Has cashflow dried up in Durham, NC?

Question

Back in 2015 I bought my first rental in Durham, NC. After looking for a month, this seemed like the best deal.

Specs:

4/2 built in 2006 1200sqft

PP: $94500

Had a tenant in place renting for $1050.

I recently had the property appraised and it came in at $162000. Great! But rent has only risen to $1150. Now I'm looking for my second property, but it doesn't seem like anything would even break even since property values have risen much faster than rents. Are there already no cashflow opportunities in this area? Will I need to go to the most bullet-riddled parts in order to find a measly $50/mo cashflow?

Randy E. · Answer

I'll take ten houses over there, over easy please.

The smart money has already started floating into that area and prices are quadruple what they were four years ago.  Don't be fooled by the "general consensus" of people who have never spent time in such neighborhoods.

Remember, the South Street / Enterprise Street corridor was a "place to avoid" five years ago.  I almost bought a couple of  houses there in 2014-15 for $11K and $24K, but things didn't work out.  Now, new builds and full-rehabs are selling for $350K-$500K there.  And don't forget about the "danger zone" that was Dowd Street / Gray Street.  Same low prices five years ago, now houses are selling for over $600K.

The smart money doesn't wait until EVERYONE knows where to go -- the smart money anticipates where EVERYONE will want to go next year.  If I had smart money, I'd lay it all up and down the South Alston corridor.

Chris Martin · Answer

Yogi Berra had it right. His classic statement "Nobody goes there anymore. It’s too crowded." applies to investors in the area. As a foreclosure/trustee/discount buyer I no longer look at Wake county real estate much. My members remain more seller than buyers. The market perception, as you identify, pushes traditional buyers out. Now if that means prices will appreciate less out "there", outside the immediate region... that's a tough one to answer. It depends on if investors see what's going on and shift gears into development. I don't have Johnston and Harnett county analysis data at my fingertips, but in new construction I'd guess southern Wake and northern Harnett and north-west Johnston counties will outperform the Wake county MSA in general by a wide margin in the next few years.

The new construction in this market continues to surprise me. There remains huge demand, so developers push on. I don't see an end in sight. As long as net migration remains as it is, the party rages on!

Randy E. · Answer

LOL.   Where are the "bullet-ridden areas" of Durham where real estate is so affordable?  Show me affordable in Durham, and I'll let you shoot me out of a cannon to that location.

Chris Martin · Answer

Your comment "...the South Street / Enterprise Street corridor was a "place to avoid" five years ago. " sounds a lot like what people said about South Park in Raleigh. Now look at it. Holy $#!*!!! Just parking money there five years ago with a boarded up building would have paid off.

Your comment "The smart money doesn't wait until EVERYONE knows where to go -- the smart money anticipates where EVERYONE will want to go next year. " That is spot on. This is true in real estate, but also true about business trends in general. For everyone reading this post, pick an industry (e.g. agriculture, real estate, etc.)  and then try to envision yourself (or company) with a product you develop or transform (e.g. a new redeveloped house.. or block... or subdivision) in a year or (better) in three years. For builders, the good ones, they have it figured out. @Jay Hinrichs comes to mind. Personally, I think the redevelopment side (those in the gentrification space) is tougher to execute, but the rewards are similar. Unfortunately, in the real estate space I for the most part am just an observer of this phenomenon rather than a catalyst. Big $ at play in these markets for those who can 'see' the future.

Caleb Heimsoth · Answer

@Ross Bernard. Granted I’ve only lived in Raleigh area for about 18 months but I can’t find anything that’ll even meet the 1 percent rule so I didn’t really bother looking in the triangle much.  I’m having much better opportunities around the triangle, but you won’t get the appreciation.

Mark Hove · Answer

@Ross Bernard There are always good deals to be had- sometimes they are harder to find. Yes, the market is hot. My first deal in Durham (house hack duplex) preforms very well. I’m living in it now but when I move out, I’ve estimated a 20% cash on cash return, taking everything into consideration. And no, it’s not bullet-ridden, my wife and I walk out our front door for walks multiple times a week and never fear for our safety. It’s possible if you are patient and work hard.

Ryan Daigle · Answer

Yeah, the core areas of the Triangle are just not cash flow markets anymore. Unless you're working with wholesalers and doing big rehabs yourself, I'm not sure what you're going to be able to find (outside of the aforementioned bullet-ridden areas). That's been my experience, at least!

Kathy C. · Answer

Sure! From what I’ve seen from investors is a home becoming available and it quickly gets rented in between for a very minimal  increase. It’s not from too many properties being available or new build rentals. The market has really gone up price wise for buying. So many bought when prices were low and have low mortgages. Buying at 80k vs the same home now is 160-170k for lower end. So many have lots of inventory that they price low to keep I think rented. I feel it’ll be a few more years before we see a good rate on return. If you buy now. That’s my take on it.

Ryan Daigle · Answer

@Randy E. Ha! Well strap on your propeller hat and head towards S. Alston Ave :)

Chris Martin · Answer

Can you elaborate on why you think investors are keeping rental prices low?  I'd like to find out where you get your information. I have seen no indication that apartment absorption rates are causing lower prices, quite the contrary from everything I've read from sites like the TBJ (eg. More apartments don’t mean lower rents in the Triangle.)

It's clear that rental price changes are not correlated with property valuations, but that has to do with supply and demand, absorption rates, the market cycle, and demographics. None of these have to do with investors "keeping rental prices low."

Has cashflow dried up in Durham, NC?

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