K&F are long time clients and friends. I’ve sold them residential properties and investment properties in the past, so this new purchase wasn’t their first with me. Still, for this type of property, my first question to them, as always, is:
How long do you plan on keeping the property?
Currently, you must be willing to hold onto the property for a while (my estimate is currently 4 years) to see a profit. This is assuming that you are financing the purchase, and would hire someone to make the majority of the repairs. Your closing costs would be approximately 4% of the purchase price, and to sell it would be another 6% or so. With prices stable right now, you need to see an increase in prices to recoup your investment, not to mention repairs, utilities, interest, taxes, and other related expenses.
Purchasing and renting out is probably the best method to go right now. Rental prices increased in June 2011 for the Washington, DC area. Depending on the amount of your financing, your rental income may or may not cover a mortgage payment. The tax benefits associated with rental property are similar to other types of businesses, and your entire portfolio would need to be considered.
How much can I afford?
The mortgage company is one concern, but the monthly amount is another. What happens if the property is vacant for a few months, can I afford the payment? How about if a major repair is required, do I have the funds? You need to assume that you will incur at least a 10% vacancy rate and another 20% in annual repair expenses. Another 1 month’s rent is incurred as an expense when you hire an agent to rent your property (smile!) and 8% per month for a property management company. Remember, you pay for any HOA or Condo fees, not the tenant.
So, you need to plan on assuming that you will not have at least 3 months of rental income per year….can you do that?
For K&F, they decided to buy and rent out. They wanted a property that was either in Arlington or Falls Church where they knew that it would eventually appreciate.