Discrepancy between property prices and rental income

[MaryAnn O'Brien]

Hello - My husband and I are new to the New Orleans area, and are interested in investing in multi-family properties here as buy and hold investors. The real estate market in New Orleans is very hot right now, particularly in up and coming neighborhoods such as the Bywater neighborhood. As a result, prices for multi-family properties in these comer neighborhoods are skyrocketing. What is strange, however, is that the rental rates are really lagging behind. So, as it stands now, you need to pay top dollar to get into the hot areas, but you aren't going to be able to generate any cash flow from the propert you buy, based on the current rental rates. Has anyone seen a dynamic like this in another market or have experience doing a deal in this type of market? Is this a deal-killer? Thanks very much for your thoughts and advice on this.

[Matt Payne]

I agree with @Brie Schmidt . If you want to be investing in the hot or trendy areas, you're going to be paying top dollar for the properties and rents are not going to be able to keep up typically. Especially if values are rising quickly.

Where I am, in New York City, we see this a lot. If you want to buy a 20 unit building in the West Village it's going to cost an arm and a leg because that neighborhood is perennially popular. So unless you look for a sleeper neighborhood about to pop or a major league fixer-upper, your return is likely to be sluggish.

I say that you and your husband should be on the look out for areas that are just starting to get some nearby commercial development, particularly if some major national stores are moving in. This type of development can make a neighborhood more livable and desirable and those are things that can really drive value and rents up. So if you're on the first wave of investors in and find good deals, you may be able to catch the rising tide.

And if your value increases steeply, then you may find some new equity you can leverage into the next up and coming neighborhood. :)