What kind of deals make sense in the current market?

Question

With interest rates AND housing prices continuing to be elevated, I'm curious about what types of deals folks are doing in the current environment? Is it all-cash, cheap money left over from the pandemic days, or are you venturing into D class neighborhoods? Just wanted to see what folks think makes sense at the moment.

Eliott Elias · Answer

Creative financing is what makes most sense. I am buying deals subject to with loans under 4% interest.

Eric Fernwood · Answer

Hello @John Anderson

The deals that make sense at any time include:

• Deals that will provide a long-term, reliable, passive income that keeps pace with inflation.
• Real estate is not a get-rich-quick scheme. It is a process for achieving financial independence over time, without having to quit your day job. Because real estate is a long-term investment, the initial return is not as important as what happens over the long term.

We employ three basic strategies to enable clients to achieve positive cash flow, in addition to selecting performing properties. In most cases, we combine two or more of these strategies. The three categories are as follows:

Interest Rate Buy-Down

You can pay an upfront fee to reduce the interest rate on your loan. Below is an example comparing the benefits of an interest rate buy-down.

In this deal, the interest rate was reduced from 7.75% to 5.99% by paying 2% of the loan amount upfront: 2% x 70% x 370000 = $5,180.

The buy-down rates and requirements seem to change almost every day. So, we implemented the process illustrated below.

Once we have a property under contract, we send the client's preapproval and a property description to multiple lenders for their current interest rate buy-downs. After receiving responses from multiple lenders, I review the options and present the best five or ten to our client. During a Zoom meeting, we select the best option for them. The client then closes with the selected lender.

Increased Down Payment

Increasing the down payment is an option to avoid negative cash flow in the first year. Here's an example: I calculated the percentage of the down payment required to achieve net zero cash flow with a 7.50% interest rate. The down payment needed for net zero cash flow was 36%.

After-Tax Returns

When it comes to tax savings, it's important to keep in mind that you may have negative cash flow throughout the year. However, you will recoup those losses and more through tax deductions when you file taxes.

Note: Depreciation is calculated as follows:

• Annual depreciation = $360,000 x 80% / 27.5 = $10,473
• Monthly depreciation = $10,473 / 12 = $873
• Depreciation is a credit and I included it in recurring expenses

Combine multiple strategies.

We usually combine multiple strategies. For instance, the following model incorporates interest rate buy-down, a 30% down payment, depreciation, plus maintenance, and vacancy.

John, I hope this gave you some ideas.

Patrick Drury · Answer

@John AndersonStill buying BRRRR deals

Steve Donovan · Answer

Cash flowing deals make sense in any type of market.  I would recommend locking interest for five years if possible to be able to ride out any upward spikes that may be coming our way.  I don't think interest rates will stay elevated beyond that timeframe and will likely settle back into the five percent range.  I'm always leary of banking on appreciation because you just can't bank on it happening or at what rate.  Property values are likely to move lower instead of higher due to elevated interest rates for the next few years and I don't want to risk the loss of equity, even in the short-term.  I think rents are going to stay at a high level as fewer people can afford to purchase houses due to high rents.  There are still deals to be had even at these elevated interest rates.  Be diligent in your selection process; verify "possible" rents, or better yet, buy properties with good quality tenants already in place and under professional management.  Don't let the urgency to do something cause you to buy a bad deal.

Henry Lazerow · Answer

In the really cheap areas people going cash but if desirable major cities like my market (north side chicago 300-800k price ranges) its the same it's always been most people use financing, just take a little more time to find deals. Find deals with low rents and do cosmetic updates to raise rents 50%+ which also raises building value. We have a ton of buildings here with way under market rents. Even just since 2020 our rents are mainly up 30-50% but most mom/pop landlords not brought to market.

Account Closed · Answer

Creative financing, distressed properties, properties that need cosmetic rehab (value add), etc. Anything that can be bought below value due to seller's motivation, condition of home, debt on the home, etc. Many turnkey properties aren't profitable as rentals right now, and go far above market rate, or even listing price, At the end of the day any property you thoroughly underwrite makes sense, if the numbers check out.

Caleb Miller · Answer

1. Either look for creative financing like everyone much smarter than I said above;

2. Focus on a longer term approach, 5-10 years out; and

3. If you are not wanting to buy distressed properties or BRRR, get creative with your offers. I made several offers on STRs over the last year and every single offer included seller concessions or seller covering a large portion of closing costs so I could buy down the rate with the seller's money.

Steve Vaughan · Answer

I think build to hold would be good in this market environment if someone had the pieces and processes in place.

I'd also continue planting off-market seeds and getting creative with acquisitions and/or repurposing @John Anderson

Alecia Loveless · Answer

@John Anderson Hi John, I’m still finding some good deals on my local MLS. Working on one now that almost makes the 2% rule. It’s had a lot of renovations but still needs a little work once we close on it and we’re doing a total heating system upgrade so the tenants will be responsible for paying for their own heat.

A few months ago I did a deal that was pre-MLS. The listing agent hadn’t gotten around to doing the paperwork after a month of saying he was going to and I finally just had my offer written up and landed the deal. I imagine in that instance if it had gone on the MLS there would have been a bidding war. But I moved when no one else did.

So I think it depends on your area and the particular situation currently.

Crystal Smith · Answer

We haven't changed that much other than we are more focused on looking for opportunities that provide us with multiple ways to cash flow the property along with multiple exits. We are encouraging clients to do the same. Example- Purchasing properties near Universities. Options- Cash flow by the apartment or increase cash by renting by the room.  It means being more selective and evaluating if the alternate ways of using a property will pencil out.

What kind of deals make sense in the current market?

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