First time Investor - high COL area, worth it?

Question

Hello, first time posting after months of podcasts and reading thru forums. Myself and another friend of mine are really looking into investing in a high COL area (Ashburn VA). Lots of appreciation potential, new development & properties, new metro connecting from Washington DC. We are both going to be out of state investors, but grew up in Northern Virginia so we know the area very well.

A new property (3BR, 3.5BA, 4 floor) we are analyzing passes all the check marks for investing viability, except for financial from the way I look at it. Using the rental property calculator, Cash on Cash ROI is -7% for the first year, and doesn't become positive till year 11, after we've had to invest an additional 46.2k to balance each month. However, due to the appreciation play, we can see this increasing 3.5-4% over that time, including maybe 5-7% each of the first 3 years. This makes our overall profit look pretty decent, with a 12% return.

Question I have is, at what point do you value appreciation over cash flow? My friend is pretty interested in the property, especially due to its growth potential, but I'm wary of the amount of additional cash required. Appreciation is also a projection that could be off, whereas a mortgage payment, taxes, HOA, & vacancy rates are easier to predict.

Russell Brazil · Answer

It is highly unlikely you will get a negative cash on cash return in Ashburn.  You are likely over estimating a number of expenses or underestimating the rent to come up with a negative cash on cash.  While I dont invest in Ashburn, many of the locations I do are very similar (Rockville, Silver Spring, DC) and I can firmly attest I cash flow comfortably....and cash flow more and more as the rent grows each year.

Adam B. · Answer

Hi Jay, I live in Ashburn currently and have been since I moved here in Feb 2006. I am sure you know the area well since you lived here. It still amazes when I go down a parkway I haven’t driven down in awhile and I see all the new construction taking place. We bought our SFH in Dec 2010 as a short sale for $425k. The home originally sold as new construction $561k in 2005. Zillow shows value today at $579k, which is likely on the high side. We have thought of converting it to a rental property and moving a bit further west, but like you folks discussed above, we would be lucky to break even on a monthly basis if rent was only around 2800. The metro is currently under construction and should be done within a couple years (as of this writing). Rents in relation to purchase prices are significantly better as you go closer toward DC, especially in Arlington with a large stream of young consultants supporting government technology projects.

My cousin has been doing better in upstate NY buying an older duplex property for $130k with combined monthly rent of $1500. I personally would rather take on the risk of an older property like this with better cash flow and lower rental rates that tend to be more recession proof.

Unfortunately, there are basically no multi family residential properties around the Ashburn area.

I hope this helps in talking with your partners. I welcome any feedback or questions I may be able to answer.

Jay Jasunas · Answer

@Abhishek Ramanan Yes it does if you are certain you can attain the returns. But an appreciation play in Ashburn or Sterling Ranch (Loudoun county) if far from guaranteed. I lived there for six years and saw no appreciation or rental increases.

It is a very transient area with people always moving in and out for goverment or contracting jobs. Which would seem like an ideal rental market, but the rents just don't justify it. Not exactly sure why they are not higher. You are bearing the brunt of high taxes and a high association fee.

Abhishek Ramanan · Answer

@Jay Jasunas doesn't it only make sense to put more money down initially if you believe that you won't be able to compound your money greater than the interest rate on your loan?

$2600 seems about average for the area given the size of the TH. This will likely increase to $2900-$3000 in a couple of years. That put's me at 16.98 price to rent ratio initially, which is lower than average for Northern Virginia.

Jay Jasunas · Answer

@Abhishek Ramanan  No way I would buy a new rental property that is going to cash flow negative. Most of the appreciation plays my friends do on the west coast or here in Denver put more money down to avoid the negative cash flow.

Rent of $2600 on a $525k townhouse seems like a bad deal for the landlord and a great deal for the renter.

Abhishek Ramanan · Answer

@Russell Brazil yes this is 20% down, with .75 points. I've tried to negotiate the price down (base price is at 525k) but to no avail. This is a townhome, but even discounting for vacancy we're at -$470 CF per month...which maybe isn't as bad and could yield positive in a couple of years after some rent increase? Would you be willing to pay that much if the appreciation possibility was substantial?

Russell Brazil · Answer

Whats the price point of the property? If that $423k is 80%, then thats a $530k property. Id suggest targeting properties in the $400-$450k range that rent in the $2500-$3000 range. Thats my bread and butter.

10% vacancy is above above average. If this is a single family...you should have 1 month vacant every 3 years or so.

Your interest seems low, but maybe thats because you are paying points.

Abhishek Ramanan · Answer

@Russell Brazil Unfortunately my calculations do say negative cash on cash. I can display them here.

$2,600 a month in rent for the first year, this is likely to increase with metro expansion and new development, but seems to be the average about now. Property tax & HOA are pretty high, Loudoun County charges 1.285% per $100 in tax. I've even removed CapEX (new property, minimal required), and property management, but still arriving at a negative CF. Interest rate at 4.8% for non-conventional loan seems about right. Do you think there's something I'm missing?

First time Investor - high COL area, worth it?

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