Do house prices even matter when renting???

Question

Greetings all,

I am located in the Charlotte NC area and am wanting to build a portfolio of rentals. I only want to purchase single family, turn key or properties with minimal required repairs. This area has had houses that were 150k in 2015 appreciate to 200k as of this month. Most would call it a sellers market now, but who knows if values will continue to increase.

the price of houses in my target area would be between 150k and 250k and it would be very difficult to achieve the 1%. Most of my estimates look to be closer to .75% of purchase price in monthly rent. The only time the numbers work to the 1% is in very low income areas.

I am trying to get a better understanding of the value/equity of houses. For example, if I buy a house today  for 200k, and 5 years later it increases to 250k. most people would say, “great, I made 50k.”; but, in order to capture that money, I would need to sell the investment house and do a 10-31 exchange. In order to continue with the rental income, then obviously I would need to purchase another property. The problem is that All properties in an area are relative in value, so when I would go to purchase another house, I wouldn’t actually gain anything because it would cost just as much to buy another house as I just sold the one for.

So if a house will cash flow, does a house price even matter when all houses in an area are so closely priced?

Mike Dymski · Answer

Rents don't move in a linear fashion with values but they will track direction-ally together; so, cash flow increases over time with an appreciation strategy.

You can extract value/equity out of a property with a refinance...a sale or exchange is not required.

The appreciation strategy is either long-term and you ride the cycles or you have to pivot at your planned exit value.  Some value (appreciation) investors are pivoting to cash flow plays right now (and will pivot back when the time is right).

You are asking the right questions.

Joe Villeneuve · Answer

Of course it matters.  What you pay for a house involves two parts,,,cash and leverage.

The cash you pay must be recovered (through cash flow) before you start to make a profit.

The leveraged part impacts your cash flow through the monthly payments on that leveraged amount.

James Wise · Answer

Most important thing is to never over pay when buying. If you are buying at market price or below you should do fine as you'll have little issues when it comes time to exit. Even if you cash flow great if you overpay you'll be stuck when it comes time to exit the deal.

Curtis Waters · Answer

Since you are in the Charlotte area - I invest only in outlying cities - Gastonia for me.  Similar values in Concord, Monroe, etc.  I achieve more than 1% in these markets.

Jared Wonders · Answer

Completely agree with all that has been said above. Charlotte is definitely booming and has seen A LOT of growth but to assume appreciation will continue the way it has is speculative and if you don’t have a property that cash flows you can run into a lot of problems if you don’t account for vacancy or have adequate reserves in place if maintenance/repairs come up (which they will). That being said there are value add properties available here but I can’t emphasize the importance of networking and continually being on the look out for these opportunities.

Jared Wonders

Chris Vincent · Answer

@Alex Smith I will keep it short. Alex your betting alot and trying to predict the market. Calculate your cap rate. Maybe you should look fo a fixer upper rehab it and pull some equity out while finding a renter. The equity should allow you to buy a cheaper house  and rehab to create some more income then pull equity out of that house and find a renter for the 2nd house at the same time. You never want to get in a situation where you can pay your mortgage cause you dont have a renter. Always think of having a safety net.

Jerry W. · Answer

@Alex Smith, I think you have heard the same answer again and again.  price does matter.  You have set criteria to buy a house in such a way that it is unlikely to cash flow.  When you buy for cash flow you need to have cash flow.  If you are buying betting on appreciation that is speculating.  I cannot buy a property and rent it out and get cash flow.  I have to find a problem property, or as I call it distressed, then I have to fix the problem that others do not want to address and then i can rent it out and cash flow.  If all you are willing to buy is MLS listed turn key type properties you won't get cash flow.  If it was that easy everyone would just go buy MLS turnkey properties and make huge piles of money.

Andrew Syrios · Answer

You can also refinance the property and pull out a good portion of your equity that way. Given the ability to do that (which is basically how my father built his company), prices certainly do matter.

David Kramer · Answer

The Purchase Price matters as that is what will determine your Cap Rate, Total ROI, and Cash-On-Cash ROI. A buy and hold investor may even decide to neglect any appreciation when running the numbers in order to come up with a more conservative scenario. Also, as @Mike Dymski was saying, appreciation does matter to a Buy-And-Hold investor as they can access that increased property value through a cash-out refinance or HELOC.

Do house prices even matter when renting???

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