Considerations for buying a new build and renting existing home

13 Replies

Hello BP,

I've been saving up capital to purchase an OOS turnkey for the past 1.5 years. Was thinking about putting in about 30-35k and getting something in a B/B+ area in the Midwest. Recently I've seen some older homes in the City Park West area of town purchased, torn down, and replaced with a multi-unit building. 

Now I'm wondering if it would be a better financial strategy to buy one of the properties, owner occupy and rent out my existing home. My thought process is that rather than use 20% down on a 130-160 property in the Midwest I could instead use 5% down and get something worth 550K or more. 

From a numbers standpoint I could probably make about $700-800 profit renting my current home which would subsidize the new mortgage payment on the new property. The property I'm looking at would also have AirBnB potential as well. To me this seems like a no brainer but I'm also sure that there's something I'm not considering. What does everyone else think. 

Depends on what your goals are. Some people are opposed to OOS investing while others see it as the only way to cash flow. Denver is a difficult market right now as prices are quite high, but personally I prefer to stay local. I recently did this as I owned a home in Aurora and purchased something new in Arvada. I was able to get a lease set up before I closed and that rent payment covers my new much larger mortgage payment on the new home. Sounds like you are planning the new property to essentially be a live in flip, which is a great way to go. 

I personally like the "house hacking" approach.  It's worked for me.  As long as the numbers work and you're clear with your long term goals, it's a solid way to do it.  I've had clients do very well with that approach as long as they focused on what the cash flow would be (when turned into an rental) and not the appreciation play.  Some of my clients have even retired after house hacking for just 7 years when the market exploded in Denver and they were in a favorable position.  Remember, lenders can use 75% of your rental income as qualifying income for the next mortgage which should help. Lenders can also look at your Sched E on your taxes and often squeeze some extra qualifying income to improve your qualifying ratios. Good luck!

@Peter S. As others have pointed, there is no right or wrong as it depends on your investing strategy. However, if I were in your shoes, I'd buy a place in City Park or a similar area. Assuming there are no wild curve balls in the world, you'll more likely make a much higher rate of return buying a property in Denver vs a cash flow city.

Have you run the numbers on buying a place in Denver? What will your monthly payment be? What could the potential rents be?

@Peter S. My thoughts mostly in line with others, I'll just toss out a couple ideas to consider.

I don't have data to support this- I feel like new construction is slower to appreciate in our market - because there is typically other new construction that follows in the same area - when you are in the 1-5-year-old range it seems that people prefer buying new than "slightly used" if you will. Look in areas where there is new construction now vs units built a few years ago for resale and the price differences.

I have a close friend that rents his new townhome Jefferson Park on Air B&B - in March he made about $3,000, occupied about 30% of the month - he has a good place to stay when it is rented. The owner occ regulation on  Air B&B has been great for folks that want to participate as the inventory went way down. 

At the end of the day you have to do what is best for you, just be sure that buying a primary residence at $550k fits your long-term goals if that includes continuing to buy real estate consider future financing ability. Also that your reserves are well capitalized.

I do believe you are much better off buying in "our completely overpriced market" than buying one out of state property.

Best of luck in what you decide!  

Hi Peter, Personally if I had the option, I would look at the next property being a duplex or triplex. Something that can already cashflow along with the current home cashflowing. In some cases the duplex will pat for itself. 

Another option is to look for a property that is zoned as two unit and then converr the new home into a duplex where you can rent out the basement and live in the top.  

Overall the perfect situation for you will be determined by your risk tolerance, comfort level and your family situation to find the right investment for you. 

Good luck and Happy investing

Thanks for all the feedback. I am now definitely more considering buying something here in Denver vs out of state. My money will go a lot further here if I owner occupy, and I could always move back to my current house down the road and rent the newly purchased place. That way I'd turn a portfolio of 1 primary residence into a primary plus a 2nd SFR or 2/3 plex right?

@Steven D. Yeah I'm thinking of doing something similar, my biggest issue is finding something I actually WANT to live in and is still a reasonable commute to my job (although if it's only a year I could probably go anywhere). I'm not sure I understand what you mean by live-in-flip. Could you explain?

@Peter S.

Mostly self explanatory, essentially you buy a house that you would flip. You live in the flip and do construction to force appreciation as you are living in it. Generally it takes a bit longer to flip since you have to have parts of it habitable for yourself to continue to live. However you essentially are eliminating holding costs as you have to live somewhere so you are not really losing the money of having a vacant property. 

@Steven D. sorry i was just confused. I'm actually looking at a new build, no desire to do a flip. 

@Chris Lopez as for the numbers, that part is tough. The current mortgage on my primary is just under 2K, based on my area and house size I think I could get 2700-2800 realistically so I'd be cash flow positive about $7-800/month. 

The real trick would be figuring out the numbers on a new property. Let's assume it lists for 500K, I could put 5% down (25K) but that would mean I still have PMI and my payment is probably close to 2850/month at a 4% interest rate. In this scenario I make about 800 from the rent on my current existing property so my out of pocket cost is about 2200 a month or only about $200 more than I pay now, except now I have 2 properties instead of one.

Alternatively I could look at doing either a HELOC or cash-out refi of my existing home to be able to make a larger down-payment. If I could put down 20% (100K) then I don't have to worry about PMI and now my payment is around $2100 on the new place and whatever my additional payment is for the HELOC or refi. So my out of pocket would be close to $1300 plus the additional loan.

Either way it seems like a solid move, but I can't help feel like I'm missing something here. Obviously I run the risk of having to pay both mortgages in the same month anytime I have a vacancy, but if I'm able to AirBnB the new place, I'd think that would mostly offset that.

Thoughts?

Have you spoken to a lender yet to run a few scenarios by him/her? If you pull a heloc, that will hurt your DTI. There is no sense speculating on what could be done if the $$ man won't let you do it.

There are some different products that can eliminate your PMI or pay it upfront through the rate.

Where are you thinking for new construction? 

@Peter S. sounds like you need to get tighter on your numbers. Have you looked at Zillow and Craigslist for rental comps of your current home? You'll get a really good feel for the numbers. 

Is the 2k/mo counting taxes and insurance? Have you calculated repairs and vacancy?

For the new home, are you renting out the entire home or room by room on Airbnb? Have you looked at Airbnb.com for comps?

Cash out refi vs paying PMI - no right or wrong there. Depends on the numbers and what you're comfortable with.

My biggest worry with real estate and business is running out of cash. Years ago I ran into a cash crunch with a business and it kept me up at night. I never want to be in that position again. My advice, make sure you maintain cash reserves or emergency funds for both properties. 6 months worth for each mortgage is a good rule of thumb. 

I'll send you over a spreadsheet that a local lender put together. It might help with your property analysis. 

@Matt M. good point. I've spoken briefly with a lender but I probably need to to actually sit down with him and work through a few scenarios to see if this plan is even possible. Thanks.

@Chris Lopez appreciate you sending over those links, I'll take a look this week. The 2k/mo counts taxes and insurance but doesn't currently include repairs/vacancy since I live there now. I like your advice about zillow and CL for rental comps, I'll do some research there too.

Where are you looking at new builds? And are you looking in the $550k price range? I think you could get a new townhome for less than that in some areas - especially with the winter season coming..

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