Posted by mike on December 20, 2002 at 16:04:01:
good question…the location is great…and that’s key…at worst you will probably break even…is this in arlington? vienna? how far out from DC? blue/orange line?
i think it may be a good time, but get comparable sales…that may be good
email me more if you want to talk more about it…
Should I be being now??? - Posted by Confused in DC
Posted by Confused in DC on December 20, 2002 at 12:19:14:
I’m a 24 year old professional. I am looking into purchasing a 1bd 1 br condo in Virginia right outside of DC. The price is about 250K. The reason why (for those out side of the area) is that the Metro (subway) is located 1 block away. This is a major appeal in this area. If I move farther away from the city past the Metro I could find a much larger home for the same price. These condos have appreciated tremendously over the last two years. From 150K - 250K. I don’t know if I would be attempting to purchase too late. Or if its still a good time for me to get in. The area is very crowded with very few condos available. There is basically no land left in the area for new development. Any tips, suggestions, or advice is greately appreciated.
To rent or to own, that is the question… - Posted by Ronald * Starr(in No CA)
Posted by Ronald * Starr(in No CA) on December 20, 2002 at 22:22:16:
Confused in Washington, DC--------------
Gee, I wish you were the only one in Washington who is confused. What I read in the newspaper about our “leaders” makes me confused, and I’m in California.
There are two aspects of buying your own home: emotional and financial. I bought my first home when I was 23 years old, so I think I can perhaps understand you a little better than others do.
Financially, the question is: how much does it cost to live in a rental property, which is comparable to the owner-occupied property you are considering? This question could be fudged around a little to make the comparison between the ownership cost of the condo and some other type of property which would make a satisfactory rental situation for you, even if the property is not really comparable to the condo. If it were much cheaper to rent than own, I would lean toward renting.
Now, if it is cheaper to rent than to own, and you decide to rent, there is a new question. What are you going to do with the extra money that you would be spending on the owned property but are not spending on the rental property? If you fritter it away with consumer goods, I will not like you. Opps, sorry, my feeling got away from me there–you don’t have to worry if I like you or not, it’s your life. Financially, it is better to not waste money, I suggest to you. So, it would be better to use that “extra” money or that “saved” money to invest for your future. You can hope that it will build up to the point that you will be able to buy a home of your own later on, when the need might be stronger–i.e., you are married and have children and would much prefer a owned home than a rental situation.
My preference for investing is in long-term rental properties. However, there are some people who can make money finding bargain properties, which they resell quickly for a profit. If you can do this well, you will probably build up wealth faster than doing the more passive rental thing. However, I think that the carefully chosen rental properties will be a lot less work and stress. So, you can choose one approach or the other. You could do both, but probably not very well and keep your professional job. The long-term rental approach is very compatible with holding a job for a long time and doing real estate on the side. The quick-turn approach to real estate is generally better for full-time investors, although it can be started on a part-time basis while working a “day job.”
Now, some people seem to think that investing in your own home is a great way to go. And I would agree with that thought if you were in an area with lower-priced real estate. But you are not. I, too, am in a very high-priced area, the San Fran Bay Area. So, what I say comes from observations around here and probably apply there were you are.
A high-priced property, either owner-occupied or rental–is a less efficient wealth builder than a low-priced property. This is especially true for rental properties. I like as a rough measure of the quality of an investment property the percent of the value of the property that you can get in rent each month. Divide the monthly rent by the value or purchase price and convert to a percent by multiplying by 100. Some people look at the inverse of this figure: the “gross rent multiplier” which is the property value divided by the rental amount, either on a yearly basis or on a monthly basis. As I said, these measures are crude, useful for quickly eliminating potential purchases that just have way too poor of figures. Then doing a more careful analysis of the property, taking into consideration a lot of things that I don’t want to spend time on now.
The rent as a percent of the property value drops as the value of properties increases. You might get $400 a month rent with a $25K property, $600 with a $60K property and $800 or so with a $100K property. The $250K property may rent for about $1800 or so a month. So, if you pay 10 times as much for a property, you get maybe 4 1/2 times as much rental income.
So, when buying rentals, the economics of cash flow from rent dictates buying very low-priced properties. Some people, especially middle-class folk, have emotional reactions against owning the lower-end properties. My advice: buy as low-end of properties as you can stand to own.
Now, this advice is based on the cash flow of the long-term-held rental property. There are two other economic benefits of owning rental properties: appreciation and tax benefits. Together the three can be remembered as CAT: C-cash flow, A-appreciation, T-tax benefits. Now, the tax benefits are pretty much determined by the property value bought, close enough to consider it the rule. So, if you buy 10 $25K properties and your neighbor buys on $250K rental property, you will have almost the same tax savings, assuming your economic situations are similar.
So far we see that lower-priced properties provide equal tax benefits to the higher-priced properties and lower-priced properties provide better cash flow than higher-priced properties. How about appreciation? While some people will tell you that higher-priced properties appreciate faster than do lower-priced properties, that is not true. (It is usually mentioned by real estate salespeople who are trying to sell you–surprise now–higher-priced rental properties.) Over short periods of time, say less than 5 years, properties at different value-levels may appreciate at different rates. Sometimes the higher-priced properties will be going up faster than the lower-priced ones. Sometimes the opposite will be happening. But, over the longer-term, say 10 years or more, they will appreciate at the same rate if they are in the same market area. There is also evidence that this will be true if the low-priced and high-priced areas are in different locations. However, local economic conditions and market conditions can distort things.
So, now we see that on two of three financial benefits of real estate rentals, the lower-priced properties will equal the higher-priced properties: A and T. For the third benefit, C, lower priced properties will almost always be better than higher-priced properties.
So, if you buy a $250K condo for yourself to live in, there will be some economic benefits to you. If you instead buy rental properties with $25K rental units, you will have better economic benefits from your investment. Plus, you will save up money because your rent is low and you will have more investment money to buy more properties in the future–if you don’t spend it on consumer goods.
So, if you can find a high-priced rental property to live in as a renter and you can find some low-priced rental properties to own and rent out, you will be financially much better off than if you buy an owner-occupant condo.
But, there are emotional considerations in buying a house of “your own” in which to live. You can probably decorate it anyway you please, at least on the interior. Black walls in the kitchen and bathroom? Sure, why not?, if it suits you. You can probably also have a pet if you wish, which might not be so in a rental property. There may be some emotional satisfactions with feeling that the owned property is “mine” while the rental property is “somebody else’s.” Some people feel this strongly and some don’t. If you take my advice, you will buy lower-cost rental properties and you can have some “pride of ownership”–“I own that property over there! I don’t live in it, but I sure do own it.” In partnership with the bank that loaned you part of the purchase price, of course. Same thing for an owner-occupied property, of course.
Owning rental properties will probably take more time and effort on your part than owning an owner-occupied unit. You will have to study up on real estate investing to do it well–maybe 6-18 months of studying real estate investing and getting to know some markets where you might want to invest. You will be responsible for the properties and will have to solve the property problems, unless you turn over management to somebody else–which reduces your cash flow advantage for lower-end rentals compared to the high-end occupied property.
Ok, so that is it: financial considerations and emotional considerations. Sometimes they are in conflict. It will be up to you to make the decision that seems best to you.
Good Investing or Good Home-BuyingRon Starr***