Assessing liquidity, ability to rent, etc, of a house prior to buying?

Question

Hello everyone,

I have no experience with real estate and will be buying my first home with cash in a few months.  Just in case I end up hating the area or want to move for some reason, I'd like to have an idea of how easy it would be to sell the property or rent it out.  I know real estate is not liquid, but I'm looking for a sense of a property's (or neighborhood's) relative liquidity.

What are the metrics I'd look at to get an idea? I'm assuming things like how many houses in the neighborhood are sold per month, year, etc, how long they are on the market for on average prior to selling, etc. I'm not sure how to gauge how easy it would be to rent a particular property. Is there some metric for vacancy vs. availability, how many people seek rentals in the area?

I imagine what I'm trying to research has some technical name in real estate parlance... This must be something that real estate investors consider prior to buying investment properties. I'm hoping someone knowledgeable might be able to point me in the right direction. Thank you!

Account Closed · Answer

I'll just chime in on one thing, and that's the fact that if you were willing to buy a place and live in it, someone else will be, too.  Whether or not you'll profit when you're ready to sell it or rent it, is another matter.

If you're planning on buying in an area you know, you might already know what the rental market is like there.  I'm assuming you're renting now in the area.  So, you should know if this place is in a desirable area.

As far as how much rents are, you can look on Craigslist to see how much rents are going for in the area.  You also might already know how much the rents are in the area, if you're renting there now.

So, if this is an area you are familiar with, you may know a lot more than you think.

I'll let the pros give you more technical advice :-)

Victoria Stone · Answer

Thanks for the encouragement!  I don't rent now, and I'm looking to buy in an area I'm not familiar with at all! :)

Victoria Stone · Answer

Thanks, everyone!  Actually the area I'm looking at will be Tucson, not Costa Mesa.

Karen Margrave · Answer

@Victoria Stone  First off, welcome to Biggerpockets. You've come to the right site to find out all you need to know about real estate.

In answer to your question, maybe you should post the area where you are considering buying and other investors that own in that area may be able to give you a better idea as to the marketability.

Is it in Costa Mesa? Do you already know what neighborhood it will be in?

We have a meetup a week from tomorrow in Lake Forest. Why don't you come? It's a great place to meet local investors,  in a low key, casual setting. It's at the Round Table Pizza in Lake Forest (on the corner of Lambert and Lake Forest) at 7:00 p.m.

In the coastal areas there's potential for buying properties that can be rented out as vacation rentals too. Not sure if you would be interested in that, etc.

Hope to see you next week.

Daniel Ryu · Answer

@Victoria Stone

Maybe these terms will help:

For renting out your property

Vacancy Rate = the % that a unit stay vacant, on average, in an area. From what I know of Costa Mesa, the historic vacancy rate is fairly low - about 4%. You could also survey some local property managers and explain the house you are buying, the area, and say you're thinking about renting it out down the line and find out the vacancy rate for them.

Many BP members mention the 50% rule which is 50% of your rent will usually go toward expenses (including vacancy). That includes:

10% Property management

5-10% Maintenance

10% Cap Expenditure (setting aside money for replacing a roof, etc)

Etc.

You can also use Craig's List to verify rent numbers. Enter your zip code and Craig's list even has a mapping function to let you pinpoint rentals near your property. Make sure to compare apples to apples (ie. similar square footage / rooms / etc.)

Zillow rental properties in your area and look at the history. You'll often see what the listed rents were and how long it was before it was taken off the market.

For Liquidity

There is an 'index' number that a real estate agent might give you that basically tells you how long a house is on the market before it's sold. I believe 6 months is a 'balanced market' - less than that a seller's market, more than that a buyer's market.

But I think price will always be the biggest determining factor. If your house is sitting too long, most likely it's overpriced.

If you want your house to be liquid, try to buy at less than market value based on comps (comparable sales within the last 6 months within a 1/2 mile of your property). Buying all cash might give you some bargaining room on the price. If you can get a 10% discount, and then later sell at a 5% discount, depending on your market and where housing prices are currently at, maybe that's one way to ensure it sells faster.

You can also look up new permits to see how many new units might be coming into the market in the near future.

I'm not sure it matters in an area like Costa Mesa since it's proximity to the beach and other amenities will always make it an attractive place to live.

Wayne Prentiss · Answer

Victoria, this is a very interesting question. I'll try and pick out a few items I'd recommend you consider, and I'll give you some assumptions I have.

My assumptions: a) you are buying in the Costa Mesa area of California, b) you are using all-cash to buy the hope, presumably because you feel it is safer, c) you are buying a single family home (might answers below might change a bit for a condo).

So...

• It sounds like you are looking for some ratio or variable that describes liquidity. There isn't one in real estate that I know of, and in fact, I'd ask you to consider if you are asking the right question.
• Nearly every piece of real estate, especially single family homes, will sell if the price is low enough. Your #1 factor in making sure you can escape relatively unscathed from what you are planning to buy is to get a good deal in the first place. An old real estate adage is "you make money when you buy, not when you sell." Instead of trying to find a special metric, get a great deal relative to your local market. This is your solution to the "if I must sell" scenario. Or at least the best I have to offer.
• If you decide to rent, you are probably setting yourself up for some pain. Especially if you are using all cash. Your rate of return relative to what you could get on cash in many, many other markets will be terrible in Costa Mesa. To illustrate this point, you can look at Trulia affordability maps: http://www.trulia.com/local/los-angeles-ca/type:rental_prices_affordability. If you toggle on rental prices versus home prices, you'll get some feel for the market. Then go to another market not on a coast. You'll see how much more rent you could get for  much lower priced house. If you buy your home for cash, then rent it out, you are assuming appreciation will save you. It might, it might not. But it feels a lot like gambling to me, and I'm a terrible gambler. :)
• I hope you'll take this in the spirit intended, but it sounds like you are trying to keep all your options open. I don't know if that is possible. If it were me, I'd consider using some cash, not all cash to give yourself liquidity and a way to invest elsewhere. I'm sure we can find plenty of people who will disagree with me!
• Best of luck!

Steve Vaughan · Answer

For sales time, I would think a good realtor or appraiser could give you the average days on market (DOM) for your area and type of house for the last couple years. Also the average inventory of houses on markt then relative to now for the last few years.  That may give you a better idea of relative liquidity @Victoria Stone.  Be sure to include 10% for sales and closing expenses when running your analysis. Hard to make a house work out with short time horizons most of the time, even without borrowing costs and bank hassles.