Market Evaluation. No Meat on the Bone?

Question

Okay folks,

I am new at this so excuse any inexperience that I may be exposing here but why do I feel like there is very little out there in the real of buy and hold property in our market?

A bit of a background here:

I am new to REI.

I have yet to purchase a property for investment purposes but am semi-actively searching and analyzing properties to familiarize myself.

I have experience in property damage estimating.

I am running my calculations based on the following:

100% financing at 5% (no, I do not intend to do this however if it cashflows at 100% it should be hard to lose money), 10% management, 5% vacancy, 5% maintenance, 10% capex. No renovations. Most houses will require renovation to some degree, even if it is minimal, but for the sake of simplicity I am not accounting for it here.

When I run the numbers in this manner, few if any properties are cashflow positive or even close. I recognize that Spokane and the surrounding area has seen substantial market appreciation over the last 5-7 years and has continued that path through the pandemic. These numbers also tend to fail with most multi-family properties as well.

Are these numbers too conservative? I have the ability to use private money to buy into some lower end houses here to get started on my journey but I am not a fan of placing my faith so heavily into appreciation and owning an asset (liability) that on paper looks like it won't be doing anything but costing money. Even with self managing they rarely work.

I see some "deals" come across my desk but they appear to have little to nothing left for a buy and hold and I would say are likely marginal for a flip. Are we expecting a significant jump in market rents that will justify the price? Are house prices going to drop enough to support the lower rents? Is my math completely wrong? What are you doing that might be able to help me out?

Thank you!

Shira Albert · Answer

@robert kincaid @eric heldt I am noticing the same thing too. The market in spokane is so tight it is hard to get started.  Over the past month I realized house hacking is probably the primary way I am going to be able to get any ground. It doesnt sound fun moving every year or so but it is a good way to build equity and some cash while keeping an eye out for better deals. Its a way to stay active.

Sean Tobin · Answer

Robert, this is a question I have been getting a lot from clients lately and you are certainly not the only one feeling this way. As I write this our inventory level in Spokane is 236 homes on the market which is about enough inventory to last us 10 days. The two strategies I have been leveraging during these times are leveraging a network of older investors who are looking to liquidate their portfolio which provides an opportunity for new investors to get a great property while not competing against 20 others. The second option is to look at non-traditional 3-4 plexes. I personally own one of these which is an old craftsman split into 4 units and had proven to be a great investment. Regardless of the strategy, with inventory levels this low it comes down to who you know and that's why BP is such a great resource. All the best!

Erik Heldt · Answer

I’m in the same boat as you in Spokane. Your numbers are the same as mine and it’s hard to make anything work it seems. You may be able to use the private money to do a BRRRR but there will probably have to be some money left in the deal to cash flow. I’ll be looking for a house hack in the next year and thinking about getting a single family and converting the basement to a second unit. That should at least free up some money to invest in other markets that cash flow better. Good luck on your investment journey and don’t give up. There is always something out there.

Robert Kincaid · Answer

@Sean Tobin I think that trying to reach out to investors looking to liquidate is a great idea. I spend a pretty significant amount of time driving around for work and see properties, specifically small multi-family, with a fair amount of deferred maintenance. I am certainly not afraid of the non-traditional properties and have even considered several mixed-use buildings.

I will completely acknowledge I have to make a shift in mindset here, however. I purchased my first home in Spokane 7 years ago. At that time, livable homes could be purchased for less than $50k and seeing those homes sell for $200k or more just makes me cringe... Missed opportunities and all that. But I suppose that should be motivation to get out there!

Deanna Joy · Answer

My findings are much the same as yours, whether looking at listed, wholesale or even off market. The only way I could manage to make a purchase work at the beginning of 2020 was to a) buy a property with deferred maintenance b) focus on house hacking and c) leverage my flexibility in living situation to increase the rents I could bring in. Similar to what Erik is contemplating in his comment above, I now live in the MIL unit I have set up in the basement of my SFR and rent the rest of the house by the room. This gives me some privacy, as my unit is distinct from the rest of the house, other than when my roomies come down to do laundry. This works well for me, but most people don't have these kinds of options. Basically, the point I'm making is that most deals take a significant amount of creativity to work out in this area. I'm already scratching my head on how I can possibly make another buy and hold in this area work and looking at other markets to go to.

Sean Tobin · Answer

@Robert Kincaid We have had good success at having productive conversations with investors who are looking to sell properties in their portfolio. Usually the investor just wants to know they are in trusted hands and working with high integrity people. If you ever need help putting those conversations together shoot me a message.

This past year I had an investor who I had been working with for over 2 years, when he finally felt like it was time to move closer to family, we were the first people he called. We helped him craft a smart transition plan that gave him ample time to do so. At the end of the day, it was a win win and he is glad he could hand his property over to someone he trusted.

Jonathan McKay · Answer

@Deanna - this is a good breakdown. I've been doing mainly strategy A.

Ujwal Velagapudi · Answer

"Deals" are only there if there is something earned out of the ordinary, and even then still not as much meat on the bones like you say.

You have to source your own off market deal, have reasonable value add opportunities, and be able to negotiate a decent offer for the current condition. Perhaps even a unique/less desired area, zoning issues, tenant issues, etc. going on. Of course a bit more complex than that, but these will always yield the best results, and in my eyes the only way to invest consistently in this market. Otherwise any wholesaled deal, MLS, or other "public" deals will have significant bidding with investors pockets full of cash.

Kyle Varner · Answer

I would simply point out that I think a lot of "comps" for rent are lagging reality a little bit.  The rental market is so tight, that you can ask for higher rents than you would expect from the decision engines like Zillow.  I agree that Spokane is overpriced relative to rent, though.

Jonathan McKay · Answer

This is definitely becoming an issue for Spokane. I'm finding that single family rentals which previously cashflowed at the 1% rule (i.e. $1500 for a $150k house) now rent for $1600 but have a valuation of $225. The way to make the numbers work is to look for things that a retail buyer would not be willing to do (deferred maintenance, tenant issues etc), and try and use this as a value-add. Or go to rougher neighborhoods, which carries some risk, but also brings better cashflow.

Market Evaluation. No Meat on the Bone?

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