Buying a rental investment property for short-term purposes

[Aniket Patkar]

Hello there! 

New member here. I wanted to get experienced opinions on our situation. My wife and I currently own a house in Royal Oak, Michigan (Metro Detroit). we have decent equity in the house as we bought it in 2017 and have 2.65% mortgage rate. 

Our main plan is to get a bigger house in near future (4-5 years) and keep this house as a rental property. We also have good enough cash put aside for a %20 down payment. We are not going for the house right now as the market is inflated and the interest rates are much higher.

We are thinking about buying a smaller property using that cash for rental investment in the mean time. Planning to buy it now, rent it out for 4-5 years and sell it when its time to buy the bigger house.

Do you think its financially wise to go through this process before the big house purchase? or Do you think its too much of a hassle and not enough profit margins for a property to give net positive gains and possible house appreciation? Since we are total amateurs, we don't which way is better (either get a property for short term or invest that extra cash .

Any help will be appreciated! thank you.  

[Travis Biziorek]

4-5 years is a pretty short timeframe. And you are contradicting yourself a bit here.

You aren't willing to buy the house you want because you believe prices are inflated and rates are too high. But you're willing to buy a smaller house?

Don't your same beliefs apply to the cheaper or smaller houses too?

Let's set that aside for a moment and go back to your 4-5 year hold timeline. 

I think that's fine as long as, and this is important, you DO NOT pay market value for the home.

If you pay market value you're going to expose yourself to fluctuations. What if prices go down over the next 4-5 years. What if they go nowhere? What if rates stay where they are?

Will that completely ruin your plans? If your plans depend on selling this new, smaller rental for a profit that's a big risk.

Now, if you can buy something that needs work, do the work and force some appreciation... that's a much smarter play. 

The other idea is that you just buy the house you want today. Again, if you're going to buy a smaller home why not buy the one you plan on purchasing in 4-5 years?

And finally, of course, the last option is to just keep saving and waiting until you can afford the house you want.

[Vasudev Kirs]

Quote from @Aniket Patkar:

Hello there! 

New member here. I wanted to get experienced opinions on our situation. My wife and I currently own a house in Royal Oak, Michigan (Metro Detroit). we have decent equity in the house as we bought it in 2017 and have 2.65% mortgage rate. 

Our main plan is to get a bigger house in near future (4-5 years) and keep this house as a rental property. We also have good enough cash put aside for a %20 down payment. We are not going for the house right now as the market is inflated and the interest rates are much higher.

We are thinking about buying a smaller property using that cash for rental investment in the mean time. Planning to buy it now, rent it out for 4-5 years and sell it when its time to buy the bigger house.

Do you think its financially wise to go through this process before the big house purchase? or Do you think its too much of a hassle and not enough profit margins for a property to give net positive gains and possible house appreciation? Since we are total amateurs, we don't which way is better (either get a property for short term or invest that extra cash .

Any help will be appreciated! thank you.  

 I am also a newbie but here are my two cents:

1. i agree house prices are inflated but dont wait for interest rates to come down. if they do come down, there will be competition.

2. go for your investment property asap but dont buy it by all cash. go for mortgage instead. when interest rates come down you can refinance.

am late to the game and realized only few months ago that parking money in the bank is not a wise decision.

[Patricia Steiner]

Suggestion for you:  find the opportunity first.  Get pre-approved.  Start looking - and see if you find anything worth buying within your price point AND in the right market.  Thinking about doing something and discovering if the opportunity exists are two different things.  About inflated prices and high interest rates...I've bought my best performing properties during the worst economic cycles.  If it's an opportunity - regardless of the size of the property - it's an opportunity.

Start kicking the tires...the market will tell you if you can do what you're thinking about doing.

Best...

[Bill B.]

If you truly believe prices are inflated. (As in they’re going to go down.) I disagree, but let’s pretend you believe that. You should sell your current home today and rent a place for a year or two. Why are you hanging on to your home when you think it’s going to drop in value? And you definitely shouldn’t be buying anything. 

