How to make the numbers work - 2022 Wilmington NC

Question

Hey bigger pockets community!So about 2 years ago me and some friends invested in this property in Wilmington nc. It's a condo off of S kerr ave. Our criteria was 150+$/m in cash flow, accounting for 8% vacancy and 8% repairs and 8% management fees.2 years later, I've been looking for weeks at similar units in size and age in the same area and everything I'm seeing no longer fits into my initial metrics. There is almost no Cash on cash returns, and generally negative 100 to 25$ cash flow. making them look more like this:Full breakdown here. https://www.biggerpockets.com/...My question is, what long term numbers are investors in NC looking at when viewing properties? For example, Is there a 10-year return mark that perhaps people are now using to price condos on the market? Is there a favorite number you look at when viewing condos or townhomes specifically?My investing group is looking for 2b2b or 3b2b condos between 90k and 160k that rent for 1200+/m We own 2 and are looking to add more base hits to our portfolio. Thanks!

Grayson Spittel · Answer

Yea, take a look at those numbers as though it is a SFH without a HOA payment every month and look to see what the cash flow is per month. Condos are rough in my opinion because even if the #s do work with the HOA payment, I guarantee you that the HOA payment will increase over time, often times at a rate that isn't linked to the market or to rents increasing as well - can be related to needed capital expenses, landscaping improvements, hurricane repair, increase after several years of flat. Too much I can't control with that!

Jason E. Smith · Answer

Josh, where did you come up with 8% for vacancy, management and repairs? And in your first image you only allocated 5% to vacancy and 5% to repairs (both too light in my opinion) and I don’t see any capital allocated to HOA which typically is a major percentage of expenses in any condo. Management contracts will typically have an 8% ongoing fee, but they will have additional fees for finding a new tenant, overseeing large projects and possibly a fee for signing a lease renewal. My experience is over ten years management total fees are typically closer to 12%. I also don’t see any capital allocated for CapEx. A brand new class A property you would be hard pressed to have less than 35% operating expenses (not including debt service) over a ten year hold period. B class properties in good areas are going to be closer to 50%. And C/D class properties can quickly exceed 60% operating expenses. As for people who are buying today and how they are calculating cash flow, the simple answer is they’re not. At least not in a well calculated manner. Right now real estate is the popular asset, along with high tech growth equities, so everyone is trying to win the popularity contest. And they know someone who made a bunch of money in real estate the past five years, the markets been going up for over ten years and so it looks easy. Essentially right now it’s a race to the bottom and we aren’t competing. All of our capital moved into precious metal space in March of 2018 and we’re still confident in that sectors ability to out perform US real estate and US equities over the next two to five years. So I would proceed with caution if you still want to continue purchasing in this real estate bubble. Best of luck! Jason

Bob Anthes · Answer

I agree with what everyone else said re: condo’s I stay away from them. I’ve done pretty well with SFH in Wilmy.

Anthony Johnson · Answer

I have been looking I have been looking all over this area for months. The deals are almost non existent. But market is really slowing down. Construction hit a major pause in the last 2 months. I would look to see a correction on the horizon. So hold off a few months and see where it goes. I have been a contractor in Wilmington since 2007 and I’m seeing some major slow down. Good luck

Wes M. · Answer

I second the comment above. I would stay away from condos here unless you get a killer deal. For long-term rentals, look to single-family properties in need of some work and cosmetic updates. They are few and far between on the MLS, but can still be found off-market by doing some marketing. We have an influx of families moving to the area and if you can find a property that is suited to that demographic you can likely make your numbers work.

Tom Wagner · Answer

I would be very careful analyzing a deal with leverage involved, as levered IRR can be distorted by increasing your LTV.I instead analyze deals based on the going-in and pro-forma cap rate. I watch the market carefully and analyze deals as they close to see what the market cap rate is.And stepping back, a 4.47% cap condo in Wilmington does not sound like a good investment. For older builds investors are unearthing 5%+ cap's in NYC/LA/etc -- so I think the hurdle for Wilmington should likely be >= 5.5%

Josh Bowman · Answer

Thanks for the replies guys!The one thing that gives me pause when looking at deals right now, is that even for ones with almost no cash flow I'm seeing a 5-year annualized return of about 11-12%. Is that a number that anyone looks at for longer term rental investing?For example in my 2 deals above #1 has 10% cash on cash return and #2 has essentially 0, but then 1 has a 5-year annualized return of 35% and #2 an annualized return of 11%11% year over year doesn't sound terrible if I remove everything else from the equation. Does anyone look at that metric similarly? Am I thinking about that correctly do you think? Thanks again!

Josh Bowman · Answer

@Grayson Spittel I totally agree that it's difficult to not be able to control the HOA and that man do they go up each year! However, with the two that I do own the rent has also been going up the last 4 years and they have been cash-crunching machines compared to some of the SFHs around here that I had considered buying at that time.Ex: I bought a condo 4ish years ago in wilmington, cape cottages 809 march court for 100k, 180/m HOA, and 1100/m rent.It's now worth 185k, 240/m HOA and 1300 rent.To get similar rent for a SFH I'd have had to about 100k more in a house. I've always had trouble getting enough rent to cover the costs of SFHs around here at that 1100->1400 rent range. Would love to see or hear of what you look for in SFHs when you are specifically looking to rent them. What numbers you like to see in CoC returns or cap rate.

Jashy Bowman · Answer

Jiri B. · Answer

In my opinion, condos have horrible appreciation over time and considering we are at the hight of the real estate market, I don't think going for negative cash flow in this case is a good idea. The one way i would personally consider condo at this market is if I can at least have a very good cashflow out of it.Of course, you can just put more money down to offset the cashflow but at that point, you are just making yourself feel better about bad investment.If condos are your thing, maybe look into some that need improvements / rehab which would allow you to purchase under market value, get extra equity and increase the rent once you fix it up.