Feedback on if I should purchase this or not in this area?

Question

I live in Bozeman, MT and have an opportunity to purchase a brand new townhouse for $327K (or $335 if its an end unit). 3 beds, 2.5 baths around 1600 square feet. I can get it to cash flow for about $265 to $300 a month with a Coc ROI of just 5%. Many/some investors say they just buy property here and make sure they can cover expenses and they don't care about cash flow (they say its too hard to find cash flowing properties here).

I was looking for 10% Coc ROI, but couldn't find anything that would cash flow.  At this point I'm thinking this might be a good opportunity to get into the market and have some okay cash flow, in a market that can be challenging to find a cash flowing property.  I would GREATLY appreciate any thoughts that you might have on this and different perspectives.  I really want to start out investing here, since I live here.  I've been analyzing 5 properties a week  (through Brandon's recommendation) over the last couple of months.  I have one property that I bought almost 18 years ago and I'm committed to finding and buying my next investment opportunity!

Alan Brown · Answer

Hi @Leslie C.!

Cash flow is the target for most investors of course, as you know, because they are trying to do as many deals as they can and stretch their capital as far as they can, and the cash flow buffers them from hard hits in the market (like pandemics!), or they're trying to live off of the income, which gets dicey when all 4 furnaces go out in the building in one year!!

I haven't lived in Bozeman for a few years, but most of the big fish I met there and in Boulder, CO, were buy and hold, fully speculative investors who couldn't care less about having to come up with a few hundred bucks a month to cover their investments... because if the market is providing appreciation at anywhere between 10 and 20% (I don't know what it is these days in BZN, but that's what it always was in Boulder and that's what it was in Bozeman and Big Sky when I left), you can do the math and see why they're dumping their millions into it.

As much as I have to hedge my bets and make my capital s t r e t c h for all it's worth to live on the cash flow, the times I've made giant gains were always in the appreciation markets...

So if you feel you actually have a cash flowing property, and your income is strong enough to carry it without stress if you weren't conservative enough in doing your numbers, get anything you can in BZN I say and watch it go through the roof over time.  It's one of the VERY LAST best places, and it doesn't seem like it's going to ever back off (but plan on it sooner or later!).  I found the only way to ride that train is to jump in as soon as you can, because over time you keep leveraging up through that magical market.  Everyone wants to live there once they've experienced it (so mum's the word!) and the economy is incredibly diverse with so many individuals drawing tech money telecommuting from all over the world, that it's hard to imagine it being anything other than Mecca for those that love the outdoors.

I was in the Boulder Market for a long time and even when everything else crashed, it just leveled out for a while and then picked right back up.  San Francisco seems to be the same way in a massive way!

so I say go for it and enjoy the best place in our amazing country!

Michael Rutkowski · Answer

Hi Leslie, I also live and invest in Bozeman, and it's really not the most ideal place for cash flow. There are many reasons why, but all of them contribute to the high cost of real estate here. So what most investors would do here is to buy the property, and if it cash flows great, but the gains in equity can enable the investor to then leverage Bozeman money elsewhere in Montana (which still does have cash flowing properties all over the place). Personally, I would just buy a lot, build on it, and you've doubled your equity, from what I'm seeing in the market. That would be the most efficient means of investing in my opinion right now, in Bozeman, and you will see that reflected across town with all the cranes and construction going on.

So what you're talking about is 2 different over-arching investment strategies, the buy and hold investors are leveraging equity, while the cash flow investors are using cash flow to leverage into more property. I personally can't think of a better market to be in, anywhere in this country right now, so if you see that condo at $327k, it may be worth it even if it's not cash flowing. Remember, unless you have an ARM, your mortgage will stay the same. Rents always go up here, as long as property taxes keep going up. But my advice to you would be to look reaaaally hard at comps, and keep in mind, condo prices just tanked about 10% over last year here. Maybe... add another 5% decrease in price to cushion yourself from any further decline. So if you see a condo which pops up at -15% of its previous value last year, then I would say it's a steal.

Daniel Juliano · Answer

Thanks to Alan Brown for making the point more eloquently than I did.

Leslie, I have not bought anything in Bozeman other than the house I live in, because of the difficulty in finding something that cash flows from the start.  I am in the process of buying something outside of Bozeman that does cash flow, and am considering something in Bozeman, cash flowing or not, under the rationale Alan stated.

Logan Manzanares · Answer

You can have both... but it depends on how much cash you have... if you have only enough for 1 or 2 deals there are definitely better deals out there

Daniel Juliano · Answer

As a fellow resident of Bozeman, I've also been looking at the low cash flows available on properties in the area.  Cash flow is ideal because it is something you can calculate and understand as a tangible return on your investment.  I'm personally buying my first property outside of Bozeman, where I will have strong cash flow (but perhaps not much appreciation).

However, if you are confident in future appreciation, and aren't in immediate need of the cash flow, that is a return that should be factored into the investment, in addition to the equity you are building.  Although some would consider that approach speculative, I see it as similar to the difference between value stocks (that generally have a dividend yield) vs growth stocks (which generally have no or only a low dividend).

The property you describe (slightly positive cash flow in Bozeman) sounds like one I would consider investing in myself.

Feedback on if I should purchase this or not in this area?

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