Which to buy and hold/rent????

Question

I'm looking for opinions on buying some rentals. Please give me your opinion on which you like better and why or why not. I'm very handy and  have built by own house. I will be looking for properties that need rehabing/tlc in order to get a better price, then rehab and rent. Thanks Hugo.

Eric Tait · Answer

One metric that I was taught and use for rentals is:

Cater to the widest audience of potential tenants in any area where you decide to invest. (not the low end or the high end, you want the bulging middle)

Take the median income of the area where you are interested in investing and double it (assuming a 2 income working class household).

Use this to determine what your potential tenants monthly income is.

Take 1/4-1/3 of that monthly income to determine what the median rent that particular area can afford.

This gives you the widest possible group of people who can afford to rent your property in your particular target area.

Use this rental number to determine what types of houses/condos/townhouses etc... can be bought in your targeted area that will give you the return that you require (taking into account taxes, insurance, vacancy, maintenance etc... ).

So you are basically finding your rental rates first, then back engineering your purchase price based upon the rehab that you may have to do, and the expenses of your target area.

As an example in the Houston market.

Median income is 35K, so a two income household is 70K a year or around 52.5K after taxes.

That is $4,300 a month after tax cash flow. 1/4-1/3 of that is between $1000-1400 a month in potential rental payment.

In Houston you can buy houses that are between 80K and 140K in after repaired value where this rental amount creates a yield that I am comfortable with.

I personally like to buy them and have them rehabbed where I can have at least a 100% return on capital gains (i.e. if my all in costs are 10K, then I need to capture at least 20K in equity) or 20-30% equity based on ARV of the property.

So on a 100K house, I am all in at 70K with less than 15K out of pocket. (If using financing)

On an all cash purchase, all in at 70K with a $1000 a month rent generates about a 12.4% unlevered cash on cash return in the Houston market while also accounting for expenses. If I decide to use financing, the returns just get better from there.

The equity capture of course is market specific, but the rental income numbers can be used in most markets, the tough part can be finding properties that you can buy that will cash flow catering to this middle market group.

I tried to make this as clear as possible, but if you have specific questions or clarifying points, please do not hesitate to ask.

David Krulac · Answer

@Hugo Gort

I prefer SFH in decent neighborhoods with good schools and low crime.  I like properties in residential areas, no yellow lined streets, generally houses post WWII, 3 beds, more than 1 bath, some storage areas like garages, basements, sheds, yards for kids to play, and I like them no more than 30 minutes away.

Elizabeth Colegrove · Answer

@Hugo Gort My husband is in the military so I buy two kinds of investments.

1) Personal Residents - Houses that are bought as personal residents that will be rentals when we leave. These houses are bought that will fit my family and also be great rentals. They are bought as Personal Properties so with less than 20%. These tend to me more upscale areas but they always rent out well.

2) Pure Investments- These are bought with 20% down. I look for great numbers in good areas with upper middle class renters. I have no trouble doing cometic "flips" to buy and holds. The houses tend to be the small houses in nice neighborhoods. I also buy in specifc areas: School districts, location to industry or base location.

Distance to me, the buyer is not important. I don't mind managing long distance. Cap Rates are 8.5+

I look at cap rates. I find middle to upper class are easy to fill, easy to manage (mid 20's white female) and able to fund with 20% down payments.

Again this is *AREA Specific* In my current area $70,000 houses are in a "horrible" part of town that are ridden with gangs and other problems that I would not be comfortable in. Therefore as much as I would love to be able to invest in $30,000 houses at $850-$1100 rents. This is not possible.

Matthew B. · Answer

It all comes down to your individual strategy. I look for homes in good areas, mostly blue collar, lower to middle class. I'm going for pure cash flow and low vacancy rates. Appreciation is not as important to me.

Some investors like more upscale homes that will appreciate more. These guys will pay more for a house that has a better chance of appreciating even if the rent isn't a whole lot higher.

Which to buy and hold/rent????

Most Popular Reply