Does it cash-flow in Tucson?

Question

Hello, everyone! First off, thank you for reading and taking the time to educate. I am considering purchasing a single-family home off of Speedway and Arcadia and am having a difficult time finding rental info about the area. It is a 3 bed/ 2 bath 1121 sqft home that I will be renovating, and, if all goes to plan, will rent it out and start my rental property portfolio.

The problem is, there are very few rentals available on the market right now (per Zillow and other websites) so I am having a difficult time determining what rents go for in this area. I have a feeling a lot of the rental market is extremely sensitive to U of A being in session (this place is 3 miles away), so i have no idea what i could fetch for rent on this place. Could you please provide aprox. cap-rate and avg rents for this area? This is my first project and I am looking for cash-flow, not to flip. I would also be happy to provide details on the deal if you find it relevant. Thank you so much for your time!

Alan Grobmeier · Answer

@Ryan McKean, here is what I do: Go for as much as I can with craigslist ads. If you get no bites, your price is too high. Plain and simple. Aggressively drop price weekly until you get bites. After all, a month of vacancy is NOT worth an extra $100 a month income. My rentals are in Chandler & Gilbert. Charge extra if you allow pets. Charge an extra non-refundable deposit for pets. There are ALL kinds of things that you can do to increase revenue stream.

Hold open houses. I usually do every Saturday from noon-3pm until it's rented. That way you dont have to open up the house for 'looky-loo's'

Hold open houses.  I usually do every Saturday from noon-3pm until it's rented.  That way you dont have to open up the house for 'looky-loo's'

Alan Grobmeier · Answer

Not really a math thing.  I look at cashflow.  If properties appreciate in value, you have to look at the equity vs the cashflow.  For example:  a 'dog' appreciates by $80k.  It cashflows $250 a month.  Do you keep it or not?

The 'better' question is to ask:  Would I pay $80k for $250 a month 'forever'?  If the answer is no, then the house is a 'sell'.

A 'good' property appreciates by $100k, cashflow goes from $100 a month to $400 a month.  Sell or not?  A much more dicey question.

There are a zillion other things to consider as well:  30 yr mortgage, 15 yr mortgage, how far into the mortgage you are, do you like the house, is this a 'leader' or 'laggard' area, etc.  In some cases you MAY pay $80k for $250 a month because you know the place is growing like crazy.  ALL of these become variables/considerations.

Hope this helps.

Alan

Jim Sestito · Answer

@Ryan McKean im not local but I can bet most will tell you '3 miles from campus' is too broad to get an accurate rent estimate... #BRs Baths and narrow location will be able to help there... jump on zillow, or trulia and see what other LLs are asking for in the area where you are looking...

Kevin Phu · Answer

You are looking at ~1000/mo give or take. That area is not UofA rentals.

Ryan McKean · Answer

@Alan Grobmeier I appreciate the wisdom, thank you. I realize I will make a ton of mistakes with this, but I hope my mistakes wont cost me too much, either! This might be asking a lot, but if you wouldn't mind sharing the criteria you follow when deciding to hold or sell, I would love to see how you work this out.

Alan Grobmeier · Answer

@Ryan McKean, I am at the end of my career.  I've already 'retired' twice.  LOL.  Third time will be the charm.

What I try to do is come in with enough down that it will ALWAYS cashflow positive.  Most of my places now have LTV of 40-50%, but it wasn't always that way.  I had properties that were 100% free and clear (inherited), while other properties were 'negative cash flowing' despite 20%+ down.  :-(

I made a decision which properties in my portfolio were 'forever' properties (20 year horizon) or if I would sell if the numbers were right.  I then took on the painstaking task of refinancing 7 properties (about 3 years ago) and attached mortgages to ALL properties based on forever/sell.  The 'sell' properties had higher mortgages on them by about 25k (all properties are worth about the same).

Well, here we are 3 years later and I just sold one of my 'dogs' for a 100k gain.  The property was STILL positive cash flowing by about $400 a month, but I decided to take the 100k off the table.  My view is that prices are higher than they should be and I want some ca$h to weather the next storm (and hopefully come out on top).

If this is one of your first properties, I can almost assure you that it won't be a 'forever' property.  I made a LOT of mistakes at the beginning while creating a vision/system of what I wanted/needed.  Fortunately my mistakes never did cost me 'too much' (relative term compared to how bad it could have been).

As far as rents, you 'ballpark' where you think you will be.  THEN you figure 'worst case scenario'.  If you can live with worst case, it's a go.  ;-)  Time will take care of you over the long run.  :-)

Ryan McKean · Answer

@Alan Grobmeier Thanks for your response. I absolutely agree- trying to fetch a couple extra bucks per month is not worth the cost of vacancy.

The stressful part about not knowing the rents is the potential to have negative cash-flows if i cant fetch what i need. How do you approach deals with this kind of uncertainty? Do you think it is unwise to pull the trigger on the deal if I cant determine rents? I'm no doubt going to capture a lot of equity in this deal, so flipping is an option, but I would rather not.

Ryan McKean · Answer

@Jim Sestito thanks for the advice. I will keep researching rents. Luckily, I have a month or so before I have to pull the trigger on this deal, so hopefully I will find what i'm looking for.

Ryan McKean · Answer

@Kevin Phu 1k is exactly what my assumption has been when doing my analysis, but unfortunately, that wont be enough cash-flow for this deal to work out. I have seen some remodeled 3b/2b going for 1100-1300 on the high-end in this area, but i only have like 3 homes to go off of. Do you think it is unreasonable to think i could get a couple hundred bucks over 1k? do you own rentals in this area?

Does it cash-flow in Tucson?

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