Asking Prices Too High?

Question

Hey everyone,

I've been feeling a bit confused as of late. I am still looking to make my first investment purchase and am really interested in a small multifamily.

I am getting updated with the latest properties available via auto-alerts and searching on Craigslist (I know these are probably not the best places for deals) but it seems like most of the properties make absolutely no sense as possible investments due to the high GRM. Meaning that the rents don't seem like they warrant the asking prices nor would they allow for any cash flow after running our expenses.

For example, a lot of the duplexes we are seeing are 140K+, but the rents may only be $1.6K combined. Although this may satisfy the initial screening of the 1% rent to purchase price, after I run our numbers there is barely any cash flow left.  And then the few properties that seem like they may provide cash flow are mostly C-class.

Now, I obviously don't expect every property on the MLS to be a great deal, but does this also reflect that of other markets? Is this what others are experiencing as well.? The thing I am noticing though, is that these properties are still being bought by others in the area, fairly quickly, close to asking price. Do you guys think that I am being too conservative or are others just being too loose with their money?

I am running #s just like most others on the forums, so I don't feel like I am doing anything incorrectly. I don't know if my point came across as clearly as what I was hoping, but I needed to get my thoughts/frustrations out. Seeing others talking about getting 25+ deals in their first year makes me feel like I am sitting idle.

Ned Carey · Answer

@Allyson Straka whenever I ran numbers with rent at 1% I just never saw how the property could  cash flow.  Today's interest rates are lower than when I started so maybe it works in some areas.

My suspicion is that because of the hot market returns are being driven down. They are driven down to the point they don't' make sense to you or me. Good deals are out there it just means you have to look harder and they are much more rare.

How do you think I feel I have been doing this 10+ years and have 10 units. Based on questions and comments here on BP clearly people are not considering all the costs and taking risks they don't understand.

You mention Duplexes, Muti family of all sizes seems to be particularly overpriced. In my area you can generally do better with SFHs than with muti family properties. My favorite rental is a duplex though. We own it free and clear so it is a cash cow. This of course will vary by market.

Jaron Walling · Answer

Raising the rent $75 per month, per year, every year is damn steep increase. You're going to have a lot of turn over if you're doing that. Prove me wrong.

Matthew Paul · Answer

@Allyson Straka  A 140K duplex that rents for $1600 a month total is a great start , remember you will be raising the rents yearly .  Next year raise each side $ 75 a month , and do that every year . Now where are you at year 5 ?  You are looking at properties in " B ' areas . You have a MUCH better chance with appreciation also . And will draw a better tenant base .   You wont find home runs on the MLS .  And remember , the asking price is the start point .

Allyson Straka · Answer

Yeah, I have began to think the same for my area as well and have began to look at buying some SFH instead, which was not my original plan.

I doubt that some of the rent increases noted in this thread would be sustainable in my area, but it does make me realize that as a buy and hold investor I should also be considering the future calculations as well, such as IRR.

Russell Brazil · Answer

Most of mine go up about $100 per month each year over the last 10 years. My increases are usually at tenant turnovers and are a few hundred bucks as I fall behind. The exception in my portfolio are a couple of condos I have in Frederick which Ive not really been able to raise the rents in 6 years. One of them actually had the rent drop $50 for a couple years before coming back to par. But thats why I like my Montgomery County properties. Low cash flow on initial purchase but with the average going up $100 a month each year, they cash flow heck of a lot more than the cash flow buys people buy in these secondary markets. Ive got one property in Rockville that I have free cash flow at $1600 a month after 9 years of owning it.

Matthew Paul · Answer

@Jaron Walling I live in the Md / Dc ? annapolis area I have done it the last 3 years

Russell Brazil · Answer

Rents actually increased strongly in most markets during the great recession and housing collapse. You had a ton of former home owners becoming renters, and that pushed up the demand for rentals almoat everywhere.

I tend to get strong rent growth in general as I specifically target locations with strong rent growth.

I have however had rents go down in my far far outlying properties from DC. (In Frederick MD about 90 mins from DC). What brought my rents down there for a couple years is there was a ton of new developments in the area (yes development can negatively affect your property) and with the increased housing supply and new apartment buildings that went up, it pushed my renta down in that area. Rents have come back to par there, but they are still at what they were 6 years ago. So I much prefer my properties closer to DC where the rents grow considerably.

Kon Zel · Answer

@Allyson Straka  For anything < 5 units, the prices are set by comps.  While GRM is a good metric to give you an idea of your internal value, these properties don't trade based on it.  The market values will be set by local recent sales.

As others have mentioned, there are still deals to be had, just have to negotiate a bit and work a little harder.

Matthew Paul · Answer

@Jaron Walling   thats great for you

Jaron Walling · Answer

@Matthew Paul  That's good to know but as a renter for the last 10 years, my land lords never raised rent. Probably stupid on there part.

Asking Prices Too High?

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