Is it a good idea to buy a new townhouse and rent it?

3 Replies

First of all, Happy New Year to you all! 

I just saw a new townhouse with one car garage. The location is good, the price is $320000, the monthly rent would be between $2000 and $2200. I will pay 20% to 25% down payment. The monthly HOA fee is $60. Most likely I am going to get a 30 year conventional loan with the rate at around 4.125%. It looks like I won't have any cash flow if I invest in this one, but since the house is brand new, I won't have to deal with repair issues which is what I am afraid to deal with.

Is it a good idea to buy a new home as a rental property? Any input would be appreciated! Thanks in advance.

No, unless it is purely a speculative appreciation play.  

Here is why-  25% down is $80,000.   Your closing costs will probably be around $6,000.  Total $86,000.  Your mortgage payment would be about $1180.  Using 40% for expenses (its likely going to be  higher over a period of years) means you'd net something like  $140 a month or $1,680 a year.  That is a cash on cash return of less than 2%.  If you are able to take deductions on your taxes and since you are paying down the mortgage each month that would increase your returns to somewhere near 5%.   That still doesn't seem like a very good return and that is best casing it.  

I agree with @Cal C. . Also, if your buying this as an investor loan, you will likely have a higher rate than listed, which would drive up your mortgage payments.

I do like the idea of new properties as rental units.  I build new duplexes for this reason, but the numbers have to work out.  Yours don't work for me, and as Cal said, you would be relying on speculation.

Cal and Mike, 

Thank you so much for the replies.  I will follow your advice and am not going to buy this one, since the $15,000 closing cost makes the deal look even worse. 

Your advice help me keep a clear head when it comes to investment. Thanks again.