One smart way to buy a place in DC

As we have all heard- buying a place to live in DC is completely unreasonable and no one can afford it if they make a reasonable salary. But someone is bidding these homes up into the stratosphere, right?

The truth is, most of the people who want to move into a house in the H St. area are young couples who have kids or are about to start a family. Yet they can't find anything in their price range and so they can't move out of their $2,300 a month condo. Wait- someone can afford $2,300 a month in rent but still can't find a place in DC outside of plunking down way too much money for the honor of buying something in a shady area where the husband, let alone the wife, won't want to walk after dark. Awesome.

But, if that same couple just looked for a fixer upper that was a little too expensive for a flip job from an all-cash investor, and was a bit too ugly for a run of the mill single family home shopper, who could live for a few years where things weren't totally amazing inside, they might get a good deal. You could really find yourself with a great home that you would never be able to afford otherwise.

Here's the gig- find a house with a rental in it that will help cover the mortgage. Most houses that have it will have already been fixed up and so that rental income is already baked into the house's selling point. What you need is for one that is not done, and that can be gutted and built up. While you have the construction crew there you can also gut that nasty kitchen and the bathrooms, but live with the non-refinished wood and the ugly baseboards and maybe the layout for a few years while you build up equity.

Also- do it smart. Get an FHA loan. I know, it has mortgage insurance. So what, pay it for a year. Yep, you will have to pay $700 extra a month for a year, but you are getting 2k for that basement rental. So, your nut is only a bit more than the $2,300 you pay now. If you find a place that you can add value and do it for an FHA loan minimum down (3.5%), use the extra cash that you were going to put into a down payment, then the market will do the rest. You will have just forced appreciation into it at the same time as the market is making your place more expensive. Even if the house only goes up 3% in the next year, after you add on your forced appreciation from your rehab work you should be at 20% loan to value. (Remember, you are playing with big numbers here. 3% of $650,000 is $19.500).

Refi that sucker out to a conventional after a year which will drop the PMI and presto, you just made 17%. Wait a year more and get an appraisal and I bet you can pull some cash out from a credit line and redo those baseboards and the layout. Just sayin'

How do you do this you might ask? Well, you need some cash, or you could borrow from someone like your parents or your spouse's. The bottom line, after you drop 80-100k (including the down payment) into the place, you will have a 24k revenue stream coming in and your nut should be between $2,000-$2,700 depending on the interest rate from your loan and how big you went. I'll try to do the math for you in my next post.