Rent or Buy, when buying doesn't meet a 1% rule? Time Sensitive!

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Rent or Buy, when buying doesn't meet a 1% rule? Time Sensitive!

Jacob Eddy
Asheville, NC · Member since 2016 · 23 posts · 2 votes

We currently rent a townhouse in the very hot market of Asheville, NC.  Got an unexpected notice to vacate at the end of June due to the owner selling the townhouse and have less than 30 days to get out.  Townhouse is a 2 bedroom that rents out for $1200 and asking price is going to be $169K, yet the seller says they are willing to take $155K from us since we aren't working with a realtor.  This does not meet even the 1% rule and it is an extreme challenge to find much in the Asheville market that does meet a 1% rule as we've been looking for a while now.  The least we can move into another 2 BR apartment is still $1200 per month.  If the place had a fresh coat of paint with the fixtures updated, it would probably rent for $1300.  Also has HOAs of $95 per month.   We would not want to live there long term as we're house hunting in the $300-500K range but can't seem to find anything worth buying right now.  The idea would be to buy this townhouse as a short term solution and keep it as a rental or Airbnb once we find the home we're looking for long term.  What is a the most we should be willing to pay so we're not throwing away our money in rent for another year? 

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Lynn McGeein
Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
9y

If it's an updated, newer unit in good shape, not needing any major expenses like roof, HVAC, siding, flooring, etc., then I'd contact lenders to see their special programs like 3% down or 5% down conventional with no PMI, whatever the lowest down payment you can get with no PMI, find out what your total payment would be. If you can get it under market for very little down payment, live in it 2 years for less than you are paying now in rent, then sell and take the profit tax-free with the homeowner tax exemption, then it could be a very good answer as long as it does not need repair. If systems are not newer and you could be looking at major expense in next 2 years, or if it's in a flood zone or termite damage or other weird issue that could mean more expense, then you're just buying their problems, so better to move. I don't know your market, but be willing to offer less and see as you are saving them the trouble of listing and selling, so you may have some negotiating strength as long as you are willing to move if they don't meet your numbers.

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  • Christopher Phillips
    Real Estate Agent · Garden City, NY · Member since 2016 · 3k+ posts · 1k+ votes
    9y

    @Jacob Eddy

    Obviously, you need a place to live. But, thinking what to do with the place down road makes sense...

    What you have to do is look at the cash on cash return if you were to rent it out. 1% rule is just for a quick look. Not all markets will generate 1%. A and B neighborhoods might actually have a hard time generating positive cash flow, especially in a hot market with prices rising quicker than rents.

    If you paid $155,000, with a mortgage of around $700 plus - HOA, taxes, insurance, utilities, % for maintenance, % for CapEx, % for vacancies, and % for property mgmt. You'll probably will be in the $1,400 to $1,500 range in expenses per month depending on the property taxes and utilities.

    It's almost impossible to really get positive cash flow with that $1,200 rent level.

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  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    9y

    I'd recommend running it through your rental property calculator and bench-marking it relative to your investment alternatives (and goals).  If you don't have a calculator or alternatives (or goals/criteria), I'd recommend starting with them first (and not rushing into a decision).

    There are millions of properties and investment alternatives and isolating your search to one is very limiting.  Often, our primary residences do not make the best rental properties.

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  • Account Closed
    Investor · Asheville, NC · Member since 2015 · 187 posts · 112 votes
    9y

    As a quick glance I'd say that's not in the realm of consideration as an investment. The HOA fee is unusually cheap, but you have to subtract that out from your rent before you get to pocket anything- and it may go up. Even without it, you're likely to be cash neutral or negative, on a property that will appreciate slower than a real house in the same area.

