Back from Washington D.C.

I recently got the opportunity to take a work trip out to our nation’s capital, Washington D.C. For people who love history, big cities, and all types of ethnic food, you’ll love D.C. Seriously, you can eat delicious steak frites at Le Diplomate to a filling falafal wrap on the go from Amsterdam Falafal or even go with some classic Ethiopian cuisine at Keren Restaurant.

The city can be a bit hectic at times and this might bother some people who aren’t used to this. Being from L.A., I wasn’t bothered  by all this hustle and bustle. What I did love though was how walk-able and easy the city was to get around with public transportation. LA’s public transit is nowhere close to other major metropolitan cities like SF, Tokyo, or even D.C.

In this post, I want to share my latest trip out to D.C., the great sights I visited, and lastly a brief discussion on the real estate market there from a buy and hold investor’s point of view.

First, Some Sightseeing

With its rich history, national monuments, and array of diverse food options, D.C. is an amazing city. I’ve been there a couple time in the past, but I’m always happy to return. Here are some pictures of my recent trip.

The Lincoln Memorial is a must. While there’s always a ton of tourists here, it’s well worth the walk alongside the Reflecting Pool to this monument.

Washington D.C. Market Analysis

Located near the Lincoln Memorial, is the Korean War Veteran’s Memorial. Although this war lasted only 3 years (1950-1953), we suffered huge casualties with over 36,000 Americans who sacrificed their lives in this conflict. The Memorial consists of 19 statues depicting not only various army, marine, navy, and air force members, but also represent a diverse ethnic mix that served in this war.  You can see in the picture below the ponchos that they’re wearing to cover their weapons and equipment. This memorial was quite moving.

Washington D.C. Market Analysis

Lastly, if you ever decide to walk toward the Jefferson Memorial, stop by the Franklin Delano Roosevelt Memorial. This memorial was unlike the others where it guides visitors through his four presidential terms. From the Great Depression era to the second World War, you walk through various outdoor rooms containing sculptures and memorable quotes from that time period. Below you’ll see FDR depicted during his last term with his trusty First Pet, Fala.

Washington D.C. Market Analysis

Now Onto Some D.C. Real Estate

Since I was in D.C. for a week, I thought I might as well look into the rental real estate market there. I already heard that the Metro D.C. area was quite expensive and if like most major metropolitan cities, were not typically suited for cash flow. For my own sake, I wanted to briefly explore the D.C. market and test this assumption out.

Median Home Prices

First of all, let’s take a look at current active listings in the Washington DC Metro area. Currently, the median list price for all active listings in the DC Metro area is $565k. Below I show the median list price broken up from studios all the way up to 4 bedroom homes. The data is pulled from Redfin and is a mix of condos, townhomes, and single family homes.

Washington D.C. Market Analysis

Median Rents

Now let’s look at current median rents. Below is a table of median rents for various home sizes pulled from Zumper.

Washington D.C. Market Analysis

Buy and Hold Analysis

Now that we have an idea of the rent and sales price of median homes in Washington D.C., we can do some quick and dirty rental analysis. We’re generalizing here by using the median numbers, but from a top-level view, this will give us a rough idea of whether this market has the potential to cash flow or not.

Below is a table of estimated cash flow if we were to buy at the median list price and lease out at the median rent. I’m assuming the home is financed at 80% LTV (loan-to-value) for an investment property at 5% annual interest. Also, I’m assuming the 50% Rule here for determining the expenses (insurance, taxes, HOA, maintenance, management, etc.)

Washington D.C. Market Analysis

If you just look at the debt payment column, you’ll notice that it is quite large. This is simply the principal and interest payment on the loan. You’ll notice that the debt payment is higher than 50% of the rents, which results in negative cash flow for all home sizes.

Typically, when the cash flow is far negative that can indicate one of two things. Either the rents are too low in a market, the home prices are selling for too much, or a combination of both.

In this case, I don’t think the rents are too low in D.C. The current sentiment in the D.C. area seems to be that rents are actually much too high. Just read this article or this one here in the Washington Post.

