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Background: I just got a new job in downtown D.C. and I'm interested in buying my first home since interest rates are low and I have excellent credit (750-ish). I will be making 130K a year. I have student loan debt but no credit card debt and no car loan. I'm a veteran so I can use the VA Home loan. (edited for brevity)

Question #1: My main concern is I just don't know how long I'll stay here since I don't know if I'll like it here (i.e. I have no plan I'm just seeing how it goes), and I know it's normally a bad idea to buy if you aren't settling down. I work for a contractor so I could move eventually for a number of reasons.

What I'm trying to figure out is if it would be safe to buy despite my uncertainties if I purchase a city condo that I can rent remotely if something comes up and I decide to move out. I always hear how bad it is to buy if you aren't staying long, but for me I just don't know if I'll stay long or not and don't want to lose out on a good opportunity with interest rates being so low. On top of that from what I've read, rent is supposedly like 32% (Edit: old data, in 2018 it was 28% if I understand correctly) more expensive than buying in DC, so it makes me question things even further.

Question #2: Since I'm not putting down a down payment, my mortgage payment will probably be higher than my rental value. I've read on a comment in another thread that that doesn't necessarily mean I'm losing money. It was explained like this: "Even if rent - expenses < mortgage you are still turning a profit as long as rent - expenses > interest." Could someone explain this to me a little simpler?

Question #3: I've read that housing prices are rising because inventory is struggling to keep up with the supply of new people moving in from new government jobs and the new Amazon Warehouse/HQ moving in, mainly because of DC's weird restrictions on how tall buildings can be. How should I view this as an investor? It sounds good that prices will go up, but if new regulation gets passed to lift those restrictions, could that instead be really bad?

  • You are welcome to delete (again) but I was typing my advice as the question vanished. – JTP - Apologise to Monica Jul 26 at 19:59
  • Sorry, I deleted it pretty quickly after I created it so I thought it'd be fine. My apologies. – Mathew Cowdery Jul 27 at 2:05
  • No worries. It’s a decent question, if you like it deleted still, for whatever reason, you can do that. – JTP - Apologise to Monica Jul 27 at 3:34
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It's very hard to suggest what another person should do because it's going to depend on so many factors. At a minimum, though, make sure you understand the risks you're taking so that you don't get blindsided.

The reason that the conventional wisdom is not to buy unless you're going to stay somewhere for several years is that buying a house is expensive. You've got buyer and seller agent fees that are generally going to be 6% of the purchase price, a couple thousand dollars in origination fees for the mortgage, etc. In general, it's going to take several years of property appreciation to pay for those things before you're breaking even. If you've got a small down payment and you've got a 30 year mortgage, you won't have a lot of equity for the first several years. If you get unlucky and home prices drop, you could easily owe more than the house is worth. In that case, you might need to come up with 15 or 20,000 dollars just to be able to sell the house, pay back the bank, and walk away with nothing. That happened to plenty of folks in the 2008 time frame.

But, as you say, you always have the option of renting out the place if you need to move. That's true. But then you have more to consider.

  • You mention a condo. Most condo associations limit how many units in the building can be rented out at once. Depending on how close the building is to that cap now and what happens to other owners, be aware that you might not be able to rent your condo out in a few years.
  • If you're renting out your condo, are you going to be able to survive if you don't get any income from the condo for, say, 6 months? Tenants stop paying (but banks still want their money and you still need to pay for repairs) and evicting them takes time (particularly in cities like Washington, DC that have relatively tenant friendly laws). What about if after that you need to come up with several thousand dollars for repairs before you can rent the place out to new tenants? It sounds like you don't have a ton of assets at the moment so that's a serious concern unless you're planning to be able to save a large fraction of your paycheck to build up your reserves.
  • If you're renting out your condo, are you going to be able to buy a new place wherever you relocate to? The bank is only going to count a fraction of the rental income you get from the condo (they want to make sure that they get paid back if you get unlucky and your tenant stops paying). If you have to make two mortgage payments, that will use up your salary and eat into your financial cushion very quickly.
  • If you're renting out the condo remotely, how much are you going to spend for someone to manage the property for you?

Personally, my preference would be to keep my options open (but I'm financially rather conservative). If you rent for a year, you can always reconsider buying at the end of that time. In a year, you'll have a much better idea what your budget is (how much you're saving, how much you're spending, etc.). You'll have a better understanding of the local property market. You'll have plenty of time to do your research. And you're likely to have a much better idea whether you're interested in staying in the area for a while. If you're making a big personal transition now (moving from the armed forces and/or college to civilian employment, moving to a new city, etc.), that's generally not the best time to make a huge financial commitment.

Yes, rates are low now. And it is entirely possible that they'll be higher in a year. But rates have been very low by historical standards for a number of years now. The Fed isn't going to raise rates significantly unless the economy is doing so well that they're concerned about inflation. And while there are no guarantees about the future, it seems far more likely that the Fed will be trying to stimulate the economy in a year than that they'll be trying to slow it's growth. In other words, rates might be higher (or they might be lower) but it is unlikely that they're going to go from 3% to the 6% rates from 2008 or the 8% rates from 2000.

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I would suggest slowing down, unless you are very familiar with the Washington Metro area. I live in Northern VA and have lived in the DC area my entire life.