    I also do rental buy-and-holds in Asheville, and feel lucky to have purchased most two years ago when retail buys were cheaper. Finding cash flow in the current market in AVL is much easier said than done.   :(

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  • Lynn McGeein
    Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
    9y

    If it's an updated, newer unit in good shape, not needing any major expenses like roof, HVAC, siding, flooring, etc., then I'd contact lenders to see their special programs like 3% down or 5% down conventional with no PMI, whatever the lowest down payment you can get with no PMI, find out what your total payment would be. If you can get it under market for very little down payment, live in it 2 years for less than you are paying now in rent, then sell and take the profit tax-free with the homeowner tax exemption, then it could be a very good answer as long as it does not need repair. If systems are not newer and you could be looking at major expense in next 2 years, or if it's in a flood zone or termite damage or other weird issue that could mean more expense, then you're just buying their problems, so better to move. I don't know your market, but be willing to offer less and see as you are saving them the trouble of listing and selling, so you may have some negotiating strength as long as you are willing to move if they don't meet your numbers.

    2Reply
  • Jacob Eddy
    OP
    Asheville, NC · Member since 2016 · 23 posts · 2 votes
    9y
    Thanks to everyone for the input. If we were able to get it at $145K (not sure if the seller would go this low), would that make it worth it, if we were able to sell it down the road for at $155K? I would want to go on the conservative end for resale seeing that it's a townhouse. $155K minus the 6% to sell would be around $145. We would put down 20% to avoid PMI so roughly $30K down payment vs. if we ended up renting we would throw away around $15K per year.
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  • Andreas W.
    Durham, NC · Member since 2013 · 502 posts · 215 votes
    9y

    @Jacob Eddy

    Out of curiosity, I have a slightly different question. What funky lease do you have in place that gives you less than 30 days notice to vacate?

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  • Jacob Eddy
    OP
    Asheville, NC · Member since 2016 · 23 posts · 2 votes
    9y
    We were given a 60 day notice but just heard from the owner yesterday about her being willing to sell it to us.
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  • Jonathan Landry
    Contractor · Candler, NC · Member since 2016 · 43 posts · 15 votes
    9y
    I'm inclined to suggest that you role the dice, purchase and live in the unit for two years and re-evaluate your position. Lynn M. 👍🏼 Anything under $200k between downtown and the airport is a slam dunk on appreciation. Not enough homes built in that range for the working folk.
    2Reply
  • Jacob Eddy
    OP
    Asheville, NC · Member since 2016 · 23 posts · 2 votes
    9y
    Hey Jonathon, it's at Lake Julian Trails if you are familiar with it off Airport Rd and unfortunately right behind the Duke Power Plant which could be seen as a negative. Are your thoughts still the same?
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  • Jeff CopelandBusiness Member
    Real Estate Broker · Tampa Bay/St Petersburg, FL · Member since 2015 · 1k+ posts · 2k+ votes
    9y

    @Jacob Eddy - All of the analyses above are ignoring the fact that you are currently throwing away $14,400/yr on rent, and would continue to do so if you moved into another rental. When you factor that in, you're looking at a completely different set of numbers.

    You aren't worried about cash flow right now. You'll be running those numbers in a couple of years when you decide whether to sell it (likely at a profit, tax free because it was your primary residence and you lived there for at least two years), or rent it out then, at 2019 market rents (which could very well exceed the 1% rule by then). 

    There are also other financial benefits (mortgage tax deduction, availability of HELOCs, etc.) to consider.

    You might be kicking yourself a couple of years from now if you don't buy it!

    Copeland Morgan LLC4.770 Reviews
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  • Jonathan Landry
    Contractor · Candler, NC · Member since 2016 · 43 posts · 15 votes
    9y
    Jacob Eddy same thoughts. That's near TC Robinson and the school compound? That location is sound. I like the deal because I'm not sure where you are going to find another deal. Especially in the sub 500k housing market. I'd play the appreciation game
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  • Rick Moccino
    Washington, DC · Member since 2017 · 11 posts · 0 votes
    9y

    What about the DC market? Would you use 1% or compare to nearby rents?

    For example, luxury 1BR condos are going from high 400-600k, compared to rents for 2500-3000 per month.

    Buying a primary home would allow for tax deduction and I'd be eligible for good loan terms. 

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