So if the rents are too high, then that leaves price. We get negative cash flow largely because the prices are too high to offset all of the necessary expenses that will come with our rental property.

In that case, the Metro Washington D.C. area may not be suitable for a buy and hold investor looking for cash flow.

I’ll Need to Return

I had an amazing time visiting D.C. and absolutely loved the history, the monuments, and not to mention the variety of food I had. There are so many interesting museums and unique neighborhoods in D.C. that I really do need to go back to see more of it.

From a rental standpoint though, cash flowing properties may not be easy to come across in the D.C. Metro region. When looking at the median list price of homes and current median rents, cash flow is actually negative for financed properties. Unless purchasing far below the median price, then there may be some cash flow plays to be made. I didn’t get a chance to venture outside of the D.C. Metro region. My hunch is that there probably are some communities where you’ll find lower price points so that cash flow properties may exist.

All in all, I had a great time visiting our nation’s capital.

4 thoughts on “Back from Washington D.C.

  1. Looks like a fun trip, OB!

    Did you expect positive cash flow with a zero down payment? Your spreadsheet assumes someone came in with zero cash to begin with and bought a house to turn into a rental. Almost by definition, that can’t work. If people could come in with zero cash and get a property that would cash flow from the start, all of the available housing would be snapped up for investment purposes. Which really just means that the prices would rise due to the demand. There has to be some barrier to entry (i.e., a down payment) for the home purchase market to stabilize.

    What I’ve found in dense markets like Southern California is that you generally need a good-sized down payment of at least 20-30% in order to break even or have a small stream of cash flow. And when prices are as high as they are in SoCal, that’s a huge chunk of money to put down.

    Isn’t that why out-of-state investors like you choose cheaper areas, because you can go in with a $20,000 down payment and really make a dent in the mortgage amount, so it will cash flow right away? What percentage of a down payment do you need to make in your chosen markets in order to cash flow?

    • Thanks for stopping by!

      The cash flow results shown here are for a 20% down payment. If you take 80% of the list price and calculate the P&I payment at 5% over 30 years, you should get the numbers I show on the debt payment column.

      Yup, So Cal requires a huge chunk of cash to put down and even then, may not cash flow. Waiting for the bigger appreciation potential to materialize with little to no cash flow is a tough pill to swallow. Though you do own properties here so what kind of returns are you seeing?

      Going out of state was definitely a lower financial barrier of entry into real estate investing. So I was able to get started much earlier than had I saved up a down payment for something near where I live. Not to mention that any mistakes I made early on when I was still brand-spanking new would be much less costly than a mistake made in So Cal.

      Turns out, I’m able to cash flow fairly well with as little as a 10% down payment in my first property. That was a nice Homepath investor program with no PMI that’s unfortunately no longer available. I haven’t done 0 down, but they can work in many out-of-state markets. I wouldn’t recommend it unless there’s a bit of equity to be gained when you acquire it. Too much leverage is never a good thing.

      • Doh, I’m an idiot. Sorry, I completely missed the part where you said it was 80% LTV.

        I should have a better idea of my SoCal numbers later this year. We had our big 22-unit building from 2003-January of 2016, but there were multiple owners, and the numbers on a building that size can be sort of all over the place, and it was professionally managed, with somewhat frequent change-ups in managers, so all of those things can tend to skew numbers.

        For my current fourplex, which I bought at the very end of February, it hasn’t been a smooth ride yet. I kicked out the tenants in April and May, and just finished renovating. My first new tenants move in this weekend, and the rest will move in on July 1st. By August/September, I’ll have a much better idea of what “normal” monthly numbers will be.

        Wow, I’m surprised that 0% down cash flows anywhere! That just doesn’t seem possible. That’s great that you can cash flow even at 10% down. You’re right, though, too much leverage is a scary thing. Our old 22-unit building was essentially 100% financed, and that scared the crap out of me. It lost money for all but about the last year or so, and then we ended up making a boatload from appreciation and the rental rates dramatically increasing. The result was good, but I wouldn’t intentionally do that again. Too stressful.

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