Have your parameters for new purchases changed in 2023?

Question

In the last two years, home prices have gone up 30-40% in my area and rates are at 7-8%+. It seems like the only options are to either sit on cash and wait, or buy using different parameters than in the past.

I used to only consider a purchase worth it if the numbers worked as an LTR, imagining they can ban STRs tomorrow. Are you still following this rule yourselves, or has that changed? I live in a state that has outlawed local municipalities from regulating STRs, so it's pretty safe, but who knows if state laws change one day.

Next is the numbers. I used to find cap rates of 10% or higher. Now, it's more like 3-5% at best. Cash flow is still solid and Gross Yield is 12%. Should I change my standards to continue to make things happen? Is this just the new normal and new risk we have to take on?

I used to follow a "15% rule" where I wouldn't buy unless the gross revenue was at least 15% of the purchase price (e.g. Gross Yield). Now it's lucky to find something that hits 11/12%.

Lastly, the vacation market, while still strong in my area, has cooled off and numbers are down 20% this year compared to last. Still, even adjusting for this, the cash flow is solid and the yield is 11-12%.

I'd love to hear from people still buying in this new market and to learn if you have changed things to keep it moving.

Brian Barch · Answer

In a somewhat weird way, I don’t mind higher rates. They keep the competition down and force me to underwrite under the worst of conditions. To some extent I try to ignore them, and just underwrite the numbers.

To me I’m more concerned with buying good properties in good areas.

One thing I won’t do is buy a crappy property just because it cash flows. I personally want to be proud of the property a decade from now

Alex Scattareggia · Answer

This has always been my golden rule as well, and I think it will continue to be the conservative and measured approach for people that want to last a long time. However, when I say what ¨works¨ as a LTR I have gotten a little bit looser about what that actually means.

If it didn´t pencil out as a cash flowing LTR in the past I would have said that was a pass. But with rates where they are now, a break even or even slightly negatively cash flowing LTR might be enough of a safety net for me to buy if the STR opportunity was good enough. There will be refinancing options + rent inflation (even if it inevitably slows down) to create future cash flow. And at the end of the day the LTR component is only the safety net. If an STR makes sense, it will always be the superior income generator.

Chris I. · Answer

Is this any different than hard money lending?

Sarah Kensinger · Answer

There's still plenty of 15-20% COC and 10% Cap, but you have to be willing to look outside the location you live and have lots of patience. That's still our rule and every several weeks we come across a property that works.

Andrew Steffens · Answer

I am buying less - but I would not necessarily blame the rates. I am being more choosy and only purchasing STR's that will really stand out. They have have the right location, layout, and amenities or I will not bother. Even with higher rates, higher taxes, and higher insurance the best properties will still have great cashflow.

Eric Gerakos · Answer

Waiting or buying are not the only options. Take advantage of high rates by lending through first trust deeds, currently paying around 9%. When rates are low, buy property.

Michael Baum · Answer

I am similar. I still look for the 20% if I can get it.

I am flexible down to 10% if I like it and think I can increase it.

Have your parameters for new purchases changed in 2023?

Have your parameters for new purchases changed in 2023?

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