  So, there is nothing wrong with your thinking.

Buying power in your area should continue to increase as military, civilians, and contractors have been getting decent to very good annual increases.  So, the properties will continue to appreciate.

I don't know that market, so not sure on your question between a townhouse or a regular single family.

I hope this helps.  Happy to chat.  Good luck.

David M. · Answer

@Lewis Finney if you need reno money, i believe the loans all have something.  Conventional is just called renovation.  VA should also have an option.

Not sure what sort of lender you are working with, but honestly in my experience the brokers that are marketed to you through the military aren't very helpful.

You still need to qualify for the reno --- basically qualify for the larger loan.  All the work has to be done through one licensed contractor.  You need to find a contractor who can do a bit of paperwork since to get the loan, he will need to submit detailed estimates.  That's the most stressful part since you need that to qualify for the loan.  Contrary to popular belief, there is no "certification" to be a 203/reno contractor....

Good luck.

Theresa Harris · Answer

Don't over extend yourself.  Also factor in the cost of buying and selling.  Most people who buy and sell within a few years, might break even if they are lucky and house prices went up.  Otherwise, they are generally losing money.  With current interest rates and house prices, you may get further ahead with a high yield savings account.

Jack Seiden · Answer

Honestly this is a really simple calculation, the main reason to buy a primary residence is to shelter yourself from increasing rents, the breakeven timeline can vary greatly on that I’d play around with a calculator like this (https://www.calculator.net/rent-vs-buy-calculator.html) figure out how long you your break even is, how long you think you will be in area & make a decision based on that.

Initial primary residence, then long-term rental...maybe?

Most Popular Reply