There's a market for this HERE? High end SFH rentals?

Question

I was kicking around on Zillow today, and noticed that there's a surprisingly large amount of properties (currently 21 for rent right now in Raleigh) for rent between $2500 and $3500. That seems crazy high for Raleigh, but it seems to be fairly popular, at least from what I could seen on Zillow. Anyone here have their rental business built around these high end SFH rentals? What kind of cash on cash returns are you seeing? How much did your properties cost you in purchase+renovations to get them rent-ready?

Chris Martin · Answer

@Matt Rothwell regarding "There's a defined shortage of units in that price range, and I think that the money to be made in that market is in building, rather than renting." Did you pencil this out or are you just speculating? I've done Alteration Permits in Garner, Fuquay, Apex, and Wake county. The inspectors in Garner were great. Raleigh? No thanks. New construction? No thanks.Don't forget about their 36 pages of fees associated with any development. Permits for water and sewer alone were about $7500 if I remember right. When total fee and permit overhead is approaching 15% of your target cost, and that is without touching a tree (add a few percent to well over 100% of your costs depending on your lot), I'd say the days of the cheap and small builds are over. My opinion, obviously, so I would consider building in another city (e.g. Garner) or county (e.g. Harnett or Johnston) where development fees (and fines (e.g. tree)) are more reasonable and you can build smaller and still make a profit. It's still generally cheaper to do alterations on existing vs. new unless you are planning to build subdivisions. But there aren't cheap subdivisions anymore, unless you call a MHP a subdivision;) Or mini storage. LOL!

Chris Martin · Answer

High end homes in the Raleigh area are almost all Owner Occupied. This area isn't SF or SD or NYC. So, yes, I agree with you in part. The people I've met in this space were all accidental landlords (rented their place to recoup something while the property was for sale). There is a market for this type of property... a market for others, not me. I have yet to find someone actually planning to buy big to rent out, for precisely the reason you state - the cash flow will be negative after modest leverage.

Matthew Tringali · Answer

@Matt Rothwell , we have a property management office in Raleigh and I think all of our rentals in that price range are accidental landlords as opposed to intentional investors. With that in mind, we don't often dig into their debt service and cash on cash return in those cases. But, they have done the calculation and decided it is better to sell than rent, for whatever that is worth. I think it would be trickier to purchase a property in this market to turn into a rental in that price range on purpose though. Personally, I think the sweet spot is targeting $1200-1600/mo rentals.

Kory Denny · Answer

This guys above me have told you everything you need to know. There are not investments but "safer" places to park capital for some. Cash flow is you're safety net. If these properties are financed they at best break even each month (with PM, CapEx, and vacancies factored in) I'd assume. Then you have those who put their faith into appreciation. I think most investors know where that road will lead you. That's not to say money can't be made in that market but it's more similar to gambling than investing imo. Thanks for the great topic.

Jay Hinrichs · Answer

@Chris Martin sub 200k I only see in Texas type market were land is very cheap and plentiful and they throw them up in 3 months for 50 to 60 a foot.. I see some new stuff in Memphis about 150k ish..out our way forget about it.. we are pretty much 100k per lot 20 to 50k for permits before you go vertical. 300k is the new 200k ... and in our market its really the 400k is the 200k.. sad but true.. our govmit keeps addition fee's and conditions that are passed on to the consumer.. even though the big bad developer takes the blame you can point your finger right at the system developement charges and planners

Thomas S. · Answer

High end homes are not purchased to make cash flow they are purchased to park large amounts of cash for future use or speculation on appreciation. There is no way the rent on a high end property would ever be high enough to actually produce anything except negative cash flow. The math simply does not work.

Tiffany Alexy · Answer

I've wondered the same thing. For some international investors it may be a case of not necessarily caring as much about the return but more of an inflation hedge/protected place to keep money. For instance Chinese investors typically buy properties cash and consider real estate a "safe" place to hold money (rather than the bank). Don't know what % of what you're observing is due to that, but it's one possibility.

Matt Rothwell · Answer

@Matthew Tringali, I was kind of thinking the same thing about the accidental landlords, that's why I asked if there was anyone on here doing it intentionally. The thing that attracts me to the higher end instead of the $1200-1600 rentals is that the ~$100k homes market is really really really fierce here in Raleigh. Houses are sold hours after they go on the market, and there's not much room to get a discount off of market value. There's a defined shortage of units in that price range, and I think that the money to be made in that market is in building, rather than renting.With the higher end homes in Raleigh though, they sit on the market for a couple weeks and sell for less than list. I'm thinking it'd be a more relaxed process, and with less competition, since there aren't many people out there buying a $400k home with cash. The math sort of works, a $400k home has a ~$1900 PITI, and could maybe rent for $3000, so that's a ~16.5% cash on cash return before maintenance and management with a 20% downpayment?

Chris Martin · Answer

There is nothing wrong with being outside the box. Late last year, I was looking at building a small MF property not in Wake county. It's hard to make the numbers work when your construction costs are over $100/sq.ft. and existing structures are under that, some well under that. But in Raleigh where entry properties were $80/sq.ft. a few years ago, that number has mushroomed into $100+, and some places well over that. A quick browse of realtor.com today shows that about 80% of property listed at $125K and under has a contingent status, about half of the 20% are tagged as New. Supply and Demand. And very unlikely there will be any substantial sub-$200K construction in the near future. There is some in 27610, but not in big quantities (13 in April, 23 in February, etc.) and all other zips are infills, not subdivisions. Framing costs (central NC) are also up over 10% over 2016Q4. And labor shortages persist... harder and harder to justify building anything but big and at the top of the bell curve.

Jody Schnurrenberger · Answer

Raleigh is about $3B in debt?!? Are you kidding me? That is NOT good! I find that very concerning. I wonder what it looks like if a city economy collapses. Detroit?