People who work in downtown DC can live anywhere in the region. Many use public transportation. Besides the subway, there are many other options including commuter rail from MD and VA, commuter buses from multiple counties, a regional bus network that either feeds into the subway or goes directly downtown. And that unique system of slug lines. It is not unusual to know people in your office who commute from Frederick MD and others from Fredericksburg VA. Even the people who will be working at the new Amazon location, who will be hired over the next 10 years, could live anywhere in the region.

You may find it easier to pick a place that will suit you as a occupant and then later as a landlord after you learn the area.

Several items of caution regarding the VA loans. Make sure you understand how long you have to live in the place before you can turn it into a rental. Also understand how this loan will impact your ability to get another loan. It is possible to have multiple loans but the resources aren't unlimited.

Now onto another of your questions:

Even if rent - expenses < mortgage you are still turning a profit as long as rent - expenses > interest.

Taxes and profits when you are a landlord can look strange.

If you collect more rent then your expenses you think that is great I am making a profit. Then when you figure in the depreciation you either reduce your taxes related to this profit, or you will generate a loss in the view of the IRS and it will reduce your overall taxes.

If only it was that simple. Yes, you don't pay taxes on the rental income. You pay taxes on the result after you subtract your expenses. So you can subtract the condo fee, property tax, homeowners insurance, repairs and maintenance. But you don't subtract the entire mortgage, you only subtract the interest portion of the payment. The reason is that the loan proceeds's weren't counted as income, so the re-payment of the principal doesn't count as a deduction.

Then you factor in the depreciation.

It is possible to have a negative cash flow, and still be viewed by the IRS as making a profit.

So people say that if rent - expenses > interest you are making a profit, but that is only true in the long term view, and if the property grows in value, and if you can sustain the drain on your cash each month.

One other consideration. Being a long distance landlord is more expensive. You will need to pay somebody to manage the property and handle the issues.

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  • Echo this comment. DC/Maryland/Northern VA is a HUGE metro area and you'll want to get familiar. Recommend renting for a year while doing your research. You should be able to find a good deal somewhere on rent due to COVID. Low rates creates more demand which actually increases home prices so you can afford to take your time. As someone who also lives in this area, if you're gonna rent you can rent anywhere, but if you're gonna buy I'd suggest Northern Va due to less issues with crime, as certain parts of DC and Maryland are very dangerous – public wireless Jul 27 at 16:21
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rent is like 32% more expensive than buying in DC

If this is accurate, that you've calculated the total costs, including taxes, condo fees, etc along with adding a line for 'repairs', you may be in a good situation to buy. As I read your question, my gut reaction was "No, never buy unless you plan to stay for XX years." But, if you are planning in advance to buy a rental property, do the math for the condo as an investment. As a vet (thank you for your service) you have the benefit of both a low downpayment and lower rate. This wouldn't be available for a rental, so the idea of living there, getting this advantage, and later, having a profitable rental, is appealing. If the number is truly 30%+, you'll have room to hire a management company to watch the unit, collect the rent, and find new tenants. This is all one person's opinion. Give it a bit of time, other members here will talk you out of it.

If you share numbers, you'll get some better advice. (How much is the condo? What is the going rent?)

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  • Thanks for the reply! Right now I'm not looking at any one particular condo, since I'm still trying to see if buying is even the right choice. I've been doing a lot of homework though and can at least say what neighborhoods interest me: NoMa, Mt. Vernon, Chinatown, etc. I like these areas since there is a lot of new construction, it seems like it'd be easy to rent, and it's relatively close to where I work. – Mathew Cowdery Jul 27 at 2:40
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Buying a property (I mean even with a mortgage) has a number of specific enormous advantages, beyond the raw figures.

  1. Overwhelmingly, in this socio-historic era, it's the one and only way ordinary people can gain access to massive leverage. If the price does double in say ten years, you'll have made that much money with all but no cash outlay to speak of in comparison.

  2. In almost all situations, there are massive tax advantages to home ownership

  3. There are epic advantages to your general credit situation. Your ability to indeed make other investments, and "just" incidental issues like buying appliances or a car, or being approved for general societal aspects (perhaps professional society or security situations) are all tremendously hinged by home ownership

  4. There's a tremendous "forced saving" aspect. With the best willpower in the world, it's hard to consistently invest in MFST stock or the like. Buy a place this afternoon, and your success is locked-in, end of story. Every month you spend "thinking about it" is just a month down the drain. By all means, once you have established home ownership, calculate and make other sophisticated investments. Secure your simple, reliable home investment first, enjoying the incredible 1/2/3 advantages above.

And note that your VA situation is a staggering, beyond-belief, benefit to take advantage of, on top. Scoop it up.

If you happen to move in a few years, so what? There's often confusion about this, folks say "oh, I am 'tied in' due to home ownership". On the contrary! The fact that you have started up the home ladder makes it far easier to swap to your next home in the new city. It gives you freedom, just as all financial stability gives you freedom.

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  • +1 even if I’m not 100% as enthusiastic as you. For me, 2 things came to the top. The OP willingness to rent. And the wide disparity between rent vs cost of buying. That’s when the average person, with decent incomes, can’t quite afford to buy, due to lack of down payment. OP gets to use that Vet’s perk. – JTP - Apologise to Monica Jul 27 at 23:48

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