NC RTP/Durham, Raleigh open forum - thoughts?

Question

Looking to start a thread to discuss current events in RTP/Raleigh-Durham and it's impact on local real estate. We clearly see an uptick of demands & low inventory. Especially with investment properties, it's hard to break even the 1% rule; there are so many strategies out there to go around this (house-hack, partner, etc.). We have Apple moving here in RTP, with many high-tech/pharmaceutical companies, with the recent addition of RTP Boxyard (pretty cool!), I see a lot up and coming.

Anyone have any further observations/top of mind in this market? Would love to hear your thoughts.

Anyone have any further observations/top of mind in this market? Would love to hear your thoughts.

Chris Martin · Answer

The issue I have is that, indeed, a person could possibly find a 'deal' in this market... but the opportunity cost is too high. My analogy is fishing in a now crowded 'favorite' spot. If crowded, I tend to go further upstream, until that spot becomes crowded. It's about that point when I pack up my gear and plan for another day. Stay fishing... on your own time. No luck? Don't blame me. For me? No thanks, time is a precious commodity.

It wasn't that long ago when the market was more rational and prices were not inflated. Two current items to keep in mind: it's highly possible that lumber commodity prices normalize, and interest rates increase off of record lows. The first part, lumber getting 'normal' is underway. The Chart below (URL credits are in the images for you lawyer types) shows the action. Rates are still at historic lows, and the Fed has hinted that hikes are in the relatively near future. Rates are going to increase.

When rates increase, housing affordability will suffer. Those who bought new homes when lumber was at the peak... they potentially overpaid. I'm not saying end of the BOOM in local housing prices is within any fixed time like the next year or so, but as a casual observer, I'm not really interested in buying when the odds are against me. At this point, they are. I (and my company's fellow members) don't get subsidized rates (too many FNMA mortgages) like newbies and I pay market rate with commercial loans. So every acquisition I do must be accretive to earnings... or why would I play? Yes, I am spoiled. Sorry. I'll stick to my own discipline and wait to play the game on my terms. It's possible that for me the game is over for Residential RE investing in this area, where prices may go to infinity (and beyond). So be it. No complaints. I've missed lots of investment boats. I lived through, while invested in Wake county RE with significant leverage and uncertainty, the 2001-02 recession and the GR (Great Recession) of 2008-10. Fortunately I am still standing.

Raleigh and central NC is a great place to invest. The market is stable and returns mirror inflation. But timing is everything. I've been right and wrong. To sum it up, this current time reminds me of 2005-06. With 30+ years investing behind me and at my age I'd rather be safe than right. As I've said for almost decade now, my 2 bitcents.

Peter K. · Answer

I agree, at some point, it'll have to expand as supply gets exhausted in RTP. I already see outskirts (Apex, Holly Springs, even as far out as Mebane) growing.

Vinay Kolluru · Answer

What direction do you see growth out of RTP going? At some point, the spillover into surrounding counties is inevitable.

Sara T. · Answer

I made a trip from out of state down to Raleigh a few months ago, stayed for around 9 days to familiarize myself with the city and to look at some properties, by the time I left, almost all the properties I saw were gone, lol. Prices seem high too for what you can get as return, maybe I wasn't looking at the right places. But then I am also a newbie and didn't know what I was doing. lol.

How is it right now? I'm still interested in Raleigh / RTP, but I'm not sure if the numbers are reasonable.

Jaymin Jasoliya · Answer

@Sara T.

I did the same. I am in similar boat.

I honestly suggest to keep looking. Market has showing some signals of slow down. Current prices are unreasonable. The area has potential but, wrong move in real estate could cost more than profit.

Peter K. · Answer

- Absolutely, agree with your comments there Patrick. You have to be creative in this market to stay ahead of the pack. Definitely having a GC in-house helps.

Chris Martin · Answer

First of all, great post. Starting with the last paragraph first, regarding "Game is over in the Residential RE investing in this area", please let me clarify that I put the context in bold in my post: "It's possible that for me the game is over for Residential RE investing in this area..." As an investor, I still have interest in and hold a variety of real estate, from SFR to apartments to undeveloped land to a solar farm. As for residential real estate, in the current market there are not a lot of potential acquisitions that are appealing for me.

