bjohnston

I've been mulling over the idea of buying a townhouse as an investment property, and I'd like to get the thoughts of those with more experience than me in real estate investing. Here's the details: I've been thinking about buying a newly constructed 3-4 BR townhouse in the farthest outlying DC suburbs for something like $200-250K. I would put 20% down, rent out the property, and hold it for only about 2 years. With the way real estate has been appreciating around here, I would think that I may be able to double my 20% down ($40-50K) in 2 years. I would also probably make a few hundred per month ($300-500) with the rental, plus a few thou in equity. I would only be keeping it for about 2 years, as my wife and I are planning on moving out of the area. What do you think of this as a short-term investment? It is my understanding that I will not be able to deduct the interest on the mortgage, as it is not my primary residence, and it is also my understanding that I will have to pay capital gains upon sale of the property, also because it is not my primary residence. Am I right?

dbjb

1. No, you cannot deduct interest on a non-owner occupied property. You can, however, deduct "expenses" related to upkeep.

2. You will have to pay capital gains, it is a return on an investment.

3. I would not count on making $80k in two years, even in that area. You will make a profit, but probably not double your money down. The market will start to change and real estate prices and values will start to level off. Over the past few years, real estate values have risen exponentially whereas incomes have linear growth. The bubble has to burst eventually.

4. Investing in real estate is almost always a good idea.

bjohnston

Thanks. Actually, I would only need to "make" $40-50K to double my initial investment, and that assumes a 10% increase each year (on a property purchased for $200-250K), which is much less than what the market has been doing recently. I agree, this may be a little optimistic (I too am concerned about the market leveling off for a while), but I think it's certainly possible (which is much more than I could say for investing in the markets).

steven975

I do think yer being a little optimistic also. While there is a bubble that may pop, it won't send real estate values down like stocks. they'll go down, but not a lot...more like they'll slow in their growth.

anyway, real estate is NOT a short term investment. Remember that real estate is not liquid (at least not if you want what it's worth). In 2 years, you won't have built up much equity.

I doubt you'll lose your shirt. Why only 2 years??

bjohnston

I don't need to build equity if the property's value goes up 10% (or even less for that matter) per year. That's the beauty of real estate. I get the appreciation on the entire value of the property ($200-250K), but I'm only investing $40-50K. That being said, I am worried about how much more the real estate market is going to rise. But, even 10% per year is much less than what the market has been doing here for the last 3 years or so.

We'd only be hanging on to it for 2 years because we are planning on moving down to Chapel Hill, NC in 2 years, and I don't want to be a landlord 250 miles away from the property. Also, our plan is to build our dream house a year or so after arrival in NC, so I'd like to have the $ back from the investment property to throw into our house.

dbjb

standard yearly appreciation (as used by most residential real estate appraisers) is between 3% and 5%. 10% is abnormal.

also, you can hire a management company to worry about your investment and its tenants. check your area, it may be worth it to purchase more than one property and let someone else manage it for you.

KaiWang

eh dont forget. as interest rates rise. house prices will fall or level off ( location dependent )

location
location
location

and the fed will be rising interest rates soon

200-250k TH in the DC area is WAY out there.. not the most ideal location.

KaiWang

oh btw u can also "depreciate" the property even though you cannot deduct the interest..

Morris

Where oh where do you guys get your info? On a rental property, of course you can deduct the interest and all related expenses to offset the rental income. Even if he didn't rent it, but used it as a second home he could deduct the interest and taxes (assuming his total mortgages were not over the limit.) And if he let it sit empty, as investment property, he could deduct the interest (and taxes) to the extent of his investment income.
BJohnson, did you get this?
The capital gains on sale is correct. But there are ways to defer that, if you don't need to cash out.

sirrach

if you roll that cash into another real estate property you can do it tax free.