Question on buy and hold

[Glenn Mayo]

In my area, I'm finding a lot of homes that have been previously purchased by investors and rehabbed, and are often FSBO, owned free and clear. I also have the great fortune to be located smack dab in the middle of an area that is in the early, but identifiable, stages of gentrification. I have heard it said that, if you're planning on buy and hold, it's ok to pay a little more for your rental properties. So, my question is, is that true? And if so, how does that apply to the kind of situation I described above? What percentage of retail do you think would be fair for a home that is newly rehabbed and move-in ready?

[Jeremiah B.]

Each market is different.  Generally speaking, when I'm buying, I'm looking at something like this:

• If you want recently remodeled/flipped house, or buy from a turnkey provider, you'll pay something like 105%-110% of market.  
• I've always been shocked to see this, but if you want new construction on the lower end of the spectrum, you can actually get that for around 102% of market.  I haven't gone this route yet, but it's awfully tempting.
• If you want a well maintained, move-in ready house, on the open market, you are, by definition, paying 100% of market.  I haven't gone this route, but would be open to doing so.
• If you want a generally well maintained, in a strong area, house that needs paint and carpet only, you can get that for around 90% of market.  Probably built in the 90's or 2000's.  This is my preferred buying method, but you need to know that there is not a lot of money made when you buy (~ 5%).  This is my sweet spot, and what I'd consider a solid double.
• If you want a house needing major rehab (15K+) in a B area, I can get that for around 70%-80% of market.  Probably built in the 80's.  I've done this a few times with good success, but it requires a lot of capital, I've missed my rehab estimates by a lot, and it takes more time and energy than the above strategies.  Cash is king here, and non-cash offers will struggle to be considered.  The biggest downside to this for me has been that I haven't been able to get as much cash out at refi (delayed financing) as I had hoped (it sounds easy on paper, but I've struggled with this).  Still, I will typically make 10%-20% in equity when I'm done, and end with a good rental.  This is a higher risk, higher reward strategy for me.
• If you are open to major projects in C-class areas, you should be able to get these for <50% of market.  You will need cash, and you should work with wholesalers if you want to go this route.  Rehabs will be well over 25K, and you run the risk of lower rents not justifying the work or maintenance.  Appreciation is also a big question mark here.  With that said, I've never gone this route as I prefer newer, stronger neighborhoods, and am willing to pay for that.

Hope that helps.

Happy Hunting!