Buy, rehab, rent/hold, buy a 2nd?

Question

My wife and I bought a SFR to live in, in Aug '17 and finished the basement for ~$18K. We will move out in Aug '18 due to a job offer, and we'll have built 10% in equity, including downpayment,  at that point. I plan to rent it out hoping for future apreciation and perhaps a couple hundred dollars of cash flow before vacancies, maintenance, etc. It seems we would just break even if we were to sell at this point. And a cash-out refi was not encouraged by realtor because interest has gone up since I bought.

We'll move to an upper-income college town, and the new job will bring in significantly more per year.

If we qualify, I would like to buy a 2- or 3-bed condo -or duplex, but they're rare in the new area- so we can live in it while we save for another downpayment, then move out, and rent the condo to students (having college kids as roomates is not an option). What mistakes am I making here? Is this plan naïve?

Jeremy Z. · Answer

Account Closed

perhaps a couple hundred dollars of cash flow before vacancies, maintenance, etc.

If the market rents only provide $200 before expenses (don't forget capex) I think you will find that the property will actually cost you money on a monthly basis. Principle pay down and appreciation might still make it a good investment, but you may be better off selling and finding something that provides a better rent/price ratio.  Read up on the 1%/2% rule and 50% rule. But be careful of chasing cash flow in questionable locations. The rent might be high compared to the low home values, but expenses will increase. I'm not saying you definitely should sell, just that you should be aware of the actual cost of ownership.

Condos can be nice low-maintenance properties, but the same rules regarding expenses apply. Make sure you are factoring in all expenses including the condo association fees. If you plan on being a serious real estate investor, learning to analyze all of the income and expenses is key. Best of luck!

Jeremy Z. · Answer

Account Closed

I know you were responding to Joe, but I'll take a stab at answering your questions.

I have hopes of qualifying for a 2nd mortgage with only 10% equity in my current home and no tenant history to show, but just the intention to rent it out?

You really need to talk to some lenders, as there are so many variables specific to your situation. You might try posting this question in the Private Lending & Conventional Mortgage Advice forum.

Is buying a college town condo a good option for future cash flow?

I live near a couple of colleges and the SFR's within a couple blocks of campus do command higher rent, but the market price for those properties also tend to be higher. At least in my area, the premium rental demand from the college drops off fairly quickly as you get further from the college. The area of demand is probably quite a bit larger near large universities, so it just depends on the specific market you are looking at.

In general, it's all just a number game. Look at the price of condos near the college you are looking at and then look at what rents are going for in that particular area. Then compare it to other investment opportunities.

Joe Villeneuve · Answer

In general, almost any strategy will work...or not.  The specifics of the deal/property is what will tell you if this will work or not.  It isn't important if a strategy will work "in general"...only if it will work for a particular deal/property.

If a strategy works for one property, then it works...for that property.

If a strategy works for every property...but the one you need it to work on, then it doesn't work.

Do a proper analysis of this property, then ask the question when you have actual $###.###'s

Account Closed · Answer

Thanks for your polite response and advice.

I found out through a local realtor that there's a surplus of condos on campus, so they're looking like a bad investment right now. I will explore SFRs nearby in high quality school districts.

Account Closed · Answer

Perhaps selling is not my priority now because I am betting that the SFR will at least pay for itself as a rental and appreciate over time. My question is more along the lines of the bigger picture: is the strategy outlined a decent one? Do I have hopes of qualifying for a 2nd mortgage with only 10% equity in my current home and no tenant history to show, but just the intention to rent it out? If I do, is buying a college town condo a good option for future cash flow?

Account Closed · Answer

A rough estimate from broker who knows what we paid and what the renovations were.

Joe Villeneuve · Answer

Ok, then to answer your original question of "what mistakes are you making", you just answered my question with the answer to yours.  You can't answer your original question when you are basing it on estimates, and opinions.  Do a proper analysis, with actual numbers with "$$$$" in front of them.

Joe Villeneuve · Answer

What do you base "just break(ing) even if we sell at this point"?

Buy, rehab, rent/hold, buy a 2nd?

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