Military move (personal home turned into rental property)

[Ed Florack]

I'm moving to Valdosta, Ga in mid to late September and am looking to purchase my first property. My assignment lasts approximately three years. The goal is to purchase a single family home for my family, and then turn it into a rental property after I leave. My problem is trying to figure out how to analyze the deal vs. renting knowing that I will live in it for three years and then turn it into a rental or try to sell. Do I project my cash flow based on equity, loan pay down, etc based on the property status in the future (3 years out?)? I'm also having some trouble determining market value for the home because the neighbourhood is relatively new and their don't appear to be any homes rented out currently in the development. Zillow is estimating it at 1200 and the overall average for the city proper is less than that. The home is a newer 4 bed 2 bath at 1911 sqft, built in 2013, and is currently being offered at 184,000 w/ 3.5% mortgage and 10% down on a VA loan. My realtor said I might be able to walk it down to 179,000, but that's it. This is comparable to most of the homes in the neighborhood, on the low end, but not substantially lower than normal. I used dealcheck, and am not showing a positive ROI until about year seven with no positive cash on cash return until year 21. Is there a way to account for the 3 years of home ownership? Should this affect my numbers at all or no?

[Anton Ivanov]

Ed,

Your equity or loan pay-down (which are inversely proportionate) in 3 years will not affect your cash flow in this case. Your loan payments won't change until you pay off the loan or refinance and how much the home is worth or how much of the home you actually own do not affect cash flow either.

The factors that will affect cash flow in 3 years will be rent (which could be higher if the rent in the area goes up) and operating expenses (which could increase due to inflation).

I was in a somewhat similar situation a few years ago, except I bought a duplex and live in one of the units. I analyzed deals as if I was buying them strictly for investment, so I calculated the cash flow I would have if I bought and rented it out right away. I don't believe it makes much sense to attempt to predict cash flow in 3 years because a) it will not be much different than it is now and b) it's based on assumptions that you can be wrong about (like rent appreciation).

Nobody can tell you what the real market value of the home is. I think your best bet is to use a collection of sources, trow out the outliers and average it out. You can look online, but I would focus on recent comparable sales or ask 2-3 realtors what they think they could sell the home for.

I suspect when you run the property analysis through DealCheck, you are seeing negative COC and ROI because you plan to use a VA loan with no or little downpayment. I could be wrong and the home may just not cash flow. In either case, you should look at the current year analysis and look at factors that are reducing the cash flow, COC and ROI.

Perhaps the home can't be rented for that much, but is a "hot" neighborhood, so the prices have been driven up faster than rents. Perhaps the taxes are high. Perhaps you may need to put down a larger down payment if you want the home to cash flow more. It's hard to know for sure without looking at the actual numbers, but I hope this helps!

Anton