Buy & Hold - If you could invest anywhere in the US?

[Wes Shive]

First off, Happy Friday!

This question has been asked before, but let me clarify and put some parameters around it:

"Where would you invest for long-term buy and hold (5-10 years) if you could go anywhere in the US, assuming your goal is total ROI?"

Include an expected ROI from rental income. If you have an idea, include expected ROI from appreciation. More important than an ROI number on the appreciation side would be an assessment and reasoning of the potential.

Assumptions:

1. You don't have the concerns that go with managing property from a distance.

2. You have and must use (so we compare apples to apples) a good property manager anywhere you buy.

3. For the sake of keeping everything normalized, you would buy and hold all cash.

4. Cost basis must be at market price (i.e. no wholesale deals or value-added methods of picking up the property). Must include transaction and rehab costs to get property rent ready.

5. One expense ratio does not fit all. Use a ratio from 40-60%, but state what ratio you use. Adjust for knowledge of what the expenses would be (i.e. older properties have more expenses, taxes are higher/lower in certain states). Expense ratio used should include everything (vacancy allowance, mgmt fees, taxes, insurance, maintenance, etc).

6. Exclude extremely subprime, crime-ridden areas. If you don't want to walk down the block during the day, it's out.

7. Residential, 1-4 units only.

Selfishly, I'm posing this question because I've been looking into non-local markets myself. I don't have an answer to kick things off with. Instead I'll provide an example based on investments I made a few years ago.

Answer (back in 2010):

Palmdale, CA SFHs. East Palmdale, slightly better return but West Palmdale, lower chance of buying in the wrong neighborhood. Driving around the area will lower most but not all of that risk. East Palmdale SFHs pretty much fit the 1% rule (West Palmdale more like 0.9%).

Typical East Palmdale 3bd/2ba, 1300sqft, 1980-1990s build, SFH about $90k at MLS prices. Expected cost basis of $100k, including some rehab. Market rent of $1000/mo. Apply 40% expense ratio = rental income ROI of 7.2% of $100k cost basis.

Expect capital appreciation of at least 50%, as high as 100%, in the next 5-7 years. Based on the following observations and assumptions:

1. Economy will recover in a 5-7 years. Expect 10 years as a possibility but unlikely.

2. Construction cost of a new 1300sqft home is at least $162k ($125/sqft). Being that's the cost of a new home without land, it is a good basis for the intrinsic value of the property + land. $150k valuation in 5-7 year is reasonable if not conservative. Passes the "sniff" test.

3. Current (2010) market prices are 65-75% OFF their 2006 highs. This means that said $90k ($100k ARV) SFH, based on comps, was valued at least as high as $300k in 2006. An expected 5-7 year value of $150k would still be 50% off 2006 highs. Again, IMO, a safe expectation.

4. 1% rule properties anywhere close to Los Angeles are tough to find. Investors will provide support at current prices and probably far beyond.

There you have it. It'd be nice to keep prolonged back and forth debates to a minimum but follow up questions are great. If you disagree with someone's numbers or assumptions, post your own!

[Matt Rothwell]

Since this is all hypothetical and we're investing with imaginary unlimited cash...I would think that looking towards the expensive markets would be the way to "win" this game, so I'd be looking at NYC or Southern California.  The reason I suggest this is that the upkeep for a 1500 sq ft 3/2 in the burbs is probably not going to change a whole lot whether you're in Raleigh or Southern California.  A roof is a roof, and electrical work is electrical work, and plumbing is plumbing.  Appliances cost what they cost, as well.  So with that in mind, I'd likely be able to keep my SoCal units in better shape than my Raleigh units with the higher rents that I'd be commanding.  

So while the numbers might look about the same or worse, I'm thinking that as long as I have a decent property manager, I'd have a more sustainable property, and that's truly the big idea when it comes to buy and hold investing.