New to REI - How to compete with rental prices of homes purchased with low rates?

Question

I've been working for a real estate investor for a couple of years now (doing light construction and rehab work) and I'm slowly turning into more of a mentor/mentee situation - as I'd like to get more into the investing side of things. He's been very helpful and has answered every question I've thrown at him, but I also want to respect the employer/employee relationship and not bother him with questions every second - so there's a fine balance.

I'm planning on starting with flips as I already have experience doing the work and I feel I have a pretty good idea of the process and what needs to be done when etc... After getting a few flips under my belt to raise capital I'd like to start getting into SFH rentals as well. I'm located in Bentonville, AR (Walmart HQ) and homes have appreciated like crazy since covid. I bought my house in March 2021 for $240k and it's worth about $450k now. When I look at the rentals in my area I'm seeing houses that would cost $300k-$400k today renting for like $1,500-$2,000. Im assuming this is because they bought 3 or 4 years ago for half what it's worth now and with a lower interest rate most likely.

My question is.... How can I buy at todays prices and rates and still cashflow every month while competing with these prices? If I buy the cheapest 3/2 house I can find thats in "livable condition" with 20% down the PITI would likely be $2k a month and thats before BRRRRing. If I go by the 1% rule I would have to charge around $3k a month for a house thats completely outdated and in poor condition whereas these other houses are in good shape and somewhat renovated going for $1,500-$2,000. I know the obvious answer is to buy the cheapest, crappiest house possible and doing a full rehab to BRRRR but I simply can't find anything like that around here (atleast not on zillow).

I'm sure many of you that have real experience investing have run into a similar situation and coud hopefully give me some insight here. I just can't figure out a viable way to make this work with the current market conditions.

Thanks in advance!

Mike Klarman · Answer

So in some markets the 1% rule just plain does not work, there are some markets where it still happens. Now, in the multi universe the 1% rule is still alive and kicking. Get two or three rents on one mortgage and you will be ok. I'm yet to price a 2 - 4 unit DSCR deal that hasn't worked, I have priced plenty of SFH deals that didn't work but never a 2 - 4.Where you make out is in material and labor of the rehab. You probably get 10% discout from your local home depot and you don't have to pay yourself for the labor, so your rehabs are just material costs, unless you have a worker with you then still your labor costs are at a minimum.Smaller rehabs mean smaller loan amounts. Smaller loan amounts mean smaller payoffs and smaller payoffs means more profit for you. You should be able to increase the profit margin on flips by 25% or more.

Bruce Woodruff · Answer

There is only one way....you have to buy the biggest piece of crap you can find and use sweat equity to make up the difference. Even then, you can't really ever compete with cash buyers. Obviously it's better to buy when rates are low, but even then, Cash is king.

Ryan Blackstone · Answer

Hey @Brandon Stiles. The answer to your question is that you cant. You can't make retail prices make sense with the going rent rates in Northwest Arkansas. Which you already know this. The answer to finding deals that do cashflow are as follows. I pulled this from Henry Washington who flips in NWA. First base deal: You find on market but you have to get creatively financially or physically with the property. Lots of value add. Second base deal: You buy a deal that is off market that an agent/broker brought you.Third base deal: You buy a deal off a of wholesalerHome run deal: you buy a deal from your own efforts of finding a deal off market. The less people involved between you and the seller, the better the deal. Likewise, the better the deal typically means the more effort on the front end you have to put in to make it work. This list isn't a hard fast rule, but just typically what you will see. Overall, we have a little "bp meetup" tonight and you should come. 6-8pm at Mexico Viejo in Fayetteville. I will be there and I am pretty sure Henry Washington will be as well.

Christie Gahan · Answer

Have you looked for properties that can be remodeled in to a 2 or 3 unit? Would that cash flow? Ex: The Split Level .... lots of split levels have a bathroom and laundry on the lowest level. Can you move the laundry to the garage? Create a kitchenette out of the former laundry?

Krista Patrick · Answer

Oh goodness, that is the question! I spent the last five months trying to put together a deal for new construction in downtown Rogers and even with the land being donated and pricing the build low, we still had to look into additional cost share/grant options to make it pencil. And that's assuming they would go for our parking plan and wouldn't require a full lift station. The developer that won the project has a sale price of over $500/sq ft ($545 I believe) and their construction costs were way too low. I'm still not quite sure how they plan to make that work but I'm anxious to watch! *I was part of a development team pitching a project to the city. There were 4 development teams pitching. I've been looking into some off market deals and opportunities out of state. A lot of the developers I know are pinning projects for now.I'd also love to meet up with others in NWA!

Jassem A. · Answer

You don't compete. You don't buy rentals when rates are elevated. Ideally you don't buy them at all. People would rather own than rent so it's better to provide owner financing. The only time leasing might make more sense is if you are making a killing on the lease amount because you're running a group home or old folks home or something like that and only if it is guaranteed money and enough to easily cover expenses.

Ryan Blackstone · Answer

@Brandon Stiles You don't always need to make cash offers. It really depends on what problem you are solving for buyers. If they are getting foreclosed on, then you probably need cash. If the seller has more time like a month, then you don't need cash. FYI Hard money lenders can get you the cash fast if it is a good enough deal.

Brandon Stiles · Answer

@Ryan Blackstone This might be a dumb question but when it comes to buying from wholesalers or off market do you generally need to make cash offers to be a contender or can you finance them? I wish I saw this sooner - I wont be able to attend tonight but I would love to be a part of it in the future! Do you know when and where the next one will be?