Buying & Selling Real Estate
Market News & Data
General Info
Real Estate Strategies
Landlording & Rental Properties
Real Estate Professionals
Financial, Tax, & Legal
Real Estate Classifieds
Updated about 7 years ago on . Most recent reply
Is there any decent market left to still get a decent return?
Hi Everyone,
My wife and I have been buy/hold investors for going on 15 years now. For most of that time you could find an okay deal as long as you did your homework and were willing to look outside your local market. I think it is sort of funny watching through the years as everyone's criteria for what they call a good deal keeps changing as the market keeps going up.
I guess each person's idea of a good deal is going to be shaped by their local market, so at one time when things were really good our criteria was that we netted out a 12% return with a rental purchased with cash. My defeinition of net usually ends up assuming costs of 50% of rent so that was a pretty good deal! It's been a long time since we've achieved anything close to that. We did make some large SFR investments recently and I hope to end up close to 10% on those, but it was in a very risky market and we sort of got lucky.
I'm writing this post because I'm curious what all the other buy/hold cash investors are doing these days? At this point I'd be willing to accept a 7.5% return on a house purchased with cash and assuming 50% costs. I'm not finding anything close to that anywhere (other than maybe Detroit and we are already heavy in that area). The other thing is I'm not really talking about finding one house and fixing it up. I'm sure with some effort and time I could find that sort of return on one house. I'm more talking we have quite a bit of money sitting and wanting to purchase a lot of houses and average out to that return. I've spoken to several of the turn key type businesses but by the time they take their cut almost all of them are in the 5% range. Oh they will tell you it's right up at 10% but conveniently leave out some major cost center or use anticipated appreciation or something else to arrive at that number. I find that their rents are almost always inflated as well. Even the foreclosure prices are too high, at the point where by the time you get them fixed up there goes your return.
What is everyone doing? Just accepting the low returns? Refusing to buy? Going to war zones like Detroit and taking their chances? To make matters worse, I have a 1031 exchange coming that is a result of something outside of my control so one way or another I am buying something! The last year or two is the only time in the 15 years I've been doing this where I really am starting to think it's just not a good investment any more.
Most Popular Reply
Hi all,
I have traded in all my pricey San Diego rental properties cash flowing at $50,000 a year for 4 apartment complexes and soon to be 7 apartment complexes, currently cash flowing at $160,000 in NE Ohio. I have significantly increased NOI on each of our apartment complexes. In a 2 year period, I will have increased the value of these apartment complexes exponentially. The small community I have over 80 front doors has been increasing population consistently since 2000. There are emerging markets, in blue collar neighborhoods available to all with just a little research. When I read David Lindahl's emerging markets book and his Multifamily Millions book too, I decided to sell my outrageously high RE in San Diego.
Although, my wife won't allow me to sell our personal residence in San Diego. I have about $200,000 dead equity in this money pit and I don't want to refinance it, just in case we have a housing correction again. It is not if, it is when.
Don't get me wrong, I did make a few mistakes along the way and learned my lesson the hard way on the first two 1031 exchanges and sold those 2 dogs 3 months ago and have another 34 units that we have an LOI signed and I should be back off to the races soon. If I wouldn't have made those first two mistakes, I would have been at $200,000 cash flow by now.
However, not too bad after only investing in my first little single family rental property in San Diego in May of 2011, only about 7 years ago.
"If you change the way you look at things, the things you look at change right before your eyes."
Swanny
Why Hoard cash? Become a lender until you need the cash for your own deals.
Happy Investing
Derek Dombeck
@Ryan Zaninovich I have seen this turn in my market. Most "deals" that are out there aren't really deals. I will continue to save up, invest in other strategies and when the Real Estate market takes another down turn, start investing then. In 2017 I had over 20% ROI on my index funds, not that I may lose all that return this year, who knows. Its always good to be diversified.
Originally posted by @Derek Dombeck:
Why Hoard cash? Become a lender until you need the cash for your own deals.
Happy Investing
Derek Dombeck
Not a bad idea, something i am certainly looking into untill market cools.
I am relatively new to this & only own one rental property so far though looking to buy more. Time for due diligence & research are slowing me down.
I may be thinking about this the wrong way...However I don't see many ppl discuss the depreciation as a factor when calculating the numbers. Am I missing something?
When I factor in depreciation, it turns what would be a so-so deal cash flow wise for me into a good deal. I'm not saying I don't want good cash flow but factoring in depreciation really changes the calculation.
I like to run the numbers a few ways but when I do look at depreciation, I think of it as if it were a form of income. In that sense it's the most fixed piece of the income on a property since it doesn't fluctuate or require assumptions.
I also think of Realestate as more like "bonds" in a traditional stock portfolio- a form of diversification of an over all investment portfolio that includes stocks, Realestate and cash (personally I'm not interested in bonds at this point in my life).
