23 year old w/ excellent credit considering buying w/ a friend

15 Replies

Hello,

- Myself and a friend from college are both 23 with 750+ credit scores and ended up with full-time offers in Nashville after being fortunate enough to finish school debt-free
- We currently each pay about $1,000/month for rent and are considering purchasing a 3 or 4 bedroom home to move in and rent out open rooms to friends
- We've been qualified for being able to put 10% down without needing to pay PMI on a mortgage as co-applicants. We're looking at homes primarily in the Germantown/North Nashville area that are going for around 400k. From my understanding, it seems like we'd be betting on appreciation/capital gains to a heavy-ish extent if we were to go through with purchasing and then exiting/selling 4 years from now.
- Would anyone be able to give advice or input in regards to if they think this or another idea would be a better over renting as we currently do? It's so painful for each of us to shell out 1k/month in rent - but it's also very scary to think of purchasing a 400k home to find out a couple years later that we'd be 100k underwater if this market is truly as overheated as some think. We do value being close to areas to go out so we're looking to strike a balance between the utility/quality of life we'd get from a home along with making a sound financial decision. Furthermore, our commute wouldn't be very manageable outside of anywhere other than the downtown area such as Dickson, Murfesboro etc.
- Lastly, would anyone be able to offer a suggested price to rent ratio that we should be targeting when running numbers?

Any help would be greatly appreciated. We're very careful with our money and are just trying to explore options to set ourselves up as best as possible for the future while still being able to enjoy Nashville. Thank you!

I love the idea! I purchased my primary residence in North Nashville a year ago & am very happy with it.

I think if you can get in with a friend at a good price point in North Nashville, it's a great idea! Congrats on the journey. I'd be happy to meet up and talk about the neighborhood more if you'd like.

Is there a reason you guys are considering exiting in 4yrs? If there is a downturn, like many are predicting, then this wouldn't be a sound decision.

I don't know you or your friends long term goals and I don't know that area at all but I would consider looking into taking out an FHA loan on a MFH. You can offset the higher cost with less percent down and solidify it as a cash flowing asset when either of you would like to move on to a different property.

The most important part of this thread to me is that you consider getting an attorney to draft out a well thought or agreement in case this relationship with your friend ever goes sour, like many do.

If I can be of any more assistance feel free to reach out. Happy investing

@Brian Mulligan , thanks much for your willingness to help! We may very well do that as we don't have too many friends familiar with the area. Are you aware of what an attractive price to rent ratio or cap rate would be in these areas by chance?


@Gabe Amedee , my friend and I are both analysts in the finance industry and I'm not sure if I'll be able to stay in Nashville due to the lack of capital markets action once I outgrow my current track at the firm I'm at right now. Would it be sensible to buy and hire a property management company if we were to move out of the area? Obviously, our office jobs are very demanding so managing ourselves would be difficult out of state.

Hiring a property takes margin and you may have a hard time finding a property that comfortably cash flows after 10% of the gross rent is stripped.

In addition with all this talk of downturns, the likelihood of your one and only tenant in the single family eventually moving out is high so you can be pretty sure you'll go one month at the minimum paying a mortgage out of pocket.

When owning a MFH it's a lot less likely you'll have to ever pay the whole mortgage as the likelihood of all 2-4 tenants not paying is not as high.

We can also assume that the margins on a 2-4 unit will be much higher thus making it more feasible to hire a PM. In my area PM's are also willing to lower their fee when giving them multiple units at once.

@Peter Apockotos , If you want to go fast - go alone.  If you want to go far - go together.  Great idea and the two of you can be the iron that sharpens each other in the process.

Don't know if you realize it but Inside your post you actually built some proforma.  Test it up against your potential purchases - 10% down means a $360K mortgage.  $100K underwater implies a 28% negative event downturn.  Other than the really crazy crash of 08 in spots 25-30% if a health downturn assumption.  But hold this up against product type, and flexibility in a down turn.

Sometimes there's not selling out.  And in a partnership you want as many exit and contingency strategies as possible.  This is why I'd be more inclined to recommend a course like @Gabe Amedee is offering.  I love house hacking (Our family have done it for 26 years and it has added so much to the value of our lives in more than just financial ways) But a SF owned by two partners depending on in unit house hacking seems like a limiting strategy.  

Purchase duplex or 4 plex and live in one while renting the other (s).  If anything goes south then the entire model doesn't have to change.  You can simply move out and rent the empty unit.

If you feel you may be moving out of state in the next few years (not unheard of if you’re a single young professional), you may want to set up the systems now to be able to invest in the same market long distance, even if you live there now.

I decided to initially invest out of state as I knew it would be likely I was moving (lived in 3 different states this year), so I set up my investing to allow me to do it, no matter where I live

@Peter Apockotos

As many people can attest to, there are multiple ways to "skin the cat" and the most efficient way to figure out your best approach is really contingent upon your current financial situation.  

One other scenario not mentioned is why not keep renting and use your cash (along with other ways of leveraging I hope) to purchase investment properties so your passive income can go up first.

