Here are just a few of the national real estate numbers we are tracking for you now. For more info contact us.
Conventional wisdom dictates that is better to buy than rent. However, in many of the nation’s most expensive markets, like DC, the decision to buy is increasingly more difficult. The metro’s renters are conflicted, on one hand their monthly rent is more than $2,200, yet DC home prices are rising yearly making it ever more challenging to enter the market.
In May, it was 31 percent cheaper to buy than rent nationally, according to Trulia, and It is still cheaper to buy than rent in DC today. With the Federal Reserve threatening another interest rate hike in December, now is the time to buy a home in the DC metro.
Here are six areas in the area where renters can save substantial money by choosing to purchase a home in Washington, DC or Northern Virginia.
Adams Morgan, Washington, DC
It is 22 percent cheaper to buy than rent in this multicultural neighborhood with a diverse restaurant scene for the average foodie. The median sales price for Adams Morgan DC real estate is $560,000 and the median rent is $2,875. Renting costs average $2,745 per month while buying costs average $2,154 per month. Choosing to buy in Adams Morgan would save a renter close to $600 per month.
Mount Pleasant, Washington, DC
Located north of downtown, Mount Pleasant is a short metro ride from the heart of the District. Its nearness to shopping and Rock Creek Park make it one of the District’s most desirable neighborhood. This may account for its lofty median rent of $4,650 per month. Renter’s in this neighborhood should become owners. Despite the median home sale price of $890,000, it is 24 percent cheaper to buy a home in Mount Pleasant. Renters could save $12,000 annually by choosing to own.
Columbia Heights, Washington DC
Just east of Mount Pleasant, Columbia Heights is another one of the District’s more sought-out neighborhoods. Its median rent is $3,625 while the median sales price of homes is $625,000. It is currently, 28 percent cheaper to buy than rent in this District neighborhood. In seven years, a renter could potentially save $60,000 by investing in Columbia Heights real estate now.
Arlington with its many office buildings, is popular with both young adults and families seeking a shorter commute. Those living in Arlington VA spend $3,056 per month renting whereas homeowners only spend $2,265 per month. Making it 26 percent cheaper to buy than rent. Renters could save over $66,000 in a seven-year period by choosing to invest in Arlington real estate.
Falls Church, VA
Falls Church, just west of Arlington, offers a great suburban experience. It is 21 percent cheaper to buy than rent in this Northern Virginia community. The median sales price of a home in Falls Church $540,000. Renters spend $2,650 per month while homeowners spend $2,081 per month.
The choice to buy instead of rent is a slightly tougher choice for residents of McLean, VA. Buying offers a 10 percent advantage to would-be homeowners. In McLean, the cost of rent is $3,296 per month while buying costs are $3,653 per month. The savings per month is $357. After seven years, McLean rents could amass close to a $30,000 nest egg.
The numbers tell a compelling story. DC renters should be encouraged to jump on the home-buying bandwagon. With impending interest rate hikes, the time to start a home search is now. Call us today so you can find a home here and reap the benefits.
Methodology: Rent vs. Buy pricing assumes a 20 percent down payment, a 30-year fixed loan, a 4.35% interest rate, an income tax rate of 25%, and ownership for 7 years.
Katie Bassett is a freelance blogger who covers a wide array of topics within the real estate industry as well as the overall lifestyle for millennials.
Are you an seller or investor looking to sell a property, buy a new property, but want to avoid paying capital gains or recapture taxes?
Have you heard of 1031 exchange? This is a process where you are redistributing the equity of one property into another investment, to defer additional taxes.
Here are some simple facts on the 1031 process;
1. Sell property & identify new purchase within 90 days.
2. Find a like kind/replacement property you want to acquire. (Must be equal or greater value).
3. Reinvest all equity into the new property OR apply equity to a higher valued property.
This transaction is similar to a trade, where the equity is transferred to a new property, rather than received as proceeds, and taxed.
We have had clients sell a long term investment property, for a new construction investment, sell their investment, and apply the proceeds towards a portion of an investment or, apply the equity of one property to the purchase three new properties.
As part of the exchange process, the purchase property must be identified with in the specified time frame, and the owner may not receive cash or other benefits from the sale.
Using a Qualified Intermediary to complete this process is highly recommended, given the complicated nature and timing of the transactions.
