Finding a Deal (Focus on Rutherford County TN)

[Adam Vo]

Hi all -

I have spent the past year saving for a downpayment, figuring out my investment strategy ( 3 BR/2BA buy and hold rentals), and target market (Murfreesboro TN). I am now ready to make a move in the next 2-3 months.

I constantly hear about the 1% rule, but am hardpressed to find any properties that fall into this range, especially in an appreciating market like greater Nashville and properties that do not need a ton of fixing up. 

I have searched all of the common sites (Zillow, Trulia, etc.) and am mostly finding $160k-$190k properties that would rent for around $1200/month. (e.g., 0.8%).

These properties possess all of the qualities I am seeking (turn key, appreciating, high rent demand, good schools, etc.), but have a low cash return after projected expenses (CAPx, property management, etc.)

Given the lower level of risk, should I be okay investing for a lower return? My thoughts are that even if I break even on cash flow, I am still paying down my debt, and (hopefully) gaining appreciation and over time rents should rise to provide that positive cash flow. 

How important is the 1% rule? I am missing anything here?

Is there anywhere else I should be looking or any other strategies I should employ to find deals?

Thank you,

Adam

[Mike H.]

Nashville does seem to be a really hot market. But you mentioned something about finding houses that are turnkey. That basically sounds like you're going to have to pay retail. 

Very few areas tend to hit the 1% rule if you're paying full retail.  And the higher the median home price is, the more impossilbe that becomes.

Here in my area, I could buy 140k houses that rent for 1400 all day long. But that would be retail and I'd have to come out of pocket 25 to 30% to do it which means I'd run out of money awfully fast.

To me, if you want to invest in that area, you need to find discounted properties. You may not be able to get stuff at 70% ARV (i.e. purchase plus rehab = 70% of the After Repair value). But what about 80% or even 85%?

You are likely not going to get discounted properties though if they're turnkey. If something is move in ready, then you're going to be competing against owner occupants. You aren't going to get a discount competing against them.

You need to find stuff that you can add value to so that you can get that discount. 

If houses there are worth 160k to 190k, you need to be able to purchase them and fix them up for at least 20% or 25% off of those prices. If not, you're not really investing as a typical investor would. You'll still probably do better than sticking the cash in stocks but the value in investing is buying right. 

One other option to consider is going further out. The less populated the areas, the better the ratios will become. Find another area where the schools are really good and the price to rent ratios are a little better. Typically, the lesser populated areas tend to have less competition too so that you can get the kinds of discounts that will make your returns that much better.

The numbers look way better on a 160k house if you can be all in at 120k (thats only 75% LTV versus some investors require 70% or better).

Your down payment (assuming 25%) goes from 40k to 30k. 
Your loan goes down from 120k to 90k which saves you about 150/mo.
And so on and so on. 

Its about finding the deals......

Buying retail makes buy and hold deals somewhat difficult to make the numbers work typically. Break even is about right. And that can sometimes lead to trouble..... A new roof or furnace is going to come out of your pocket if you have no profits......