Second to last paragraph... Regarding opportunity cost, yes, you spell out very well the benefits many people consider for investments: tax savings, appreciation, tax shelter strategies, recession-proof investments. I would contend that, overall, residential real estate scores well on these points. Add to these benefits the following: low barriers to entry; high leverage via easy to obtain financing; centralized (most of the time, personal) decision (and control) making; stable and uniform 'product' standards; regulated sales/broker industry (NCREC). The bottom line is residential real estate is an easy game to play, and that's why so many people play it. There is nothing wrong with that. But the bottom line is there are alternatives to residential RE investments. This is a residential RE environment where overall returns on invested capital are less than prior times. It's hard for me to rationalize a mediocre deal to myself or other partners, so I don't do it. BTW, I know some people don't mind impairments like negative cash flow, and for them this may be a great market. But I'll wait for better opportunities and/or shift focus to other games.

Peter K. · Answer

1- Absolutely agree that is the case for you & that is OK - we each have our own comfort level :)

2- I would elaborate to say "residential real estate is an easy game to play" = IF you know what you're doing (or find one/partner with one that does). I've seen individuals going into residential RE without the foundational knowledge and really put themself in a pit. But for the most part, if you've been in this space for some time, it's definitely not rocket science. I totally get why you or your partners may rationalize a mediocre deal - it's not worth your time. On the flip side, it may be worth it for someone else - so that's subjective to different individual(s). I agree overall returns on residential homes are not the rates we've seen in the past where we easily saw 20%+ CoC returns. But hey, at the end of the day, 5% ROI is better than 0% ROI in my eyes - especially if your cash is just sitting there losing value to inflation. Just my two cents. Ultimately, it comes down to individual's goals & their comfort level.

Peter K. · Answer

@Chris Martin - first off, love your in-depth analysis (and your analogy - ha!)

There are key things I agree:

- "Fish in a crowded favorite spot" analogy = Absolutely. As an investor, you have to stay on top of market trends and be agile. This not only applies to RE investing but applies to any investing.

- Every investor has a spectrum of risk appetite = I agree you sticking to your own discipline and wait to play the game on your terms. You have to stick with your strategy and what you're comfortable with. It may not be the case with everyone else, but you need to stick by your strategy.

- "Raleigh and central NC is a great place to invest. The market is stable and returns mirror inflation. But timing is everything" = Absolutely. There's still room for growth in this locale and I think more and more investors are looking in this market - which makes sense to me. Only time will tell - in the meantime, numbers don't lie.

I do want to brainstorm a bit on some other key points you've mentioned:

- Opportunity cost being too high = I get where you're coming from. Saturated market, high RE prices, etc., leads to lower yields to investors and they may have better opportunities investing elsewhere/another investment vehicle. Say, for example, an investor chose to go with the stock market with an avg 7-10% return annualized - they could potentially be getting a better deal than investing in RE - yes. But if you look at the total ROI (tax savings, appreciation, tax shelter strategies, recession-proof investment, etc.) - even with the deal returning lower than 7-10%, in the end, may come out in an investor's favor. Now, there are many other variables to consider (eviction moratorium, government regulations overall, etc.), so you really gotta look at the overall risk appetite you have as an investor. Thoughts?

- "Game is over in the Residential RE investing in this area" = I'd like to play devil's advocate and ask - if it's over here (in your opinion), wouldn't most other states be on par as well? There are markets across the country that fare "worse" than NC from market trends (think Arizona, Texas, Colorado, etc.) from an investor perspective. Prices can work both ways as well - infinity (and beyond) can work in upward swing OR downward, and there's no way to predict the future - so be it. I still do see plenty of opportunities if you craft your strategy appropriately. From my observations, I see many investors actually shift their strategy from residential multi-family (2-4) to SFH's. Some are faring quite well surprisingly enough. Ultimately, if the numbers make sense (for an individual/group), I don't see why not pull the trigger. Thoughts?

Jason E. Smith · Answer

So Peter, would you say there is a shortage of inventory?  Or is there a surplus of fiat currency?

NC RTP/Durham, Raleigh open forum - thoughts?

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