If you have more questions about completing a 1031 Exchange, our team has completed these types of transactions on our personal properties, and for clients. Contact us today, for more info!
We’ve discussed the expense side of the cash flow equation in a previous post here, but how does one go about estimating a reasonable rent? There are several main sources:
Craigs List – Most landlords in this area go the ‘do it yourself’ route and list their properties on Craig’s List, which is free. Local renters know this is THE go to place to find rentals. Unfortunately Craig’s List postings, while plentiful, are only live for about a week, and once they disappear it’s tough to know how much the home was actually rented for. In addition, there’s no easy way to tell how many weeks the landlord had the posting up there before they found a renter. It’s wise to start monitoring Craig’s List ads at least a month before you list your own property for rent, to get an idea of rentals in that neighborhood.
Multiple Listing Service – Some landlords hire real estate agents to list their property in the MLS. This is a very reliable source of data and an agent can quickly tell you how many days the property was on the market and what the actual agreed-upon rent was (not just what was advertised). However, as noted above, most landlords rent units themselves to avoid the brokerage fees, so this data, while accurate, represents only a sliver of the market.
Nearby Apartment Buildings – If you’re renting a condo, your primary competition is nearby apartment buildings so check out their websites and, more importantly, call them up! They frequently have unadvertised specials, and that represents your true competition.
Rental Estimation Websites – A variety of websites like Rentometer.com are very helpful in aggregating data from several third party sites to let you easily compare your rent to the nearby advertised homes.
If you need help identifying a good investment property, please contact us.
- Short Sales & Foreclosures are a great opportunity because you can be patient. (See my post on the challenges of timing a foreclosure transaction here and the frustrations of shorts sales that never close here.) While an owner occupant doesn’t have the luxury of time and can get frustrated with all the problems of these transactions, investors can go with the flow since their timing is more flexible. And that flexibility pays off by getting properties for less money.
- Consider the home’s condition and your level of expertise in doing or managing renovations. Many of the short sales and foreclosures on the market today come at bargain prices, but require everything from heavy cosmetic work to kitchen and bath remodels to mold remediation. Very few properties in the attractive price ranges are move-in ready, but there’s a lot of upside for people not afraid of elbow grease and with the right handyman connections.
- Be patient. You may need to wait for the right house at the right price. Set up an alert so that you can be ready to jump on a property that meets your investment needs as soon as it comes on the market—you can be sure other investors are circling and waiting for the right opportunity as well!
Agents keep a close eye on the market and can help you identify a good opportunity. Winter is an especially good time…there are fewer buyers out there, and sellers are generally more anxious. Contact me if you want to discuss some good opportunities that are out there right now.
In our continuing series about buying an investment property, we turn our attention to the expenses. In our current market, it’s relatively easy to find properties where the rent covers the mortgage payment, but what else should investors take into account?
Obviously, condo or HOA fees are a big ticket item. Don’t forget these!
Property insurance. Even in a condo that comes with a master insurance policy built in, you’ll need landlord insurance.
Maintenance and repairs. Remember that you have a basic standard of safety and living that you need to provide your tenants. The amount you budget is largely impacted by the condition of the property you buy.
Vacancy. In a perfect world you’d have a tenant move out and another one move in the next day, but in reality it rarely works that way. Budget for at least a week or two of vacancy, which doesn’t sound like much but when you do the math, 2 weeks vacancy = 3.8% of your annual rent.
Property management. Most property management firms charge 6-10% of the rent to manage your property. Some states require you to have an in-state representative for the property, so if you’re not local, keep that in mind. The percentage sounds hefty, but do you want to be the one taking midnight phone calls about the leaking water heater, and then taking time off of work to wait for the plumber?
Advertising/Tenant Screening. If you plan to hire an agent to advertise, find a tenant, show the property, and then screen the tenant (check credit reports, references, and verify employment), you’ll need to pay for that service. Fees vary.
Depreciation. This is a non-cash expense, of course, but significantly reduces your tax bill. When estimating depreciation, remember that you can’t depreciate the value of the land–only the structure.
It’s also a good idea to budget for a ‘miscellaneous’ category…Murphy’s Law applies to investment properties, too.
Read More: How do I find an investment property?
Read More: Finding an investment property.