Don’t even think of buying a rental for 4-5 years when you think prices are dropping. You’re going to pay 10T in closing costs to sell. You need prices to rise 10% just to break even. If you can believe they will rise 10% then sell your cheaper primary today and buy the dream primary. If it goes up 10% it will be even farther from the price of your current home. 

Ps. If your current home is “inflated” don’t turn it in to a rental either. First, because you think it’s going to fall in value. But second, you’re also making your tax free gain, taxable. It could take years just to break even. 

[Aniket Patkar]

Quote from @Travis Biziorek:

4-5 years is a pretty short timeframe. And you are contradicting yourself a bit here.

You aren't willing to buy the house you want because you believe prices are inflated and rates are too high. But you're willing to buy a smaller house?

Don't your same beliefs apply to the cheaper or smaller houses too?

Let's set that aside for a moment and go back to your 4-5 year hold timeline. 

I think that's fine as long as, and this is important, you DO NOT pay market value for the home.

If you pay market value you're going to expose yourself to fluctuations. What if prices go down over the next 4-5 years. What if they go nowhere? What if rates stay where they are?

Will that completely ruin your plans? If your plans depend on selling this new, smaller rental for a profit that's a big risk.

Now, if you can buy something that needs work, do the work and force some appreciation... that's a much smarter play. 

The other idea is that you just buy the house you want today. Again, if you're going to buy a smaller home why not buy the one you plan on purchasing in 4-5 years?

And finally, of course, the last option is to just keep saving and waiting until you can afford the house you want.

Yes, that was a bit contradictory. Prices and the interest rates were part of the reason why we decided to wait. elementary school ratings and career changes were the other things.

As you suggested, buying a fixer upper is also an option. concern with that will be the added delays in actually renting out the house after the fixes/updates. And you are right, it is a big risk betting on the appreciation.

Our strategy to wait to buy the bigger house originated from the multiple factors (interest rates, inflated prices, no need for moving just for elementary school and unstable professional life). That's why we started thinking about investing in rental property. 

More we discuss this, more we are convinced that its not worth the efforts and risks to get the smaller property right now and just focus on the timeline for the bigger house and subsequently rent out our current property. 

Thank you for your advice!

[Travis Biziorek]

Quote from @Aniket Patkar:

Quote from @Travis Biziorek:

4-5 years is a pretty short timeframe. And you are contradicting yourself a bit here.

You aren't willing to buy the house you want because you believe prices are inflated and rates are too high. But you're willing to buy a smaller house?

Don't your same beliefs apply to the cheaper or smaller houses too?

Let's set that aside for a moment and go back to your 4-5 year hold timeline. 

I think that's fine as long as, and this is important, you DO NOT pay market value for the home.

If you pay market value you're going to expose yourself to fluctuations. What if prices go down over the next 4-5 years. What if they go nowhere? What if rates stay where they are?

Will that completely ruin your plans? If your plans depend on selling this new, smaller rental for a profit that's a big risk.

Now, if you can buy something that needs work, do the work and force some appreciation... that's a much smarter play. 

The other idea is that you just buy the house you want today. Again, if you're going to buy a smaller home why not buy the one you plan on purchasing in 4-5 years?

And finally, of course, the last option is to just keep saving and waiting until you can afford the house you want.

Yes, that was a bit contradictory. Prices and the interest rates were part of the reason why we decided to wait. elementary school ratings and career changes were the other things.

As you suggested, buying a fixer upper is also an option. concern with that will be the added delays in actually renting out the house after the fixes/updates. And you are right, it is a big risk betting on the appreciation.

Our strategy to wait to buy the bigger house originated from the multiple factors (interest rates, inflated prices, no need for moving just for elementary school and unstable professional life). That's why we started thinking about investing in rental property. 

More we discuss this, more we are convinced that its not worth the efforts and risks to get the smaller property right now and just focus on the timeline for the bigger house and subsequently rent out our current property. 

Thank you for your advice!

 I think that's a great conclusion. The nice thing is you'll be getting at least a decent rate in a HYSA while you wait!

