Being a real estate investor what is the mindset in buying a primary residence?

Question

My family and I are looking for a primary residence with the plan to rent it out after hopefully 5-6 years. The house we are considering is a new build 3bd/2.5ba in Lochbuie/Brighton Colorado which is a growing area with decent rent growth 4.8% MoM currently we think we could get $3,600/mo. if we finish the basement ourselves idk $30K? estimated PITI is $3,900. We are choosing new build because A) our family 4 has a certain size demand B) the price-quality ratio doesn't seem to make sense when considering a preexisting home C) with interest rates being at near 8% with preexisting homes, builders are offering 5.99% interest rates and the exact home we are looking at is about $75K discounted because it's a spec home and the builder doesn't want to pay taxes on it.

So, live in it for 5-6 years hopefully rent it out with a fully finished basement for potentially $4,200 in 5-6 years. No STRs according to the HOA.

looking at this from an investor/family man lens what pitfalls am I missing? I don't know how to tell if finishing the basement is worth it? personally I want to add 1 bed and 1 full bath and make a large, finished gym. but should I add another bedroom and have no gym? or don't even worry about renting it out? What would a REAL investor consider in this situation?

Benjamin Aaker · Answer

Your difficulty comes from the plan that you will live in it for 5 or 6 years. That can make you look at it from the eyes of a residential buyer and not an investor. 3.6k income with PITI of 3.9k is already under water not accounting for vacancy, repairs, and cap ex. It'll take a lot of appreciation to put you in the black - while this is possible you shouldn't bank on it.

Further, some of the new construction is tricky in that the builder will finance the construction but you immediately have to get a mortgage once it is built. That 5.99 rate becomes 8% very quickly. I don't know whether your PITI estimation accounted for that. Though you are looking at a spec home so already built and I'd be surprised if the builder is offering you a 30 year amortized loan at 5.99%. Check the fine print. It probably balloons (needs to be paid in full) in 2 years.

Finished basement is worth it if it adds beds/baths. It's the lowest cost you can get per sq ft as it just needs finishing. Gym on the other hand would not be something I'd put in to rent out. Liability issues and cost to maintain are big ones. If you must have a gym for your personal use, take it with you when you leave and convert to a bedroom (if can legally do it in your area).

Looks like might not be great as a straight-up investment, but if you need a home for yourself and the price is right, why not buy this place you like? Later you can choose to sell or rent and can reassess at that time to see if renting it out works.

Joshua Christensen · Answer

Denver has been a very solid market over the last 10 years and looks to continue the trend as migratory patterns continue to head that direction.

First, You're not buying an investment property.  You're buying your home with the intent to rent it out in 5-6 years.  At the point you're looking to rent it, consider all the factors necessary for investment.  In the meantime, for your family needs, does it fit the bill?  No one knows what 5-6 years will do in any market, so if it's a great deal to live in for the next 5-6 yeast then enjoy.

If in 5-6 years, you can rent it for a nice profit, do it.  If it makes more sense to sell, then do that.

As for the basement, it is an inexpensive solution to add value to the property.  Additional bedrooms may or may not help if you already have 4-5 bedrooms.  Consider 1 bedroom and a flex space like additional family room, etc.  If you want the gym for your use, you could make a large bedroom and utilize it as your home gym, then rent it as an additional bedroom.

The financing is real.  Benjamin mentioned the fine print.  If you're building with a production builder who has an in house lender, essentially they offer 30 year fixed.  They are buying the interest rate down to the 5.99 to sell more homes.  I think what Benjamin referred to is more of a custom builder utilizing a builder loan that converts to permanent after construction.  Not the same thing.

It sounds like it could be a great family home for many years.  Don't over think it.

Jeff White · Answer

@Keith Howes Hey Keith, interesting decision making on a new build. I find new builds to be one of the tougher investments to make work in today's environment with high interest rates, higher insurance rates, HOAs, and that's not even counting the higher property taxes with new builds too.

Also, on the back-end as a rental, how large is the rental base for tenants that make enough income to afford a $3,600 per month rent payment or higher?  That is a huge rent payment for someone to live in Brighton, and that demographic does exist, but I would you would have a larger vacancy rate than a Class B asset, and what happens if that tenant loses their six figure job(s)?  Coming up with $3,600 per month isn't easy without a great job.

A class rentals are of course nicer and more move-in ready, but high price point. I like the B and C class rentals in Denver metro for that reason because there is a larger tenant base that can qualify and still cover the mortgage through job loss, divorce, recessions, etc.

Have you considered the other options that could work for a family, ex. side by side duplex, house with ADU, house with carriage house, house with a walkout basement, etc?

It would be worth exploring all options, and if you are willing to live in a duplex or one of those options, the rate for owner occupied financing isn't 8%, it is closer to 7%.

Also, since the market is softer, you could easily ask for a seller credit to buy down the rate closer to the low 6s, and meet somewhere in the middle with a similar mortgage payment as a new build and get something that would be a really good house hack for a family with privacy, garage, etc and get the benefit of renting the other side or ADU. Yes, these properties won't be as nice as a new build, but you won't have to spend new build prices.

Wale Lawal · Answer

@Keith Howes

When you think about renting out your primary residence, it's key to look at many details from both an investor and a family view. Think about the first buy, how you'll pay for it, the rent you'll ask for, fixing up costs, adding value, what your family needs, where the home is, the rules you need to follow, how you'll handle it, keeping it safe, and being able to change with the market. Make smart choices by guessing your money flow, asking local pros for advice, and looking closely at the house. By weighing what you need now against your plans for money in the future, you can make a better and smarter choice.Good luck!

Being a real estate investor what is the mindset in buying a primary residence?

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