There's a market for this HERE? High end SFH rentals?
Investor · Arden, NC · Member since 2013 · 87 posts · 35 votes
There's a market for this HERE? High end SFH rentals?
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Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
9y@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 . 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!
18 Replies
- Property Manager · Charlotte, NC · Member since 2017 · 68 posts · 39 votes9y
@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.
- Investor · Arden, NC · Member since 2013 · 87 posts · 35 votes9y
@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?
- Property Manager · Charlotte, NC · Member since 2017 · 68 posts · 39 votes9y
@Matt Rothwell , that is a great point about scarcity. PITI sounds correct. I would budget 6% for management, 5% for maintenance (can adjust depending on the actual property found) and 8% for vacancy cost. Vacancy cost in that rent range would actually be higher than normal because you will have more frequent turnover since the typical tenant will be a corporate relocation who is renting for a year while they look for a place to purchase. This also will have an impact in your maintenance / CapEx cost since you will have more frequent make-ready costs. But, in any case, it looks like your net income will be: ~$1340... less any potential HOA. That is a very healthy cash on cash return. Could be a good plan, I would just plan conservatively around the frequent turnovers I mentioned.
- Real Estate Broker · Durham, NC · Member since 2014 · 236 posts · 168 votes9y
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.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes9y
@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 . 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!
- Member since 2016 · 13k+ posts · 12k+ votes9y
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.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes9y
Originally posted by @Thomas S.:
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.
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.
- Inspector · Raleigh, NC · Member since 2017 · 55 posts · 25 votes9yThis 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.
- Investor · Arden, NC · Member since 2013 · 87 posts · 35 votes9y
@Chris Martin: Oof, I guess building isn't the way to go right now in Raleigh. That sounds like a giant pain in the ***.
@Kory Denny: Yea, I think this idea is a dead end. The values of the homes renting high are higher than $400k. They must be trying to limit the bleeding by renting.
Ah well, sometimes thinking outside the box only gets you...outside the box. On to the next bright idea, right?
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes9y
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 , 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 ... harder and harder to justify building anything but big and at the top of the bell curve.
- 9yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
@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
- Property Manager · Raleigh, NC · Member since 2014 · 728 posts · 596 votes9y
I do not have rentals at this price point, but some of the houses around me were purchased ($350 - 400k range) as rentals. They rent for $2 to $2.5k. They generally have international, or people looking for short term housing while they either build a new home, or renovate existing home. The houses have been rentals for at least the last 10 years. They seem to turn over more than my rentals in the $1,200 to $1,500 range as my tenants are looking for a place to live for a few years as opposed to waiting for house to be built or renovated.
As for new builds in Raleigh, my real estate agent says that the government is not really granting SFH at the lower end of the market, but large apartment complexes. Driving around, I think she is correct. There are many large apartment complexes going up, but few to no entry level housing developments.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes9y
Regarding "As for new builds in Raleigh, my real estate agent says that the government is not really granting SFH at the lower end of the market..." I'm trying to get my head around this. Are you implying that homebuilding prices are a product of government regulation and not based on economic and market forces? I talked to a builder earlier this week about a development project I want to do, but not in Wake county. He builds in Wake county, specifically (lately) Holly Springs. The permit costs and development fees for his 12 parcel project exceeded $260,000. That's over $21,000 per house as overhead. Then add in $50K for 1/4 acre parcels... and you see why it's hard to make money when fixed costs are so high unless you build $400K+. In Johnston and Sampson county there are MLS listed new construction under $175K from $76/sq.ft (!) to $110/sq.ft. Not many to choose from, but way different than the capitol (and capital;) city.
Cheaper land and lower overhead costs = ability to build quality houses for less than $200,000. Look for more explosions like at 40/42 (the "real" Cleveland. LOL!) Lots of raw dirt today will be good margin houses and apartments tomorrow.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes9y
@Curtis Mears ... couldn't get a working @@ in prior post... I'm not aware of county or city denying permits based on permit value. I'd be really interested to see if this is happening though, since I do have some target infill projects that I may consider 2017Q4 or 2018Q1.
- Property Manager · Raleigh, NC · Member since 2014 · 728 posts · 596 votes9y
My information came from my real estate agent, so I do not know how reliable the info is. It could be that the overhead costs are so high that it is not feasible to build lower end housing. But if that were the case, then I guess you could say that government is impeding the market by pricing lower end housing out. Also, I have to think the government bodies look at tax income, and I think (again, I have done no research to back this up) larger apartment complexes probably have higher annual tax bills. Based on observation, we definitely have many large apartment complexes going up, and very few lower end SFH.
- Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes9y
Raleigh has lots of bills to pay ($164M in annual DEBT financing, $176M to public safety, etc.) and who better than
people who currently pay $143M in "Fees and Charges". And the has bigger fee revenue for the city than now.The interesting thing is I don't see in a 'balance sheet' for the city. It looks to me like the city has about $3B ($3,000,000,000) in debt. As you point out, Expensive land + high overhead + bigger places = higher revenue and higher spending. No sign that anything will change. As Jay points out, $300K is the new $200K.
- Franklinton, NC · Member since 2017 · 17 posts · 7 votes9y
Definitely seeing the apartment complexes outpacing the lower end SFH in Wake Forest.
Youngsville/Franklinton is seeing some major development of the lower end SFH communities ($200k - $300k). I would speculate that it is driven by lack of inventory in Wake Forest.
- 8yJody SchnurrenbergerPro MemberInvestor · Asheville, NC · Member since 2017 · 506 posts · 404 votes
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?
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