Opportunities in Raleigh NC Area - What to do

[Zachary Brown]

First let me say that I've only been on the site for a week or two and I'm already getting access to such great information and networking that it's easy to see the value provided here and I'm so grateful for all of the help and advice I've received so far! Some of the folks who have been very helpful so far, Chris Webb, Cory Thornton, Brian Madden, Michelle Winters, and others! 

I'm still researching and learning about this market here in the Raleigh NC Area, however, based on what I've learned so far, I'm thinking I need to invest my money (around $150k capital) into turnkey rental opportunities, preferably townhomes as they involve little headache. My reasoning for this is that after researching further into BRRR, I think that it's not realistic for me due to the time commitment required. I'm a full time lawyer and diving into BRRR properties seems like it will take too much time. I'm also thinking this is more of a play for an experienced investor who knows what they are looking for in a property, has good connections, etc. More traditional investing in properties ready to rent seems like it poses lower risk and allows me to learn while investing in the market. As I gain more experience, maybe I can consider BRRR opportunities in the future. I do understand that this strategy will mean lower returns as well.

After talking to a few realtors, I've been told that there are rental opportunities out there in this market, however, due to high interest rates, it's difficult to hit the 1% rule for these properties and .08% is more likely. This would likely result in negative cash flow, which is a red flag, however, some argue that is a temporary problem which will be solved within 2 years when interest rates come back down. If that's the case, then getting in now and realizing the appreciation over the next 2 years may still make sense even if I have to lose around $5k in negative cash flow during that time. The alternative I suppose would be to wait like other investors for those interest rates to fall, however, again I'm losing that appreciation potential if I do that. The Raleigh area is a unique market in that it has very high valuations and has for years. The area is growing rapidly with new companies announcing development here like Apple, Amazon and Google. While the market is strong right now, I think the growth suggests appreciation will continue rather than fall, however, I appreciate thoughts from others. 

As a new investor, I'm not sure of the right path forward here and would appreciate any advice you seasoned pros have to offer on this situation. 

My biggest fear at this point: Buying at the top of the market and only seeing losses (I've run into this in the stock market and crypto, so trying to avoid the trifecta here) 

[Chris Martin]

This post is meant to be constructive. I spent my career buying at the courthouse steps. Not directed at the OP, but I am seeing what Greenspan called the stock market equivalent of 'irrational exuberance' in the REI space.

I knew (and know) many investors who were financially wiped out in 2009-2011. They overpaid with leverage in 2006-2007 and when the market turned and rents dropped, they were underwater with negative cash flow. Remember strategic default? Take a look at the first chart below. Compare the 2006-2008 "bubble" to today's market. Regarding "getting in now and realizing the appreciation over the next 2 years may still make sense even if I have to lose around $5k in negative cash flow during that time," I see that as speculative at best. I would be surprised if prices remain at current levels in the next two to five years. The consensus is that we are in or about to enter a recession. I'd contend that we are in a recession now. See the second chart. The old school definition of two contracting quarters fits the 2022 US GDP. Adding to risk/uncertainty, just look at the mass layoffs in tech (not Apple so far, Amazon (18,000), Google (12,000)) that are mounting and expected to continue through 2023. 

This isn't 2008. But chasing negative cash flow property at retail (that's what 'turnkey' buying is), at or near the top of an overheated market, with relatively high interest rates, potentially a looming recession, and no more institutional iBuyers (they have effectively left the market) in the wings to bail out retail sellers, ... all this adds up to a lot of risk. Personally, I like lower risk investments not higher risk investments. 2002-2004 in the aftermath of the tech recession(*), now that was a great opportunity. 2010-2012 was another good opportunity. Now? I'd say no. 

If you do buy, I hope you do well. 

(*) IBM, Nortel, Alcatel, and a lot more companies shed many tens of thousands of jobs.