First Buy and Hold, Mid vs. Low value area?

Question

Hello friends,

I'm looking to restart my portfolio and wanted to see if anyone had opinion on geographies. Most of my looking has been in Utah and south SL counties, midrange ~200-300k SFHs. Growth is projected at 4-5%, homes typically <20yrs old. However, there are other areas in Utah with significantly lower prices, such as cache valley, west Weber county. I have capital for around a 300k deal. For a buy and hold Do I get more bang for my buck in a lower value area? Or is it all a wash?

Douglas Larson · Answer

Hi @Grant Keaton. Welcome!

Just my 2 cents...

Because you said the word "portfolio" I assume you are just talking about buy and hold rentals. For buy and hold, I prefer SFRs under 200K that will bring close to 1% of total asset price per month in rents. (e.g. buy a house for 130K and repair for 10K. Rent is $1395 per month.) These kinds of deals are getting harder to find but I still see them in Salt Lake, Davis and Utah counties. I know several investors who have branched out to Weber and Tooele to keep within those numbers. Older homes in decent areas of West Valley, Kearns or Taylorsville may need ongoing maintenance but I still find good quality tenants and price appreciation has been fantastic! Also, when you choose to sell an SFR under 250K right now, it's got multiple offers on the first day. (That's a seasonal thing so don't count on that in November.)

When you buy and hold in the 300K plus range, it's hard to get rents even close to the 1% rule but newer, nicer properties in newer, nicer areas can bring better tenants and less stress, while still giving nice appreciation over the years.

A lot of RE investing is about your personality and what you want to do. I self-manage most of my properties. Last week I dealt with one plumbing leak, one late rent payment and a garage door that came off it's track. I also went snowboarding on 2 awesome powder days and I was able to eat dinner with my family 6 out of 7 nights. I haven't needed a "day job" in 12 years. It totally works for me.... but Grant Cardone would probably call me a sissy!

Thomas S. · Answer

It is generally a wash as the advantages of one balance out the advantages of the other. Bottom line it depends on what type of landlord you choose to be.

It also plays into a investors priorities of speculative appreciation investing compared to cash flow investing.

Sam Levin · Answer

Great question Grant. Buying pre-construction (or buying during construction) already provides me with substantial "free" equity upon completion. When done correctly this can easily equal or exceed the $ value of buying something used and rehabbing it, without any of the time, effort, complexity and $ uncertainty (hidden defects) of that process.

It might be useful to think of it like buying fleet vehicles for a transportation business. You could buy used and potentially mistreated vehicles and have them painted and tuned up before putting them into service in the hopes that there won't be expensive repairs lurking beneath the surface (PS - there will eventually be a lemon which could potentially ruin your whole business). If you could actually pre-order the fleet an pay wholesale directly to the mfr at a cost per car equal to or less than the cost of the former scenario, AND get the full mfr (builder) warranty on them, wouldn't that make more sense?

It's also easier to lease the new units and they will fetch the high market rate, thus attracting a more affluent clientele that is much more likely to pay their rent and treat your assets with respect. In short, I can see many reasons why buying used could go wrong, none of which are present when I buy new. It's worked great for me so far and I will continue doing it. Here's the current situation:

The fourplex I bought upon completion in December 2016 for $550k is now already worth $645k (actual sales comp from identical building) and I haven't put a dime into it. The duplex that I am closing on this week for $410k will be worth $460k+ by this summer when the development is complete and landscaped, same $0 capital investment. The triplex that I have under contract at $525k in American Fork will be worth $650k by next summer when it's done and has grass around it, and I will spen no time or money worrying about repairs, contractors showing up, etc. All of them came with a builder's warranty. Life is good!

I'm in the investing business to create personal financial freedom not to take on a 2nd full time job as a general contractor. If you'd like to talk more about this and see these examples in real life please let me know. Helping people make the best real estate investment decisions is what I do all day, and most nights :)

Becca Summers · Answer

Yes I mean forced appreciation. I buy a property under value renovate then rent. Renovating is part of the acquisition cost then my month matanice is lower.

Becca Summers · Answer

@Grant Keaton that is a great question. I personally invest in North Utah County and South Salt Lake county. The reason? I like the renter population and how close it is to my home. These areas tent to have a lot of rental demand and good paying jobs. Also with the age of the homes (and how I buy them) the repair budget is lower than if I went of the older cheaper properties. If I where you I'd be looking at the rent rate vs the purchase price and what the renter pool would be to make my choice. Are you going to self manage if so Cache Valley might be a bit of a drive when things break.

First Buy and Hold, Mid vs. Low value area?

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