[Aniket Patkar]

Quote from @Patricia Steiner:

Suggestion for you:  find the opportunity first.  Get pre-approved.  Start looking - and see if you find anything worth buying within your price point AND in the right market.  Thinking about doing something and discovering if the opportunity exists are two different things.  About inflated prices and high interest rates...I've bought my best performing properties during the worst economic cycles.  If it's an opportunity - regardless of the size of the property - it's an opportunity.

Start kicking the tires...the market will tell you if you can do what you're thinking about doing.

Best...

 we have indeed started looking around with the help of a realtor and got pre approved. we also have a basic cash flow calculator and research done on the areas we want to invest in.

We came to our senses when the almost all calculations were showing negative cash flow due to higher interest rates and property prices. This is due to the fact that we were only looking at properties that don't need big upgrades. 

as I agree to your point of just jumping in, we want to make sure we don't jump in and then get out to realize the loss we took on it.

 

[Aniket Patkar]

Quote from @Travis Biziorek:

Quote from @Aniket Patkar:

Quote from @Travis Biziorek:

4-5 years is a pretty short timeframe. And you are contradicting yourself a bit here.

You aren't willing to buy the house you want because you believe prices are inflated and rates are too high. But you're willing to buy a smaller house?

Don't your same beliefs apply to the cheaper or smaller houses too?

Let's set that aside for a moment and go back to your 4-5 year hold timeline. 

I think that's fine as long as, and this is important, you DO NOT pay market value for the home.

If you pay market value you're going to expose yourself to fluctuations. What if prices go down over the next 4-5 years. What if they go nowhere? What if rates stay where they are?

Will that completely ruin your plans? If your plans depend on selling this new, smaller rental for a profit that's a big risk.

Now, if you can buy something that needs work, do the work and force some appreciation... that's a much smarter play. 

The other idea is that you just buy the house you want today. Again, if you're going to buy a smaller home why not buy the one you plan on purchasing in 4-5 years?

And finally, of course, the last option is to just keep saving and waiting until you can afford the house you want.

Yes, that was a bit contradictory. Prices and the interest rates were part of the reason why we decided to wait. elementary school ratings and career changes were the other things.

As you suggested, buying a fixer upper is also an option. concern with that will be the added delays in actually renting out the house after the fixes/updates. And you are right, it is a big risk betting on the appreciation.

Our strategy to wait to buy the bigger house originated from the multiple factors (interest rates, inflated prices, no need for moving just for elementary school and unstable professional life). That's why we started thinking about investing in rental property. 

More we discuss this, more we are convinced that its not worth the efforts and risks to get the smaller property right now and just focus on the timeline for the bigger house and subsequently rent out our current property. 

Thank you for your advice!

 I think that's a great conclusion. The nice thing is you'll be getting at least a decent rate in a HYSA while you wait!

 yes we are! And we are also looking into T-Bills. 

[Aniket Patkar]

Quote from @Bill B.:

If you truly believe prices are inflated. (As in they’re going to go down.) I disagree, but let’s pretend you believe that. You should sell your current home today and rent a place for a year or two. Why are you hanging on to your home when you think it’s going to drop in value? And you definitely shouldn’t be buying anything. 

Don’t even think of buying a rental for 4-5 years when you think prices are dropping. You’re going to pay 10T in closing costs to sell. You need prices to rise 10% just to break even. If you can believe they will rise 10% then sell your cheaper primary today and buy the dream primary. If it goes up 10% it will be even farther from the price of your current home. 

Ps. If your current home is “inflated” don’t turn it in to a rental either. First, because you think it’s going to fall in value. But second, you’re also making your tax free gain, taxable. It could take years just to break even. 

to your first point: we are thinking about 2 things when we decided to keep the current primary as a future rental. Interest rate is crazy low (2.63) and the appreciation is ridiculously high if we look at the Zestimate (~45%). even if it does drop down, it will still hold value. 

10% immediate loss is duly noted. and that's why it feels like a lost cause to buy now and sell soon.

Thanks a lot for the food for thought!