Is my area even worth it?

Question

Hi everyone,

I'm currently looking to purchase an owner occupied 4 plex in the salt lake area.  The prices for your run of the mill 4 plex here are on average upwards of 300k with rents coming in around 700 - 750 or so.  I hear people in the podcasts talking about getting 2% of the purchase price in rents but given prices here in Utah, I wouldn't even be getting 1%!  And that's with me not even living in it.  Obviously each deal has to be evaluated individually, but is it even worth looking if a property won't produce 1%?

Sharad M. · Answer

@Josh Butler

Each market is going to have its pros and cons. There are some parts of the Midwest where you can easily get 2% like in the market where I invest, but appreciation hasn't been as high as some of the cities on E and W coast. I don't necessarily mind that appreciation hasn't been that high in my area, because that has given me great opportunity to add properties to my portfolio.

What I would do is connect with other local investors in your area here on BP and go to local REIA and meet other investors and find out what they are doing and what's working and what's not working for them.

Bryce Till · Answer

@Josh Butler  Josh, I love the idea of a duplex for your first primary residence.  
	
	If I could do it all again I would buy a duplex as my primary and rent out the other room. 
	
	If prices are too high on the MLS I would think about trying to direct mail duplex owners. You will undoubtedly have to do some rehab , but you might be able to find a motivated duplex seller.
	
	I haven't done any research myself but there must be a list of duplex owners available somewhere. 
	
	Also, it maybe that prices in SLC are just too high to live for free.  Last year I found a condo downtown where I rent a room for $650 which helps, but I still payout of pocket to cover my bills.

William Hochstedler · Answer

@Josh Butler

I hear you, Josh.  In Logan it's even worse.  It's hard to find 4-Plexes up here than get more than $500/unit/month that sell under $250K.  And we don't have the SLC appreciation.

We've purchased 3 4-Plexes in ten years.  All of them were odd balls and only one from the MLS which was illegal non-conforming that we were able to get grandfathered.

In our market we can't afford to narrow our searches to a specific property profile or we wouldn't have enough opportunities.  You probably have enough inventory in SLC, but a lot more competition, particularly in multi's.

Like everyone else is saying, be creative.  Look under rocks where no one else is looking.  Determine what kind of distress you are prepared to deal with and look for it.  The deals are out there.

Finally, if you are even considering other markets, look at the risk.  We still like Cache Valley because it is incredibly stable.  We didn't get hit in 2008, we have less than 2% vacancy rates under good management, low crime, etc.  And we can still find deals that get us 20% IRR, but it's not easy.

Good luck,Wm

Karen M. · Answer

Hi Josh,  on one of the podcasts, Brandon said that he would not look at anything that delivers under 1%.   As a beginner (and someone who has not purchased property yet), I appreciate that guidance.  I don't want to own real estate for fun, it is a big transaction and the goal is to improve your chances of achieving your goals.  (For me the returns need to be as good or better than I can do in the stock / options market.)

I am a beginner and currently starting to think through what I really want to do for a first purchase.  I am leaning toward finding a low-price (but decent) local property in an acceptable neighborhood and getting some learning done without a huge financial commitment, and as a trial balloon to see if I am going to be any good at real estate / land lording and if it suits me.  Baby steps.

I am really considering a budget for getting started.  A modest budget, with an emergency fund on the side. And then I have to shop based on that budget and not on the properties that I am the most attracted to, but honestly can't afford (yet).  And the nice ones aren't yielding quite enough.  I don't have so much money that I can just park it without expecting it to grow.

In the last months, I have become a regular Dave Ramsey listener / fan (he's a personal finance guy that helps people who are mostly in debt, but also at all stages of financial planning).  He's very conservative, against all debt and recommends buying rentals in all cash, after you are 100% debt free, including your own mortgage.  I will probably begin while I still have a personal mortgage, and I will probably use a lender, but…. I appreciate the advice to be cautious about not digging yourself into a deep hole.  I think it's good advice to buy what you can afford and not over stretch.  A property is going to have to pay for itself and it has to produce a good investment / good return.

Make sure you are being a smart buyer. Keep looking, keep learning, keep networking, have fun!

P.S.  when you are saying owner--occupied, you mean you want to live in your multi-family?  That is great.  There have been a lot of positive comments about doing it that way.  I think you have more leeway with your calculations if you are living there, and if you can live for free….  or really cheap, I would con sider that a "win".   What are your goals?  Make them clear for your purchase and talk to other people who have done what you want to do.  :)

Ethan Bowen · Answer

@Josh Butler

I'm afraid I'm like you my friend, I only know enough to know that there are other ways out there! For example you can look at alternative acquisition strategies like seller financing or lease/options (L/Os can be really risky though, cause you're kinda gambling with the seller on appreciation). There are other benefits to owning a rental property other than cash flow. For example, gaining equity, depreciation (would not be eligible if owner occupied), and appreciation. I would try looking at it from different angles.

The best thing I think would be to keep coming to SLREIA and UVREIA. You're going to meet a lot of experienced people that know the local market. Those are the people you want to be talking to.  I also have my preferred sources of education that I have invested in and can vouch for.

Just remember the difference between a novice investor and a skilled investor; novices investors find deals, but smart investors not only find deals but can also create deals.

Sharad M. · Answer

@Josh Butler 3% is possible in my market also, but those deals are harder to come by. 2% is not that hard to hit on a regular basis. Rental demand has been pretty strong in my area.

The demand for flip properties is very intense in my area, but the competition for rentals isn't as bad, specially if you have cash to invest.

Unless you are looking to invest for very short term, use the dollar cost averaging to diversify. Don't put all your money in one big property, diversify in some smaller properties and possibly different areas to spread your risk.

Josh Butler · Answer

@William Hochstedler

Thanks for the heads up on this.  Had I seen it sooner I might have actually gone!  How are these luncheons done then?  Is everyone just sitting around a big table or something or how many people go on average?  SLREIA has some as well I'll have to check out sometime.

William Hochstedler · Answer

@Josh Butler

There's a UVREIA luncheon today with the topic prospecting for opportunities.

Might give you some ideas.

Wm

Will Samsky · Answer

@Josh Butler do you listen to the podcast? I have found that the phoenix area is hard to find good rental deals unless you are in a pretty shady neighborhood. I found the latest podcast Show 73 to be very inspiring if you are in a situation where your market is to expensive.

Josh Butler · Answer

Thanks everyone for your responses.  These have all been very helpful!

@Karen M.

Yeah as an owner occupant I would agree you can take a slightly different perspecitve on the numbers.  I was talking with another 4 plex owner who says he cashflows 800, but in reality, it's only 200 and he 'eats' the rest.  So effectively it cashflows 800, but some of that is just money he's saved.  I think I would be able to find a situation similar, but not exactly reaching the 1% rule.  With as much as everyone talks about it, it makes me hesitant to violate that rule on my first purchase!

Is my area even worth it?

Most Popular Reply