Profile picture for bourgeon

Dupont Circle - right place to invest?

I recently visited a 700 sf one bed one bath apartment on the second floor (without lift) of a town house neatly located by the farmer's market and one block to the Dupont Circle metro station. Asking price 460 K. I checked with a property management company and was told the rental could range between 2200 and 2500. I dont see a rental premium on the location or the town house. Do you think this is a good rental investment, assuming it is cash-financed?
  • March 24 2011 - Washington
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Answers (6)

Hi Bourgeon. You need to do the hard work to prove the right answer to yourself. Craigslist is the best source by far, it takes a little leg work to scroll through the listings but you want to really try to pin down the right number. You can also call on any rental signs you see around the area or from any other sources like rental listings. Do this primary research yourself so you have a good independent, neutral and unbiased answer to your question. Thanks.
  • March 27 2011
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Profile picture for bourgeon
thanks to your terrific feedback! now let me know ask - how much do you think a 700 square feet 1br/1ba apartment in a 8 unit town house on block from the metro station and in the embassy row can be rented for? I thought 2200 and even 2500 was a conservative estimate, or am I being too opmistic? 
  • March 25 2011
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Wordsmth.... Here here! You are 100% on track!
  • March 25 2011
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Profile picture for wordsmth
No. It certainly would not be a good rental investment.

Just do the numbers. What would you net on the property? Assume the property management company is correct and you could get $2,400 a month. That's $28,800 a year. But assume (as you must) 1 month vacancy per year. So your net is $26,400. I'm only guessing, but your condo fee probably would be at least $600 a month. That's $7,200 a year. Subtract that from $26,400 and now your net is $19,200.

Then there will be some maintenance and repairs. Usually you figure about 1% of the purchase price. Let's be optimistic and assume it's less--just $2,000 a year. Your net is now $17,200. Then there are the property taxes on your individual unit, not covered by the condo fee. In D.C., it'd be 85 cents per $100 of assessed value. If we assume that 80% of your purchase price is for your unit, then you'd pay that tax on $368,000 . . . or $3,128 a year. Now your net is $14,100 (rounding it a bit). If you pay a property management company to manage it, your cost might be another $2,800. And now your net is $11,300.

There are likely other expenses, but let's ignore them for now. So you're looking at a net of between $11,300 and $14,100. To make it simple, let's say $12,000

OK. You're getting $12,000 on an investment of $460,000. That's a 2.6% rate of return. Admittedly, that doesn't include appreciation . . . if there is any. But by paying all cash, you're getting no leverage from appreciation. (It doesn't include depreciation, either, but it also doesn't include the taxes you'd pay on any profits.)

Bluntly: a 2.6% return on an investment of nearly half a million dollars is lousy. You ought to be able to do much better, especially in real estate.

Hope that helps.
  • March 25 2011
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Profile picture for CraigFauver
Assuming it is cash-financed you will always be able to rent it fairly easily and in Dupont you will normally find highly-qualified renters.  That's the upside, downside is you can take all that cash and find something with more bedrooms (or maybe 2 or 3 units) in another part of town and turn it into a much greater yield.  Problems with this scenario can be that since the area might not be as 'hot' of a rental market vacancies when turnover occurs are more likely to occur.  If all you are looking for is cash-flow, not worried about appreciation, or what the actual property is and is not (i.e. how much you would like to live there) I think there are better places but Dupont certainly has its pros..
  • March 25 2011
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You need to take a conservatively estimated market rent (that you determine from independent and neutral sources like craigslist, not from a Realtor or management company) subtract a vacancy & loss factor of at least 5%, then take out HOA fees, property taxes, estimate for expenses of at least $75/month, and any other expenses that are typical for rental properties in that area. 

That gives you your Net Operating Income and if there is no mortgage that is also your Net Income before tax impacts.

Divide that amount by the total cash equity (downpayment or all cash purchase plus closing costs AND some rehab money) and it will give you a cash on cash rate of return.

It is probably going to be pretty low. But compare that to other investments like stocks, bonds, etc. and you will see where it falls out. 

You should also have some appreciation in value over time but don't count on that, appreciation doesn't pay the bills! You may also have some tax benefits depending on your income and if you can use passive activity losses - talk to a tax person AFTER you pencil out your deal.

Good luck!

  • March 25 2011
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