Athens GA first rental property

[Mayukh Guha]

Hello Everyone, 

I am new to BP and have been thinking about buying my first rental property for a while. I had lived in Athens GA as a grad student (2010-2016), however, I now live and work on the west coast. I was wondering if purchasing a rental property in the city is a good idea right now. I am looking at $200-220K properties (20% down, 80% mortgage) and just about break even or have upto $50 cash flow. This is mainly because of the distance - I will have to find a reliable property management company. My goal is to eventually get to a higher cash flow in the years to come and simultaneously build equity in the property.  My personal motivations and limitations have made me not consider turnkey, flipping and house hacking. My questions are : 

1) Any suggestions or comments about the student rental market in Athens ?

2) I have been reading that Athens shows around 7% appreciation per year, Is this correct ? 

3) Any foresight on how the Athens market will look like in the next 5-7 years ? I am keen on finding out whether this market is a good starting point if I wish to develop a small portfolio of say 5 rental properties over the next 5 years. 

Best. 

[Randall Alan]

@Mayukh Guha

Hi Mayukh,

Welcome to Bigger Pockets!

I don't have much info about Georgia... but I did have some thoughts about the "break even or up to $50 cash flow" part of your thought process...

The shortest version of my thoughts is - "I don't think that is the greatest idea!"

A few bits about me for background... I've been investing since 2018 and have 25 properties (37 doors) that are local to me that I self manage with my wife in central Florida.  Managing our rentals is our full time job because the cash flow from our rentals more than replaces our prior combined corporate job income.  

You need to think about your investment in terms of ROI (Return on investment). In all likelihood, what you are proposing is buying a cash-sucking (ie - negative cash-flow) property where you have to feed it cash each month you own it. This could also be called an 'equity play' where you are just buying the property to get into the real estate game and build equity, as it isn't cash flowing in its current situation (be it because of high interest rate, high RE prices, or whatever).

Equity plays can turn into better deals down the line with lower interest rates and a refi, with rent appreciation - where you can raise your rents because they may currently be lower than market, and with market appreciation - where the entire rental market moves upwards in rents.

But you want to take a serious look at your challenges there... because there can be many - especially if you are a limited funds investor.

Equity plays really only work well when you have enough income where you can cover the unexpected.  Pick your dilemma - tenant quits paying rent and squats in the house for 2 months while you spend $1,000 to evict them, the AC goes out and it's $5,000 to repair, you need a new water heater, or roof, etc.  If you have limited income, these situations can be difficult to maintain.  You are feeding this hungry beast every month and you are seeing nothing in immediate return, and only a return on equity somewhere on paper or down the line when you sell the property.  It can be a frustrating situation where you start to ask yourself, "Why did I get into this game?  I'm bleeding money every month!"

Real estate is often described as a 3 legged stool... with cash flow, appreciation, and mortgage pay-down all acting as legs that let you build your wealth.

Plenty of people will say, equity plays are fine... and they can be.... but they come with higher risks than a property that cash-flows where you have extra income every month to help pay the bills. The broader points I would make is that real estate that doesn't cash flow well isn't a great deal on short term ROI. If you are only making $600 a year - you can easily call that negative cash flow - because the first repair you have to make will probably eat that amount up.

I would encourage you to compare whatever deal you are looking at to alternative uses of your money as to investments. Take just for a minute putting the $40,000 you are looking to invest into a 5% savings account (check out online bank "Bask Bank" as an example). With a 5% ROI - that would be a $2,000+ return per year - with ZERO risk, zero headaches, zero repairs, and zero tenant issues, etc.

7% appreciation on a property will obviously outstrip that - if you get it, and if repairs don't set  you back too much.  But realize that to recognize that appreciation you have to hold the property over time.  If you have a great income that can support the ups and downs of owning a property, you will probably be fine.  If you don't, it can be a rocky road. Think about turning over the unit and having to cover the entire mortgage for a month due to vacancy.  Can you handle that bump?

Maybe you decide to refi the property in 2 years when rates come down.  Great!  But the refi will likely cost you $3,000 - $5,000 - so there goes a good chunk of change that maybe you can refi into the loan... but it is really just a hit on equity.    Also realize that when you refi, you can lose your grandfathering on taxes - where the property taxes may be looked at again with a higher value of your property at the date you refi - it just depends on how the county handles those things.

Then there is property management.  You might think that property management only costs 8-10% of the income of a property.  But you would be missing the true number of closer to 33% of your profit on a typical financed property.  On a $1,500 rental you are going to usually pay 1 month's rent for them to place a tenant - then 8-10% GROSS rent per month.  On $1,500 that's $120 - $150/month. But wait.. you are only making $50 per month to begin with!  The point would be that your property manager is cash flowing 3x what you are on the property - that's not a good sign.  Plus placing that tenant for $1,500 bucks is 30 months of your $50/month!  If your tenant only stays 2 years each time -  you are permanently negatively cash flowing until you can change your financial situation.  This is why we self manage - property management is great! - but it is expensive for a financed property.  It is at least more justifiable for a free and clear property.  Plus - property managers have this need to be managed by the owner.  They do some heavy lifting - but they are very little interest in saving you money on your rental.  The example I like to use is where my wife used a property manager when we first met.  They called up and said, "The garage door opener is broken on your rental property.  We can get it fixed for $800.  If you were too far away what choice would you have?  But if you are a cost conscious landlord you would say, "But wait, the opener is only $200... you are telling me the labor to install a replacement garage door opener is $600!??!?"  We went and bought a garage door opener and installed it ourselves in 2 hours and then fired her property manager and took over the duties ourselves. Making money in the real estate game is often a matter of how much money can you save yourself on your rentals.  Overpriced repairs can seriously ruin your day (or year) if you aren't careful.

Starting off in real estate is always the hardest part... mainly because you only have 1 property to support itself.  It gets significantly easier when you have say 5 properties, because the other properties can contribute income (presuming they are cash-flowing) to help cover hiccups with any other properties.  With 37 doors - we are putting nearly $4,000 a month into a maintenance account to spread across our properties.  It works out really well.  I had to replace. $5,000 AC this past week.  I just pulled out my debit card and said, "Here you go!"... because with a few months repair expenses built up in the account, the money was sitting there ready to go.   

We got super lucky... we spent about $1 million dollars buying the 25 properties we bought back in 2018-2021.  They are now worth over $6 million due largely to market appreciation across the past few years.  So it's now like I don't recognize the potential of equity in real estate... but I'm just not a huge fan of equity plays for beginners - especially in today's "up" market where both mortgage rates and housing prices are way higher than in the past.  I would push you towards looking for a better deal that also includes cash flow.  I read on the message boards where Ohio and the Midwest still cash flow better than most places in the country.  Why only have 2 legs to your stool?

Hope some of it helps!

Randy