BUYER: I was looking to buy a condo in DC this month for around $300k. I just found out that I’m going overseas for 2 or 3 years. Should I buy a place today as an investment property?
FRANK: Do you hope to move INTO that property when you come back or are you investing with hopes that it will go up and you can use the new funds to buy a bigger place?
BUYER: Can you go over both?
FRANK: Sure, the quick answer is No to both. While it is far less risky if you plan to move into it.
BUYER: But Frank, your Blog repeatedly says you didn’t like to give opinions, and instead prefer to give the data and work together.
FRANK: I know, but sometimes I just can’t help myself in such clear cases. Oh, ok. Let me rephrase my opinion and break your question into two. It isn’t a no-brainer, but if after reading the below information you still want to do it, great, go for it!
BUYING NOW AND FLIPPING IN 3 YEARS
Question 1) Is it a good idea to buy a place today as I’m going overseas for 2-3 years. I will sell it when I get back and use that profit to buy a bigger house.
Typical Realtor answer: Hell yeah! (Internal monologue: No risk to me, I make 3 transactions out of it: 1) Help her buy, 2) help her sell and 3) help her buy a bigger place). Do it!
Frankly answer. If flipping and rehabbing aren’t your main line of work, you’d be risking a ton, but there is a chance you’d get rich. Think of it like Vegas.
You know how with mutual funds they have disclaimers that say “Past performance is not indicative of future results”, why isn’t that used in Real Estate when showing huge historic gains?
Yes in the past people have made a killing in such a short period and heck I can show you 5 reports that will say the market will go up and another 5 saying it will go down. So nobody knows for certain. But what I do know is that with a timeframe that is that short, you are gambling, Vegas style.
- The CONS data:
- If you were to rent it, you probably wouldn’t cover your mortgage every month. So you would be losing $400 a month or taking a $5,000 loss each year that you rent. After 3 years you are $15,000 in the hole. (please allow for rounding)
- The headache of being a landlord, especially if you are new to it, and from overseas. Ok pay somebody to do it, but there goes another $5,000 at least! Subtotal is $20,000.
- Then when you sell it you will have Realtor fees and closing costs. Lets just say $20,000. Now you are $40,000 in the hole.
- The tax savings are minimal (ask your accountant) and aren’t the same as living in the home since you get rental income (which isn’t enough to cover the mortgage).
- Opportunity costs. Your money could be making 5% in the bank. Assuming 10% down, that $30k in 3 years in the bank at 5% or roughly $5,000 or $45k total.
So from day 1 you are $45,000 in the negative. Over three years the market would have to go up almost 5% a year to nearly $345,000 just to break even! Will it do that? Maybe, nobody really knows. It did in the past!! But if the market stays flat, you have lost $45,000. If the market slides another 10% (3% per year), you would be under $75,000 ($45k+30k) or over 2 times your investment!
Only the buyer can ultimately weigh their risk tolerance, but that seems pretty risky to me, but again, you aren’t me, and it worked in the past, so it is your call. Heck, I’d love it if you bought a place, got rich and shoved this blog in my face in 3 years. I just want to make sure you see that the downside risks are real and could happen.
A buyer should do their analysis under 3 scenarios regardless of everyone’s predictions:
- 34% chance of the market staying flat
- 33% chance of the market dropping 5-10%
- 33% chance of the market going up 5-10
Other buying now factors to consider:
- CON: A loan for an investment will be higher than for a residential property.
- PRO BUYING NOW: Interest rates might go up in 3 years, thus making it more expensive per month to buy (but many will say that higher rates will further drop prices so it is a wash).
- PRO BUYING NOW: Yes, you could miss out on another historic run up and become rich. Just blame your Realtor!
BUYER?: 2) Ok, I’ll think about it. Well what if I want to move into the house after I come back?
FRANK: Much of the analysis above would still apply, minus those stinking Realtor fees. So remove that $20,000 and it isn’t AS risky, and MAYBE even a good idea, but I wouldn’t say a “no brainer.” But it isn’t my brain, it is yours. It all depends on where the market goes and how SURE you are that you will a) come back here and b) want to live in that one place. It seems like a lot of variables would have to line up perfectly for you to come out ahead, but that is your call.
Remember NAR has said “this is the bottom” several times. If it is, you could become rich! If it is goes down, you still might be ok if you hold it long enough. And that could be an additional 3 years or as much as 10 years.
Good luck, let me know if you have any further questions
– Written by Frank Borges LL0SA- Broker/Owner FranklyRealty.com