Does single family work in the Phoenix area?

Question

Hey everyone! I am new to the valley and am trying to get a grasp on the market. I'm curious if new investors like myself are able to make single-family work as rentals. With the average home cost being 250,000plus with rents that don't seem to even cover the loan payment how are investors here making it work and what areas are you able to accomplish this in? Looking to make connections in this area. I love to talk about real estate, and creative finance. Thank you in advance!

Ryan Hoover · Answer

@Alan Robert Litz In my opinion as a Realtor and investor in the valley, the real appeal of SFH investing is in the appreciation.  That may sound like blasphemy, given that cash flow is the primary goal of most investors on this site, but listen to most long time investors and see where they made their money.  Even if you get a break even deal at 20% down (not advising by the way, just making a point) you are getting principal pay down, depreciation, and appreciation each month.

If you purchase a property at $300k with 20% down, you have $60k invested.  With a conservative appreciation rate of 6%, you gain $18k of equity the first year and compound each year.  Invest the same $60k in a 10% return (pretty aggressive) fund and you are earning $6k the first year.

As a native, I’m betting on the area for the long term. If you only want cash flow, may not be the right strategy for you, as a few of my properties only earn $200 a month. But if you have a long term outlook, Phoenix area has everything you want at a decent price point.

Ryan Swan · Answer

@Alan Robert Litz they work with the right amount of down payment equity to lower the PITI and boost the cash flow. Think of it this way: I could have put 75k into a REIT in November '19 paying 7% interest, but that may now have lost 30% of it's value post covid, and could go down even further (especially if it's commercial real estate heavy, which is getting hammered with vacancies and no rent payments).

Or I put the $75k towards 25% down payment (or more with a lower purchase price) and should have enough equity to be cash flow positive on the right SFH. Cap rates in Phoenix are lower, but a lower cap indicates stability. Investors chasing 10 caps in the rust belt need to realize those are risky investments with much lower chance of appreciation as well.

Stone Jin · Answer

I would agree with @Paul Hansen.  The SFR on MLS as on buy and hold rental would only break even with 20% down.  With that said, there are wholesalers in town that occassionally will have a decent deal for buy and hold.  Just network and get on as many lists as possible and wait for the right deal, but make sure you are ready to act when the deal comes in though.

Matthew Terry · Answer

I agree with all here. You can look at areas like Laveen, Buckeye, Casa Grande, Apache Junction, Maricopa, etc and find lower price options. 2/2 are more affordable and may have better RtV. As someone mentioned, you can always put more cash down to create better cash flow. If you want to venture out from SFH, there are several multi-family opportunities with 5-6% CAP rates that are under market rents. Like someone also said, appreciation is key. Phoenix is a very job diverse market, massive population growth, the standard of living is relatively low (aside from real estate), there is a major supply shortage of "starter" homes and costs are high to build new homes which all create higher property and rent prices. Maybe network a bunch and find some investors interested in a partnership on a $300K house so you only need to put $30K in and spread the risk out and have more capital to deploy later. If you are only making $100 a month in cash flow, that maybe $400 a month in 5 years.

Off-market deals are pretty easy to find once you connect with wholesalers and brokers and there are still a handful of hard money lenders to leverage cash purchases and conventional lenders with 6 months or under season periods to refi fast.

Personally, my strategy is to buy 10-20% of my properties in Phoenix for appreciation and the other 80-90% in better cash flowing markets with lower prices and use cash-out refi on my phoenix properties to fund purchases in the midwest and south.

Of course, betting on appreciation with absolutely no guidance as to what the future holds because the world has never been in the situation in modern history is a risk you may not be willing to take. Make sure you have plenty of cash reserves. I personally keep 6 months of mortgage payment plus $5K for unforeseen capital expenses. Phoenix appreciation and rent increases outpace much of the nation, so it may outpace the fall as well.

Drew Hittner · Answer

@Alan Robert Litz To find what you are looking you may have to expand your Phoenix area to a 2 hour drive radius.

Daniel Pitner · Answer

@Alan Robert Litz I've found some success in short term rentals here in the valley.  You're right, the numbers don't work very well for cashflow on a traditional, SFH rental.  But in the right areas (Scottsdale, Cave Creek, down town Gilbert, etc) short-term rentals can give you unbelievable cash on cash returns. This, however, comes with a down side. It's much more hands on AND STR rules and laws could change at any time.  @Ryan Hoover has some great input here on appreciation,especially the way our market is moving even in-spite of COVID.

Paul Hansen · Answer

I was recently looking at options here since I am originally from Phoenix and have one investment there. In Phoenix, these days, you will not be able find much of anything on the MLS that would work as a solid investment that provides better returns than you would be able to get from other investments (bonds, stock market, etc.). Many of the deals I see are handovers from other investors at lower cap rates than most investors would be willing to accept so it would be wiser to seek out properties in better markets. If you could find a very distressed property in an area like Maryvale for example, that might be worth looking into. I see some have sold around $100k and flipped for a resale of $225k. If you plan to rehab and hold as a rental, I would plan to pay cash then BRRRR to get the best possible returns; however, this requires a lot of capital for a new investor, and BRRRR may not even possible (or hard to find) in the post COVID-19 economy.

Tyler Clark · Answer

In single family homes you can expect about .5% of rent off your market value in Scottsdale. In lower-income areas you mabe be able to get closer to 1%, but I would not expect to get $1000 rent/month for every $100,000 - it will take having a really good deal on the flip with your contractor.

Does single family work in the Phoenix area?

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