Are you thinking about adding a rental property to your investment portfolio? Wondering how to go about identifying an appropriate property and estimating cash flow? Not sure what typical expenses are for an investment property? Then attend this free informational seminar that will cover:
– Identifying opportunities in the current real estate market
– Finding the right property
– Estimating rental income
– Estimating expenses
– Calculating total return
The class is free, but registration is required.
Arlington Central Library
1015 N Quincy St
January 31, 2011 8:15 pm – 9:00 pm
- The first thing to do is to consider long term (e.g., 10 years) appreciation potential. Think about area employment (and more importantly where those employers are—commuting time is a big factor). Also think about long term demographic shifts like BRAC, as well as infrastructure projects like new metro stations or light rail lines.
- Consider the neighborhood. Ideally you want to find the lone problem house in a great neighborhood, but that’s easier said than done. Also consider neighborhoods that previously had been more desirable in terms of age, location, and home condition, but perhaps were hit hard by this recent wave of foreclosures.
- Consider the price range – While you hope to ultimately find a property that will be cash flow positive, you nonetheless have to front the money to buy it, and getting a loan these days isn’t easy, especially for investors. Financing remains a problem, and lenders require investors to put 20-30% down, plus closing costs of about 3%. Interest rates run about a percentage point higher than owner occupied properties. Figure out how much cash you’re willing to put into the property, what you can qualify for in a mortgage, and back into a price range from there.
- Look at rents the neighborhood can command. Once you identify a few target neighborhoods, begin collecting rent data. The best place to collect rent data is on Craig’s List in addition to the MLS. This is because many landlords conduct the process themselves and so the listings are never in the MLS. You also can’t be sure how aggressive a listing agent was in procuring a renter, which may skew the price. If they put it into the MLS but then never on Craig’s List (by far the more popular site for finding renters), then it’s likely the rents there are lower than what the market actually commands. Unfortunately there’s no easy way to gather historical Craig’s List data – you just need to keep watching and see which rentals seem to go quickly. Consider calling some of the landlords to ask whether they’ve had a lot of responses.
Looking for help in finding an investment property? Contact us to discuss a strategy for building your real estate investment portfolio.
I’m working with several investors right now. They believe that the Northern Virginia and DC market is having a ‘perfect storm’ of opportunity: low prices, high rents, and ridiculously low interest rates, even for investment properties (which historically have carried a significant premium to owner-occupied properties.) I recently had a transaction where the investor put 25% down and paid just 4 1/8% on a 30 year fixed mortgage! And all in an area that is arguably the strongest job market in the country. The property, located within walking distance of the incredibly popular orange line in Arlington and commands high rent, was cash flow positive immediately.
Given my business background and CPA, I tend to get a lot of inquiries from potential investors–some experienced, and some looking to buy their first investment property.
- How do I find a neighborhood that is good for investment properties?
- How do I estimate my expenses and cash flow?
- How do I find good tenants?
I’ll try to address these in this and subsequent posts. The Washington Post had a good article with some items to think about when buying a home, and the lessons can also be applied to buying an investment property.
First and foremost, remember that you’re locking in the majority of your expenses via a FIXED 30 year mortgage. This means inflation is your friend. The value of the property will rise, and rents will rise, but the bulk of your expenses remain the same. This is time to buy-and-hold, not flip.
Consider the tax effects of a purchase. For owner-occupied property, the interest is deductible (within limits). For an investment property, the income is considered passive income, and the rules get much more complicated. You’ll need to file a Schedule E. Be sure to consult your tax adviser about your specific situation. You’ll also want to factor in capital gains taxes (due to significantly rise soon) for the sale.
Finally, consider the cap rate. The article states:
Make an educated guess as to what the home would rent for if it were on the open market. Granted, this is easier for condos, which have a more active rental market than single-family homes. Let’s say that for a home, on sale for $400,000, the rent would be $2,000 a month. Subtract any condo or homeowner fees, monthly property taxes, insurance, and an allowance for repairs from that rental rate. Let’s call that $500, meaning we’re down to $1,500 a month. That’s the monthly operating income an owner would expect to take in if the property were rented. Multiply that by 12 to make it an annual number, and divide by the purchase price. In this example, that leaves you with a 4.5 percent cap rate…..You can use the cap rate to compare homes you might buy to figure out which is the best deal when viewed purely as an investment. The higher the rate, the better.
In another post I’ll discuss some of the common expenses associated with an investment property.
Read More: Foreclosure Properties: A Good Investment?