Thoughts welcome. Especially if you can show me how I'm thinking about this the wrong way!
@Ryan Zaninovich its great to hear your interest in expanding your investments. I understand your concern about the market but I assure you there are still some great deal here a good example is Nashville, TN. I have come across many deals. I just read an article in the Tennessean that says the average gross 48 percentage gain. Doesn't seem like much, but that is an average. Every deal that I have come across and have gotten my hands on here in Nashville has been well over that average because of the many connections I have here in Nashville.
Looking at a market's trends is something to consider when investing. An article in the Tennessean talks about the rankings and trends in Nashville. The emerging Trend in Real Estate Report is based on interviews and survey responses from more than 1,600 real estate experts. Nashville has also been ranked among the Nation's top ten real estate markets for 3 straight years. In Nashville, houses still remain affordable when compared to the nation based on the Trends in Real Estate. Another think to consider is Nashville rapid growth. On a net basis, 20,000 people are expected to move to Nashville over the next 5 years. I assure you that is a very positive trend to consider when making your investment.
Nashville is a growing very quickly, and right now is a great time to invest here. I'll be honest with you these properties are older, but if you are willing purchase and putting in money for renovations the returns look nice on both single family and multi-unit properties long term.
And along with all of the problems a lot of RE investors are having these days with low cash on cash return deals, my vanguard index for Nc has averaged 14.7 for the past 8 years. I love real estate, but these days the sellers are maj my out best.
@Ryan Zaninovich First off, I love your approach to measuring cash flow. That’s exactly the way we evaluate deals. And 12% net is exactly the minimum we’re looking for if we pay cash (and we’re getting it consistently). We’re seeking (and getting) 20% to 30% cash on cash returns if we use a loan (or refi). I agree with you that when you truly factor in ALL the expenses (which many investors don’t), you’ll have your net income equal to 50% of rents on lower price point homes. We invest in what we classify as C and B neighborhoods (it seems everyone measures that a little different). We don’t do D (war zone) neighborhoods.
Yeah, we invest in low income neighborhoods, but it’s working class people. We definitely aren’t slumlords, but I know a lot of investors don’t like to buy in the neighborhoods we invest in. That’s fine with me—less competition. The quality of the neighborhood and the cash flow you can get are connected. If you want good cash flow, you have to be willing to go to neighborhoods you might not want to live in yourself, but they aren’t that bad either.
We only invest in markets that have growing population, growing jobs, and a growing economy. We also look for great rent to price ratios. We live in Utah, but we invest remote, so we can cherry pick the best markets. Detroit is too rough for us (and doesn’t meet the criteria above). Most of Ohio is too rough for us, especially Cleveland (and doesn’t meet the criteria above). My favorite market for rentals right now is Kansas City.
For example, two days ago I closed on an off market house for $33,000. Closing costs were $258 (the seller covered the rest). Recently renovated, but still needs some work. About $5000 in various repairs. C+ neighborhood. Our property manager listed it for rent yesterday morning at $775 and had 4 showings immediately scheduled for the same day. One lady filled out an application and put down a deposit. We have strict screening, and she’ll likely qualify. Several more people called after wanting showings. We probably should have listed it for $800, but that’s okay.
We budget 10% for vacancy (although we won’t be that low). Our property manager (who specializes in these exact type of rentals and has been for many years) charges us 8% because we bring them so much business (the right property manager is EVERYTHING on low income neighborhood rentals). Taxes are $487 a year. Insurance is $451 a year. The landlord has to pay for storm water of $240 a year. The tenant cover all other utilities. No hoa. That leaves us with $1930 a year for maintanence, repairs, and miscellaneous (and it won’t be that high).
With those numbers, it's a 12% net ROI (and expenses are 51% of rents). We'll end up above 12% in all likelihood. After we refinance (which we can do in one month with one of our lenders if we don't mind a higher interest rate, worst LTV, and higher closing cost, or we can wait a year and get the very best terms), the cash on cash return will crank up to 25% or higher, especially if it appraises for more than we put into it, which is likely since comps are around $50k to $60k.
This isn’t a big rehab. Not a crazy project. You don’t have to rehab a foreclosure to get these returns. I have two more houses I’m closing on next week that are currently rented with long term tenants, and the numbers are even better. I honestly have more deals than I can buy.
I’ve seen plenty of articles and comments saying that the 2% rules needs to die and that this rule gets investors into trouble in bad neighborhoods. I agree you have to be careful and do it right, but it’s totally possible. And you don’t have to live in the market or manage the properties yourself to make it work. This property has rents equal to 2.02% of the purchase price (including closing costs and repairs), so it’s a perfect example of how this rule can work.
Yeah, we’ll have security doors on the house and a cage over the AC unit, but this definitely isn’t in the slums. It a good enough neighborhood to attract a good tenant that can pass a credit check and background check, have stable income, and will pay their bills and take care of the home.
