What kinds of returns are you seeing in Raleigh-Durham?

Question

Looking for first deal and finding it difficult to break 1% rule or >5% CaC when evaluating properties in Durham. I know deals are there, but should I mainly be focusing on appreciation rather than monthly cashflow?

Christopher Anderson · Answer

Hi Matt,

Where in Durham are you? My wife and I moved to TP back in March. We love it here.

I'm in agreement w/ @John Blanton and @Jiri B. above. I'd also share that for a BRRRR or Buy and Hold strategy it's often helpful to consider what the market trends are for rental appreciation. You might not hit 1% now (which IMHO is a really poorly understood and overemphasized metric), but if you keep rents moving up in line with appreciation (either through tenant turnover or steady yearly increases) you may well get into 1% territory over time.

That said, I think the better strategy is to look for opportunities to force appreciation, and there are a lot of those still in the Triangle however it requires thinking a little more outside the box. Three examples:

1. We're in contract for our first rental property. A 3/1.5 split level in an area that borders the downtown core. Our plan is to turn the lower level into a master suite by expanding the half bath there into a full bath. Even with the expanded reno costs, we will have a 4/2 for well below the cost of renovated 3/1.5's in the same area. ($200k acquisition + $75k reno should get us to ARV of $325-$350, and should cash flow over $350/month when rented).

2. I'm very focused on the potential for adding ADU's on properties right now. There is a firm here that is preparing to manufacture, deliver, and build modular ADU's for under $100k that will likely hit 1% targets (should rent for at least $1000 depending on location). But I think the longer term potential is even greater as I'm one of those folks who think that in 10 years or so, banks will have finally sorted out how to appraise and value ADU's correctly as there will be an increasing market of buyers who want the flexibility of a separate dwelling unit on property for rental income and/or additional familial living space. We plan on adding ADU's to all our investment properties in time, which should add at least $200 more cash flow/month to each property (which will, incidentally, get many of them below 1% rule).

3. Lastly, there are two properties I just looked at yesterday that are duplexes that may actually allow for the addition of a 3rd unit onsite (either w/ ADU or by finishing out the basement). These are harder to find, but they are around.

Happy to chat more about these strategies, shoot me a PM if you (or anyone, really) wants to connect. Best,

Chris

Jiri B. · Answer

Yeah as @John Blanton said, the numbers are tough here right now. I mean, nothing as bad as comparing to CA, NY or CO. But it's not like you can find a property that will cash flow right after the purchase.

I think if you find something around 0.7-0.8%, i would consider that pretty good.

You can find some distressed properties occasionally, but you might not be able to get them. Most of those sells for all cash and you pretty much need to know what you are doing to make that work. So probably as a new investor, that might be hard.

I would say start with what you can and try to make it work. It won't be perfect but it will get you started. So many new investor get's hang up on details and never start their journey. They think everything needs to be perfect, every thing needs to be the rules. But that is not how that works.

John Blanton · Answer

Margins are pretty tight right now throughout the Triangle @Matt Zothner on SFR and small MF rentals. Even when I began 6 years ago it was difficult to find deals meeting the 1% rule in Raleigh, Durham has seen exponential growth over the last few years as well. There is a chance to find a greatly distressed asset that may be able to reach the 1% rule, but I haven't even seen any of those lately either.

Focus on Appreciation vs cashflow is a personal decision. It all stems from the reason as to why you are investing in real estate in the first place, for me personally I focus on cashflow (income diversity) and take appreciation as an ancillary benefit. The choice is for each person to decide. If you focus on appreciation vs cashflow and a large expense is needed to repair the asset you may be having to come out of pocket (vs cashflow) to make the repairs.

Good luck!

Curtis Mears · Answer

@Matt Zothner

In raleigh, it was tough to find 1% properties 2 years ago. Maybe looking at c or d neighborhoods. Now, good luck. Not saying you can not find any, but they would almost have to be off market as any public listing would not meet requirements.

Matt Zothner · Answer

I appreciate the responses. My best bet for my first deal is likely to be house hacking with low down payment. I agree the 1% is not likely to happen in RDU but cool to hear these other creative strategies. Will have to look into ADUs.

I agree with @Jiri B. in that I need to find a deal and make it work. It won't be perfect but it will get me started.

What kinds of returns are you seeing in Raleigh-Durham?

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