New construction for our first rental but getting cold feet
Portland, OR · Member since 2017 · 3 posts · 0 votes
New construction for our first rental but getting cold feet
Most Popular Reply
Laveen, AZ · Member since 2016 · 584 posts · 528 votes
4yQuote from @William Harmon:
We are in the process of buying new construction in a town next to Portland OR for our first rental. We committed to buy form the developer in February and the math made since and we would cash flow about $100 a month. With the rise of interest rates we will now owe about $150 - $200 a month. The purchase price is $409,000 and we are projecting rent at 2499 a month. This will be a long term hold and we are planning on a cash out refinance to pay for our kids college. Oh yeah we found out we are expecting twins in November! The same house plan is now 10K more than what we are locked in at. We are going to lock in our loan rate in the next week or two. The house will be finished in late July. Do we walk away and lose $4500 in earnest money. Or do we stay the course buy it and refinance in a couple years when interest rates come back down. Looking for guidance from those who have traveled this path before us. Thank you
Purchase price $409,000
Down payment $95,000
Expected rent $2499
Monthly payment $2600
This may be a stretch but do you have financing contingency to get out if you don't want to be negative each month? Is the lender ok financing your investment property with you operating at a loss?
Here are concerns I have about what you and another poster said that you should consider:
"Do we refinance it when interest rates come back down".....You don't know if or when that will happen
"This is going to appreciate quite a bit in the next few years in addition to rental rates".......there's no guarantee this will happen or happen well enough to get you out the negative.
I'm not saying rates won't go down to refinance or that the property value and rents won't go up. That's certainly possible and you'll be ok. Be aware you risk being cash flow negative for an unknown period of time.
One of the things I enjoy about a new build I bought is fewer maintenance requests than the resales. Perhaps this will be your experience to soften your budget but I wouldn't base calculations on having no maintenance requests.
6 Replies
- 4yBrad HammondBusiness MemberReal Estate Agent · Portland, OR · Member since 2016 · 1k+ posts · 605 votes
Hey @William Harmon, congrats on so many things here!! Wow, twins! I think you should go for it. There are lots of reasons but mostly you could probably raise the rent up to your monthly payment in a year. I bet you will lose more money by forfeiting your earnest money than you would in negative cash flow. If you can make it work, try to think in the long term. This is going to appreciate quite a bit in the next few years in addition to the rental rates.
Ok, one last thing. I wonder what the rental rate will be in July? Maybe you'll be closer to $2600.
- Laveen, AZ · Member since 2016 · 584 posts · 528 votes4y
Quote from @William Harmon:
We are in the process of buying new construction in a town next to Portland OR for our first rental. We committed to buy form the developer in February and the math made since and we would cash flow about $100 a month. With the rise of interest rates we will now owe about $150 - $200 a month. The purchase price is $409,000 and we are projecting rent at 2499 a month. This will be a long term hold and we are planning on a cash out refinance to pay for our kids college. Oh yeah we found out we are expecting twins in November! The same house plan is now 10K more than what we are locked in at. We are going to lock in our loan rate in the next week or two. The house will be finished in late July. Do we walk away and lose $4500 in earnest money. Or do we stay the course buy it and refinance in a couple years when interest rates come back down. Looking for guidance from those who have traveled this path before us. Thank you
Purchase price $409,000
Down payment $95,000
Expected rent $2499
Monthly payment $2600
This may be a stretch but do you have financing contingency to get out if you don't want to be negative each month? Is the lender ok financing your investment property with you operating at a loss?
Here are concerns I have about what you and another poster said that you should consider:
"Do we refinance it when interest rates come back down".....You don't know if or when that will happen
"This is going to appreciate quite a bit in the next few years in addition to rental rates".......there's no guarantee this will happen or happen well enough to get you out the negative.
I'm not saying rates won't go down to refinance or that the property value and rents won't go up. That's certainly possible and you'll be ok. Be aware you risk being cash flow negative for an unknown period of time.
One of the things I enjoy about a new build I bought is fewer maintenance requests than the resales. Perhaps this will be your experience to soften your budget but I wouldn't base calculations on having no maintenance requests.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes4y
Stick with your numbers. Buying a property with a negative cash flow is a bad idea in most cases. Today we are in a peak market and there's a very good chance property prices will start dropping. You would be negative cash flow and could lose equity, making this a stinker for years to come. You're also in a market that is increasingly Tenant friendly. If inflation gets worse, I could see places like Portland instituting new laws that harm your ability to make a decent return. Or maybe they'll just hand over the keys to criminals and all the good people will flee.
You have twins on the way. Don't put their future at risk by making an impulse buy.
The DIY Landlord Book4.7248 Reviews - Rental Property Investor · Albany, OR · Member since 2016 · 39 posts · 23 votes4y
Hey William,
I think the most important thing to do is know yourself, and your partner's self, first. Your commitment, your financials, and ability to handle stress. If you know this will cause you and your partner a lot of extra stress, especially during a pregnancy and when the babies come, then I would think twice about it. Also, can your budget handle $200/mo. on top of extra baby costs? If not, can you or your partner work more hours, get another job, apply for a promotion, etc.? Again, how will that affect your life. Time with the kids at night and on the weekends is precious at that age so you might not want to add too much more to your plate. Also sharing the load with your partner to take care of the twins.
As for the actual deal, when you say monthly payment of $2,600, does that include repair reserve, vacancy reserve, and other operating expenses? If it does, then I don't think going through with the purchase is a bad plan as long as you can afford to pay the $150-$200 per month. Portland rental market is so tight that I can't foresee rents going down. There is such a huge demand and low supply.
As far as equity, it really doesn't matter if that drops as long as you are able to hold the property. Equity is just a paper number except when you are selling or getting financing. In fact, and I'm not an expert on Oregon's property tax system, you may pay less in property taxes if the value goes down. I believe for new builds the tax assessable value is based on the purchase price when a house is first purchased. Then when FMV drops the taxable value drops. Again, I would check on that for new builds.
If you give up $4,500 of earnest money, that is 22 to 30 months of paying $150-200. In 2 -3 years, I am guessing you could raise the rent by at least $200. You should consider rising costs like property taxes though that will offset rent increases.
Also think about tax savings. Can you take the rental losses and offset some of your W2 income? If so, you could withhold less for taxes each month and use that money to pay for the difference.
- Real Estate Agent · Porltand, OR · Member since 2022 · 9 posts · 1 vote4y
Hey William, thank you for sharing. Do you have an update? Id love to know what route you decided to take and why.
- 4yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
1) We do not know that property values will continue to increase at all. 2) We do not know that your cash flow will increase at all. 3) We do not know what interest rates will do. 4) As a matter of fact, based on a look at history, we can most likely assume that all of these will not work in your favor.
Unless you are positive that this house will have huge appreciation over the next 10 years, I would pass. Shame to lose your EM, but maybe there is a way around that? And $4500 is only $100 a month looked at over 4 years...you could lose more than that by hanging onto the property....
Just my 2 cents on this.....
Join the conversationCreate a free account to reply, vote on answers and follow this thread.