Thoughts on Townhouse Purchase?

Question

Hi all,

Pulled the trigger on my 2nd property: I bought a free-standing no driveway townhouse near cottage grove/washington corridor area for 365k-375k. late 2012 build around 2250, 3bed/3.5 bath. Used conv financing 30 year fixed 20% down.

I plan on house hacking to where ill have one person paying ~$875/month and the other ~$900/month = ~$1775. P&I+insurance = $2285/month so ill technically only be paying $510/month for the master.

I believe I paid a slight premium for townhouse as I saw prices in rice military/cottage grove go as low as ~$145/sq ft where I paid in the mid 160s range. However, home is newer construction, excellent condition, and has some custom features.

What do you guys think of this purchase? I mainly did it because i wanted to lock up something nice inside the loop and plan on holding. I dont think i would make my money back selling in 5-10 years as I do not foresee much appreciation in this area, especially for townhomes. However, It can rent for $2650/month, no HOA, $1250 insurance, 2.42% taxes so I would be looking at around 4% cash on cash and around 10% if i add in the principal

Thoughts?

James Polk · Answer

I did not check your numbers but 4% cash on cash return is terrible on a rental.  If you buy an investment property in the mid 350s you would want an appreciation play.  You usually can't get a property near the 1% rule of thumb without doing something creative.  I think you know this and that is why you asked.

The only good thing about the deal is you can live in the loop for $500 in a nice house but you have to put up with roommates. Yes you do have the principal payoff and interest deduction but had you bought a property with 10-20% coc you would have the same with a larger smile on your face.

Brian Nel · Answer

I believe you're correct. The Texas tax law is really unfortunate in that sense. You retain whatever the previous homeowner had until the next tax year. That goes both ways. If the property was the previous owner's homestead and it's not your homestead, you still get the benefit the remainder of the year.

Does the current owner have the property with a homestead exemption? You can check on the HCAD site.

Daniel A. · Answer

@Tushar P.

@Brian Nel

agreed Brian. However, from my understanding, to claim homestead exemption you need to have possession and be residing in the house as of January 1st of the year you want to claim exemptions for. In my case, since I close in Feb, I do not think I qualify. Correct me if I am wrong

Thanks,

Daniel

Brian Nel · Answer

The homestead provides about a 20% reduction in taxes which in Harris county is significant. Our tax assessor's policy is that owner occupied homes, including duplexes will be zoned multifamily so the tax office really don't care/investigate about house hacking. If the deed your name is on is your permanent address, you may homestead it. The return would definitely be impacted without the exemption but probably not enough to sway it from being a deal.

Tushar P. · Answer

@Brian Nel how are the homestead exemption laws in Harris county impacting the overall return? Do you get the exemption when house hacking? Would the return be very different whether exemption was allowed or not?

Meir Greenblatt · Answer

I agree and I did not think about it.

but I think it would have been Fraud if when applying/closing you intended to not live there,  but just now you are thinking about it.

your lender may tell you not to do it, and he can call it due if you decide to do it after all.

(ofcourse I'm just guessing and don't have any official knowledge in the subject)

Daniel A. · Answer

@Meir Greenblatt

From my understanding, if you are buying a home with the intent to rent out or AirBnB, you need to get an investment loan. Notwithstanding certain circumstances like moving for a job, etc.  If you purchase a SFH with the intent to rent but tell the mortgage company you will be primary homeowner, you are running the risk of the lender calling the note due. It’s also mortgage fraud, which can be criminally prosecuted.

the reason is that the lender inherently incurs more risk when it is deemed an investment property ,therefore they command a higher investment rate.

Does your lender(s) tell you otherwise?

Meir Greenblatt · Answer

@Daniel A.

Definitely an interesting situation.

I recommend talking to your loan officer about what if you changed your mind and want to not live there but to rent it out instead.

Russell Brazil · Answer

Im always surprised at the skeptics on things like your situation.  Living for $500 a month in a nice place sounds like a home run to me.

Daniel A. · Answer

@Meir Greenblatt

Interesting perspective Meir. I am hesitant to fully release to AirBnB because I don’t think they would treat the property with the standard of care id like.

To your point, about not having to live in it a year because I am putting 20% I am unfamiliar. I am getting a primary homeownership interest rate which requires I habit the home for 1 year before I rent out. Let me know if you know of something otherwise

Thoughts on Townhouse Purchase?

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