This was the approach my wife and I took years ago because New York was and still is ridiculously expensive.  While renting does throw money out the window, it's also relative to what else your doing.  Our logic back then was if we're going to be partying and blowing through our money then yes purchasing a home is best BUT if we rent so that we can free up ways to purchase multiple performing assets that will in turn give us a great monthly cash flow and THEN buy a home, well that was a better choice.  Now we have a home and cash flow from our investments that help pay my mortgage every month.  

I would suggest along with others to house hack at least a duplex. I'm working on an offer currently with a client for a multi family in North Nashville Cash flowing $200/door with purchase price of $150,000, which is Pretty rare in this market. But Ideally a quadplex + renovated garage would be what you would want. haha. You and your friend live in the garage and have 4 units cash flowing at least $100 a door. Finding that is the hard part. But not impossible.

Why not diversify your cash... to me investing into a 400k SFH verses multiple doors doesn't seem like you'd be maximizing your finances but I guess it depends on what your strategy is.

But from what I've learned rule of thumb is Rent to Price ratio minimum 1% of purchase price. So with a 400k house you want to be able to generate at minimum $4000/month. 

Anyways, let me know if you guys need any help as well, I'm a native Nashvillian and can give you some insight on the market and the areas around here. Good luck on your REI venture!

When I was 24, I bought more house than I could afford in Park City, Utah. I rented all the rooms out to good friends to cover most of the mortgage, and had the best time of my life. Sold it after 5 years and bought 7 houses with the profits.

Would I buy a 400k house today with rising interest rates and tax law reform that phases out incentives to own a SFH? Nope.

...But I also said bitcoin was overpriced at $700. 

Def house hack at least a Tri-plex. The two of you could live together in one of the units and you can rent out the other two units. If you guys ever have to move then you just start renting out the unit you are living in as well. 

Peter, My wife and I both hold our real estate license here in the nashville area. We are active investors as flippers and buy and holds. Would love to meet up and chat sometime about what weve learned about this market and where we have seen as the best/better areas to invest with the current crazy hot market. We look everyday at teh availability of what is on the market, that would make a sound rental investment. Our currently analysis is that those trendy areas like germantown, 12 south, the gulch, etc are over inflated and do not bring a strong return. We have few areas that we ourselves our in the process of investing in, as well as other clients/investors. We currently have a house hack that we are getting $2500-$3000 a month on a basement rental that we live in, on a house we purchased at $365k. That income easily covers all expenses and it is in an amazing central location with property values appreciating greatly. Would love to meet up and chat and let you know of some ideas or areas and see if we could help you guys out any further!

@Peter Apockotos Welcome to BP man! Awesome job and congrats on your success so far you should be proud! My opinion would be to house hack a duplex or triplex type property and focus on CASH FLOW. Like you seem to understand banking on appreciation is very dangerous. Cash flow is king and will keep you above water at all times if you focus on it and buy the deal right. Good luck!

My thoughts:

1.  Partnerships are risky unless the partner is your spouse, and then there is still risk.  What if your goals & opportunities diverge?  I'd say one of you needs to buy the place and lease to the other.  That keeps everything so much cleaner.  Business divorces are never clean.

2.  We're in the second longest bull run in history.  The longest was less than a year longer than this one.  So - just playing devil's advocate here - you're buying at the peak of market value, then relying on appreciation ONLY to make your return and cover your note when you choose to sell?  The math doesn't work.

There's too much risk in this plan for me, too many ways for it to go bad and not enough ways for it to go well.  Your probable exits don't look that great.

Whatever you do, I'd want it to cash flow from the start.  A property that cash flows is an investment.  A property that doesn't cash flow and relies on appreciation is speculation.

Save more money, stay in the same room as your buddy and rent the rest out haha. 🙌🏽

If you can find a small, reasonably priced multifamily in that area, then more power to you. Nashville is so full of investors right now and everything has been picked over so many times that you better have a great deal of patience and some luck. Most answers also undervalue how local real estate is. While the logic of "it has been going up, so it has to come down" is not crazy, Nashville is in an interesting and seemingly great position for growth. We have a ton of people moving here, limited housing supply, and basically no unemployment at all. While the days of not so talented developers tearing down one, building two cheap houses and selling them over asking are done, there is still a huge need for housing because there are too many jobs which bring too many people for our current housing stock. The cost of construction and the cost of land has also constricted new construction, so pricing has gone up as a result. All that to say, there are still a lot more reasons for home prices to go up in general than there are for them to go down. This crowd isn't fond of appreciation, but in a booming city it is very difficult to find good deals without thinking about it, especially in the city. Most cash flow people are in the outskirts at this point. The areas you are talking about specifically are quite different. Germantown is already really nice, so you are betting on appreciation if you can even find a decent place for that price. Buena Vista/North Nashville, you are betting on gentrification, as value is being added everyday as people pour money into the area. That is an important difference. We are building a lot in the Buena Vista area and I'm keeping as much as I can at less than the 1% rule, but I'm betting that a good location in a growing city will be worth more once the dust settles. Just my two cents of crazy risk taking to balance the traditional cash flow investing advice. 

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