Deal analysis gut check

[Justin O'Malley]

Hey BP!

I’ve finally saved up enough to have a shot at getting in the door in the Denver real estate market. I found a place in the SW corner near Ken Caryl.

I know this property won’t cash flow on day 1 but it should save me some cash compared to my current rent. Here’s the numbers:

Purchase price $480k

Down payment: 5%

5 bed 3 bath

So my girlfriend in will occupy the master bedroom and keep 1 other bedroom in the basement as a guest room. The other 3 rooms are large and should rent around $700 each easily.

I've estimated my monthly expenses to include mortgage, PMI, taxes, insurance, vacancy, and reserves at $2470/mo

Our current rent is $1200 for so assuming we rent all 3 rooms at 700 that would put us at negative $370 CF (2470-(3(700))) which is rent savings of $830.

I’m sure some of you are cringing at negative cash flow but I’m hoping some people who understand the competition in the Denver market give their input. Any tips or opinions would be great!

Also houses in that neighborhood with similar floor plans have been barely updated and are selling at $550k! Could be a nice secondary exit plan. Lastly the whole house should rent for $2500 including property management so we should be free to move out after the first 2 years.

[John Mayer]

@Justin O'Malley

Having a $300 mortgage on a nearly half a million dollar primary residence is a phenomenal success. Count that fact that you’re only paying $300 to live in your bedroom, and in actuality, you’re cash flowing about $400 a month.

Housing is the largest part of the average American’s budget, and its money that you absolutely have to spend, regardless of where you live, so think of it like taxes. You have just succeeded in virtually eliminating that expense. Also, your ‘rent savings’ is better than real cash flow, because you don’t get taxed on money you save. Throw in your loan pay down (about $800/month in the first 3 years), tax advantages, and the potential for modest appreciation and you’ve got yourself a HUGE win.

My wife and I did almost exactly that same thing you’ve done, except we went with a 6bed 2bath and we rent out all 5 other bedrooms. It’s been a year and with the money we’ve saved and the chunk that it’s taken out of our monthly living costs, we’ve been able leave our jobs and start a business together. The house has also appreciated significantly. Don’t let nay sayers tell you otherwise, what you’re doing is going to have a huge impact on your financial future, and that’s something you can be very proud of, kudos!