What are Durham rents like for townhomes?

Question

I'm considering investing in a rental property in the Durham area. My price range is 220-240K and less than 5 yr old construction. Of all the matches, 3 bed town homes (1600-1700 sq ft) seem to match my criteria the best.

Assuming I get a 4.7% 30yr fixed with 25% down, I'm looking at monthly $1250 payment (Principal & Interest, Property Tax, Home Insurance and HOA). I need to include a tenant finding fee and property manager fees (about $200 per month) (I'm remote investor), so total is $1450.

However, realtor.com and other rental sites show 3 bed town homes renting for $1450-1600. So in the best (and most aspirational) case of continuous rent, I'm looking at a $100ish cash flow every month.

What are your thoughts? Do you see rental prices growing in the next few years that this is a good bet (whilst there may not be immediate cash flow)?

Andrew S. · Answer

You neglected to include several items in the “cost” column.  Turnover cost (cleaning and repairs, but also typically 1-2 weeks of turnover time with no rent -  it’s possible but very rare that you can turn over in just a day or two, even in a strong rental market), then there will be service calls/repairs/appliances replacement and maintenance, flooring, painting, etc.  a condo will have less maintenance and repairs than a SFR, but it will definitely not be zero.  In reality, your projected $100 cash flow will almost certainly end up being in the negative.

There is a pretty good chance for appreciation (assuming you buy in the right location), the RTP area is a pretty save long term bet for in my opinion, but keep in mind that we are at the upper end of the market cycle right now and while long term appreciation is likely, don’t think “west cost numbers”.  There is still a lot of fairly inexpensive land available in reasonable commuting distance, so we will not see any San Francisco or Seattle type numbers anytime soon.

All that said, an investment may still suit your needs - just be aware of the whole situation.

Also, while it is true that newer constructions will need less maintenance at first, they do age and after 5-10 years, they will be “older construction”.  You are just kicking the maintenance can a little further down the road.  Year 10-15 is when a lot of those start hit (including potential HOA assessments for roof replacement or landscaping/community pools, etc)

Jonathan Taylor Smith · Answer

@Vikram Jayaram - I own several Townhouses in Durham, located within 5 different communities in different parts of town. They range in age from mid-70's to 2008 construction and required rehabs from ~$10K to ~$40K or so. These were acquired between 2015 to 2019; and I've got 3 more under contract to close within a month. They have all appreciated well (especially those obtained from 2015 to 2018) - but I bought all of them in some form of distress. They all also have decent cash-flow. Some have regular Tenants and some have Section 8 Tenants - and in Durham, Section 8 will pay up to $1,461/mo in rent for a 3BR.

I rehab my properties to excellent quality and try to address all aspects of maintenance concerns. But I think you'll be hard pressed to have positive monthly cash-flow with new(er) construction Townhouses in Durham bought at full market price - because there is no "problem" that you're fixing. I use the BRRRR method, and this can be done successfully in Durham - even from remote. Get the book on it.

John Blanton · Answer

Vikram,

It sounds like you have done quite a bit of research and your numbers sound very consistent with what I am seeing in the Durham market as well. It has turned much more into an appreciation market over a cashflow market. Demand for both affordable housing and investment properties has pushed property values much further past rental rate increases.

If you loosened your criteria a bit (older vintage, lesser price point, less desirable part of town) you could likely be able to cash flow a bit more per month but from what I have seen not by a whole lot.

The main way investors are buying rentals that can actually cashflow is they are rehabbing older homes that need a lot of work in which retail buyers would not be in competition.

Hope that helps!

Andrew S. · Answer

Look further out - I think places like Mebane, Graham or Burlington are well within commuting distance to RTP (as well as Greensboro) and will be taking off (to the extent that haven't already...)

Raleigh burbs (especially to the South, but also North and East) will explode further once the "outer loop" is done (See @Chris Martin 's recent posts regarding I-540)

Sean H. · Answer

Why would you want to invest in durham right now for rentals? Great market for flips and new construction, but I don't see the numbers for rentals. I'm getting ready to unload two sfh flips in the next month or two, a 2/2 for 200 and a 3/2.5 for 250. I could only see renting them for 1200 for and 1500, so i figured it made more sense to just release them.

Ryan Groff · Answer

Vikram, If you want to be in Durham and want to maximize cash flow, appreciation, and instant equity you should go the BRRRR method and you are going to have to broaden your year build criteria as well as be open to a detached SFR compared to just a townhome or condo. I just purchased one most recently with the following numbers within a few miles of downtown Durham, Purchase: $70k Rehab: $27k ARV: $150k rented for $1,295 per month. This was a 1969 build. I would look into this route as opposed to something new with HOA fees where it will be most likely impossible to cash flow and you will have little to no equity to start. Feel free to reach out to me if you need local contractors, properties like this, or any other help.

Andrew S. · Answer

If you are asking whether rents will increase relative to home values then, barring a MAJOR correction, I don't expect that anytime soon. I see home value increases continue to outpace rent increases, so your "2% rule", which is already below a "1%" rule, will probably end up in the "1/2 % rule" territory in the very near future.

RTP and Charlotte areas have slowly changed from "mixed cashflow/appreciation" plays to "mostly appreciation" plays.  More rural NC areas still do ok for cashflow.

Jonathan Taylor Smith · Answer

@Sean Holland - I recently completed a new build in Durham and made a nice profit. And to my surprise, the person who bought it now has it listed for RENT. I normally keep everything I buy as a rental (BRRRR) - but this one just had too much profit on the table, as I got the land for $1 when I bought the Duplex next door.

When you are selling a flip or new build, do you consider what your tax-free profit from cash-out refi might have been @ 75% ARV + the on-going monthly income from keeping it as a rental + future appreciation and tax benefits... Versus the one-time profit from selling - from which you must then pay commissions and taxes?

Vik J. · Answer

Thanks @Ryan Groff! I may reach out to you soon. I've never considered doing a BRRRR remotely!

Vik J. · Answer

Cheers Andrew!

What are Durham rents like for townhomes?

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