Dear Readers: Occasionally, we’ll post a blog, then get some additional information that might affect our analysis.
Sometimes, the new info will cast our initial observations into doubt (hey, we’re all human, and in real estate as in other endeavors, you must be willing to change your opinion in light of new information).
Other times, happily, the new data not only confirms our initial recommendations, it makes the decision even more imperative. That’s the case with a property we reviewed recently on Massachusetts Avenue.
First, read our initial advice. Then, consider the new information.
In a subsequent E-Mail, the prospective buyer sent along some additional specific information that makes the purchase a no-brainer. With the right resources and strategy, the purchase could put them in a $1,200,000 property at less monthly cost than some one-bedroom apartments in DC!
You’ve heard that there are three things that’ll affect the value of two identical properties: location, location and location. That’s especially true of this property.
It’s an easy 10 minute walk to Union Station and Eastern Market, so the new buyers will have access to the Blue, Red and Orange lines – but with all the great restaurants and shopping (plus 2 dog parks for Fido: Stanton Park and Lincoln Park), I’ll bet they’ll spend much of their time right in their own neighborhood. In any event, access to those Metro routes (plus bus lines, of course, and cabs at Union Station) far outweighs the hassles of parking on Capitol Hill.
For safety’s sake, the neighborhood is well-patrolled, with Capitol Police and Park Police sharing much of the jurisdiction with the DC Metropolitan Police. It’s also common to see police officers on horseback in that neighborhood.
We learned that the couple looking at the Mass Ave property already have smaller apartments and are getting married in late Spring. Between their savings and the equity in their current properties, they tell me they’ll have no problem coming up with the $240,000 down payment and the estimated $10,000 in closing costs. They’ll put their existing properties up for rent, since they calculate that the estimated rents will more than cover those properties’ existing mortgages. Currently, there are also significant tax advantages to renting including depreciation that ought to be checked out with this young couple’s tax advisor.
Let’s do the math. They tell me one of their two existing properties is worth around $400,000 and the other $250,000. After they buy the $1,200,000 Massachusetts Avenue property, they’ll have real estate assets worth $1,850,000. Applying a reasonable 5% annual rate of appreciation for properties in the neighborhoods where all three properties are located, after just 10 years, the couple’s gross assets could jump to a whopping $2,775,000 (by The Cribline’s conservative estimate).
If they can afford an extra point on the Mass Avenue property mortgage of 960,000, they might be even be able to secure a 30-year fixed rate of as low as 4.75%, saving them about $300 per month – a nice car payment!
That extra point would cost them about $10,000, but it would likely be deductible, reducing their out-of-pocket cost for that point to about $7,000. As long as the couple plan to stay in the house for awhile, this could be a very appropriate strategy that would pay for itself in a few years.
When all is said and done, the couple’s net monthly payments on the new property would be about $3,000, or $36,000 a year. Applying a 5% appreciation by rule of thumb, their new $1,200,000 property will appreciate to the tune of $60,000 a year. In other words, on paper at least, this couple would live for free and have an annual surplus of $24,000 in net gain.
One final thought, since it’s always possible we could be forced by employment or other circumstances to make an unexpected move: if that were to happen, the going rate for a 4 bedroom house in this neighborhood (the area they’ll occupy, not including the English basement rental unit) is currently about $4,000 a month, meaning that this couple could net about $1,000 a month in cash from their purchase if they were forced to move.
I wish them all the best of luck with this property – and in their coming marriage!