The Investment-Property Seekers
Who: Dan Sharma*, 29, a finance manager, and his wife, Samantha, 31, a middle school teacher. They have a 4-month-old son.
Location: Columbus, Ohio
What They Want to Buy: An investment property—preferably a condo—in Columbus/Central Ohio in the next one to two years.
We plan on renting the property to my in-laws in the short term and using it as a rental property in the long term. As we’ll initially be renting to family members, we’ll have them pay enough rent to cover the mortgage payment, so our only gain in the short-term would be appreciation, not positive cash flow.
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Our priorities for the property are location, property taxes, number of bedrooms and age of the property.
Where They Stand: We currently have $10,000 saved for a down payment and are aiming to have $30,000 to $35,000 by the time we make the purchase. We’ll be considering properties in the $150,000 price range.
Combined, we make $140,000 a year. We pay our credit cards off monthly and owe $7,000 this month. We don’t have any student loans, but we do have an installment loan for our SUV on which we pay $600 a month.
We currently live in a single family new-build that we bought in 2012, the year we got married. Our current mortgage is $336,020, and our monthly payment is $1,733.
Samantha and I have $80,665 total in retirement savings. Samantha has $28,539 in her pension (even though her final pension will be calculated off her salary). My public retirement account, which functions as a 401(k), has $35,474 held in index funds, and 85% are in stocks. The same is true of my 403(b), which has $16,652 in it.
We currently have five to seven months saved in emergency savings.
What the CFP Says®: I’m so glad to see that Dan and Samantha have retirement assets and sufficient emergency savings. It also seems like they want to make sure they have an adequate down payment for this investment property.
“Adding an extra real estate expense could put a strain on cash flow. Dan and Samantha should consider what sacrifices they’ll have to make to pay the monthly mortgage on an additional property.”
Given their monthly household expenses, it seems like adding an extra real estate expense could put a strain on cash flow. Dan and Samantha should consider what sacrifices they’ll have to make to pay the monthly mortgage on an additional property. My concern is that they’re making an investment that they may not be able to afford in the event they’re unable to rent the property at full market value.
Since it could be some time before the property begins to make a profit, this might not be the best use of their capital and could expose them to risk should the housing market take a dive or if they need to sell at an unexpected time.
It’s important that they consider the full carrying cost of the property (mortgage, insurance, taxes, maintenance, repairs) versus the rent received to determine whether the property will be cash flow positive, neutral, or negative. If it’s negative, they might want to consider a less expensive home or putting more cash down to get the expected cash flow to at least neutral.