There's a house that I'm contemplating if I should buy as an investment or not. Summary: House location: Seattle (great area) 3 bedrooms upstairs and 2 bed unit downstairs (separate rent). Purchase price: 1.2M Mortgage: 960k with payments around 4k / month Down payment: 240k (20%) Total rental income: 4.5k / month Potentials for appreciation in the next 4 to 7 years: 20% (on average the house can increase in value to around 1.45M in the next 5 yrs time) Given the above info all turn out to be correct would you buy this property as an investment or not? If yes, why? If no, why? Please and thank you.
Mathematically, even if it doesn’t appreciate in value it will still make sense because you are earning money from rent.
What? OP would lose money on rent assuming 3.75% interest rate (that’s low) and assuming OP pays no closing cost.
Could you both explain your thoughts please
There is also potential of 80% decline. Do you have plan B?
Of course but appreciation doesn't matter, all that matters is cash flow.
This is a terrible investment. I can't overstate that enough. (Note, that doesn't mean you won't make money, or that it's a bad idea) If you are considering real estate investment, look at biggerpockets. Not everything there is gospel, but a lot of experienced people sharing advice. Specifically: 1. The ROI is very low. Assuming maybe 30% goes to management and repairs/maintance expenses (which may be on the low side), then 12k in property taxes your getting about 24k in profit, on an investment of 240k, with almost a million leveraged. Huge risk for 10% when the stock market averages is 7% - without requiring 500% leverage!
I don't know anything about the Seattle area real estate market, but playing on Zillow there's a place called Renton where houses are around 500k and rents are like 3k. Even that's not great, but much better than paying 150% more for 50% more rent.
But places with cash flow don't have any appreciation. If appreciation is anywhere like the past, it would be a way better investment
House is an investment outside the US. The maintenance costs are high here.
What’s the total carrying cost per month (estimated mortgage + tax + monthly maintenance)? Assuming 95% occupancy rate, what is your price to rent ratio? You should also compute the dividend. The dividend will be net operating income / purchase price. Then add equity gain to that. I always use 3% inflation rather than fluffed assumptions of faster gains. Computing your total annual return here will allow you to see if this makes more sense than putting that 20% down on stocks or index funds.
To me it looks like a great investment. Here is the breakdown of my rough calculations, This is the way I look at it... that tells me it's a good investment, please correct me if I'm totally wrong. Incomes: +240K --> Assuming an appreciation of 20% over 5 years (36 months).--> +240K in appreciation. +162k --> Income from rentals at 4.5k / month over 36 months. +64.8k --> The principal portion of the mortgage (40% of the mortgage is principal) payment of 4.7k / moth which is 1.8k over 36 months Deductions: -101k --> The interest portion of the mortgage (60% of the mortgage is interest) payment of 4.7k / moth which is 2.82k over 36 months -18k --> Property tax of 6k / ye over 5 years -19.8k --> Other operating costs incl. vacancy, repairs etc. (0.55k / month over 36 months) -60k --> Estimated sale commission etc. (240 + 162 + 64.8) - (101 + 18 + 19.8 + 60) = +268k in net profits So +268k over 36 months is roughly 7.4k / month of income. Am I wrong or am I missing anything? Badly need your advice please. Thank you.
Missing a lot! 1. No guarantee of appreciation. Many would argue it's more likely to decrease, and that should be priced in instead. Housing has been slowing down too. 2. All profit is from #1.
Google the 1% rule. This house isn’t a good investment. In other words you’re depending too much on equity gains to justify the investment. A good income property doesn’t require this. Looking at cash over cash monthly returns, you’d do better with index funds or a balanced mutual fund. And they’re a lot less riskier and have easier exit and liquidity paths than housing. Own housing for the long term. Find lots which come close to the 1% rule. Most of the time they’ll be crummy lots in Renton or Rainer Beach for King County. But they’ll pay out. But more than likely you won’t find them in high cost of living areas like Seattle or they will be a needle in a haystack.
Do you need to live in the home? If not, you’d be better participating in a “crowd funded” type of platform, investing the $240k in multiple projects without direct exposure to the market and maintaining the property itself. Or REITs with monthly income dividends that you can liquidate fairly simply. If you need a home, then the investment is pretty moot because you’ll be more attached to the property vs the ROI.
Don't
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Where is the home? What’s the bedroom/bathroom count? What’re the school ratings?
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