We might do a few more evictions and deal with a little more drama than the guy investing in a top-notch neighborhood getting 5-8% returns, but that's okay. We'll make way more money in the end. I'm not selling anything. I'm just a guy that believes in good cash flow on rentals. I didn't get into real estate to make 7%. Don't give up on good cash flow. Long live the 2% rule! Or more accurately, long live 12% net ROI! (with 25%+ cash on cash returns when using a loan!).
I think the key right now is networking with wholesalers and/or direct marketing to find deals off market. Cash is king....cash buyers buying fixers are the ones finding deals. Value add is really the only way right now. The low hanging fruit on the MLS is gone.
@Ryan Zaninovich A couple more things I’ll add. We currently have a package of 27 properties under contract with almost as good of numbers. I have found that we have to pay a little bit of a premium if we want package deal already put together for us, but this is the way to go if you have a lot of money to place quickly. 24 of the 27 properties are currently rented. The other benefit of buying a package like this is that we can use a lender to purchase these homes right out of the gate. They require a 20% down payment, 25 year amortization, and 4.85% interest. This is the same lender that will refinance properties into a package (if we bought them one at a time with cash) after we have owned them for a year.
Hi all,
I have traded in all my pricey San Diego rental properties cash flowing at $50,000 a year for 4 apartment complexes and soon to be 7 apartment complexes, currently cash flowing at $160,000 in NE Ohio. I have significantly increased NOI on each of our apartment complexes. In a 2 year period, I will have increased the value of these apartment complexes exponentially. The small community I have over 80 front doors has been increasing population consistently since 2000. There are emerging markets, in blue collar neighborhoods available to all with just a little research. When I read David Lindahl's emerging markets book and his Multifamily Millions book too, I decided to sell my outrageously high RE in San Diego.
Although, my wife won't allow me to sell our personal residence in San Diego. I have about $200,000 dead equity in this money pit and I don't want to refinance it, just in case we have a housing correction again. It is not if, it is when.
Don't get me wrong, I did make a few mistakes along the way and learned my lesson the hard way on the first two 1031 exchanges and sold those 2 dogs 3 months ago and have another 34 units that we have an LOI signed and I should be back off to the races soon. If I wouldn't have made those first two mistakes, I would have been at $200,000 cash flow by now.
However, not too bad after only investing in my first little single family rental property in San Diego in May of 2011, only about 7 years ago.
"If you change the way you look at things, the things you look at change right before your eyes."
Swanny
Originally posted by @Dylan B.:
@Ryan Zaninovich I have seen this turn in my market. Most "deals" that are out there aren't really deals. I will continue to save up, invest in other strategies and when the Real Estate market takes another down turn, start investing then. In 2017 I had over 20% ROI on my index funds, not that I may lose all that return this year, who knows. Its always good to be diversified.
Same. I decided to throw 20% of my investible capital each year into a ultra-low cost index fund 401k and a Roth IRA. I think the return has been >20% over the last 12 months. I figure, it will be at least a diversification play and a way to slightly improve tax burden. I have been saving up cash for the next deal, which has been earning me 0.2% in a savings account. Finally moved that over to a better yielding account! :P
Originally posted by @Monika P.:
I am relatively new to this & only own one rental property so far though looking to buy more. Time for due diligence & research are slowing me down.
I may be thinking about this the wrong way...However I don't see many ppl discuss the depreciation as a factor when calculating the numbers. Am I missing something?
When I factor in depreciation, it turns what would be a so-so deal cash flow wise for me into a good deal. I'm not saying I don't want good cash flow but factoring in depreciation really changes the calculation.
I like to run the numbers a few ways but when I do look at depreciation, I think of it as if it were a form of income. In that sense it's the most fixed piece of the income on a property since it doesn't fluctuate or require assumptions.
I also think of Realestate as more like "bonds" in a traditional stock portfolio- a form of diversification of an over all investment portfolio that includes stocks, Realestate and cash (personally I'm not interested in bonds at this point in my life).
Thoughts welcome. Especially if you can show me how I'm thinking about this the wrong way!
I always thought that real estate income functions the same as bonds. I am beginning to see that this is false. Real estate income is rarely 100% passive like bonds. Also, its not a 100% guarantee that you will get a tenant paying you every month, there will be vacancies. Also, CapEx will cut into your real estate income. You don't pay any CapEx with bonds. That said, I think a 90/10 or 100/0 equities portfolio for someone under 40yo is totally fine.
We sold one of our Phoenix properties last Spring and bought a small portfolio in Milwaukee. So far we have been pleased with eh results. The last property has a tenant moving in April 1st and then the entire portfolio will be occupied. Prices have gone up 10-15% since we bought so we are being careful about adding to quickly at the higher prices.
Our main goal this year is to pay down the debt that that we have accrued building the portfolio to where it is.