Best LT markets in 2023 for total return (COC, equity, and appreciation) w/ 25% down

[Allen Tackett]

This post is for LONG TERM BUY AND HOLD RESIDENTIAL REAL ESTATE INVESTMENTS.

First, let's bench mark the range of options so we can put in context any potential opportunity:

 - CDs and some savings accounts are back to paying 4%.  That's for zero risk.

 - Inflation-adjusted Treasury Bills pay 6%+, for almost zero risk, but are capped at $10k per person.

 - Most residential investment properties sell for a 5.5 to 6% cap rate, so for a cash buyer, 6% is a fairly easy return to obtain for newer properties with very low risk.

- Equities offer 7-9%, but with arguably higher risk and fewer tax benefits; plus this is BP, so I'll focus on RE as the asset class to discuss (rather than say talk about buying a business on Flippa or BizBuySell for a 3x multiple).

- Flips and BRRR can generate larger returns, but they aren't passive so I'll leave those opportunities to others to discuss.

- STR is a changing playing field and is not passive, and carries more risk, so I'll leave that one to other forums as well.

Okay, on to business.  Let's assume that since it's easy to get 6% return on cash invested, with almost no risk, that's the bare minimum we should consider for our return for any investment (real estate or otherwise).  Now let's assume someone is trying to figure out how to invest $50,000 to $300,000 in an optimal way, to maximize the risk-adjusted return.  If you're going to accept more risk, you must receive more than 6% return.

What are the top cities people are able to find a total return of say, at least 15% (adding up cash on cash, equity build up, and a very conservative estimate for appreciation - I use 2%)?  I'm looking for new markets.  Most investment loan rates are around 7-8% and require 20-25% down, so let's use those assumptions.  Let's further only look at A and B neighborhoods since the risk profile of a C or D neighborhood are so different, one would need substantially more gain to justify the extra risk (i.e. one eviction can wipe out 1-2 years of gains, and so forth).

A few things I'm seeing:

- Baltimore: With cap rates at 8% or higher for rehabbed townhomes, you can still get close to the one percent rule and still generate 18% total returns.  However, you'll have to accept some risk given the issues of crime and unemployment in the city.  

 - Norada, Rent to Retirement and Real Wealth Network are still offering up some good terms, but there are strings attached.  I like these companies, but have had some issues with their local partners (PMs who overcharge, new construction with unfavorable and one-sided contracts, a seller who backed out of a deal etc.).  Their markets and properties are definitely worth a look, but think it through.

 - I can not get numbers to work in my favorite markets any more: DC, Charlotte, Raleigh, Austin, Phoenix, Portland etc.  I'm finding that I have to go to small towns that I had not heard of, and look for less expensive deals, to get anything to work.  Havelock, NC  or Texarkana, TX anyone?  I just saw a few lovely properties under $200,000 that would cash flow and generate nice returns for a new investor.  

 - For these types of markets, big long term appreciation will likely not be there, so it does depend on on what you're looking for: income replacement or wealth building that's not liquid.  I like hybrid approaches with a little of both.

- Oklahoma City: still offering 7.5 to 8% cap rates in the better neighborhoods and the homes still pencil out with total returns of 18% or more.

- Spartanburg, SC: still a few deals there, but for older homes.  Hard to gauge the additional risk of some of these properties for no additional gain.  Higher tax burden for investors as well that could wreck your pro-forma if you're using numbers from Zillow, Realtor.com etc.

- Lincolnton, NC: has cheap lots and some new construction duplexes that still cash flow.  Closer to 14% I believe for the total return.

Where are other people finding deals?  Would welcome some fresh ideas and new markets.