Minimal/no cashflow, but good potential for appreciation

[Alex Corvin]

Hello BP community. I'm considering buying a property to hold and rent out, and would like some more input on whether it's a good buy.

The property is in the Raleigh, NC market, specifically in the downtown Cary area (probably a C market right now). It's a 3 bedroom, 2 bathroom, 1050 SF SFR built in 1988. Structurally the house seems to be in fairly good shape, roof is new, HVAC has been maintained, hot water heater is recent. Needs paint and carpet and a little TLC in the kitchens/bathrooms, but overall it seems like a good little house.

The property is currently rented month to month to a tenant who has been there for about 7 years. Rent is currently $785/month. Market rent is more like $1,100/month. The seller is another investor who has since moved out of the area. They want to walk away from the sale with $125,000. Market value for the house is probably about $128,000 - $130,000. This is an off market deal, and properties on the MLS in this area tend to go very quickly with multiple offers. At market rent, this is just under the 1% rule, (my ideal target for my market). At the current rent, though, I'd obviously be way under what I'd need to cover expenses.

If I left it at that, I'd say this deal is mediocre at best. What makes things interesting, however, is that the house is in a market that I think has a strong chance for serious appreciation. The house is 2 blocks from the historic downtown section of one of the most desirable towns in North Carolina, and the town is putting a lot of resources into revitalizing this area. My thought is that I could acquire the property, get the rent up over the next couple of years where I'd cover my expenses but not really cashflow for a while. At this point, if the house never appreciates I'd be fine but if it does I'd get a nice bonus.

What do you guys think? Worth buying?

And another thing that might be relevant -- this would be my first property and I'm wondering if it's worth buying an ok deal to get my foot in the door.

[David Faulkner]

Personally, I have done very well investing for appreciation in my market for over a decade now. Mine is the minority view here on BP, and I'm ok with that, but to give you a different perspective and mix it up a bit, I'll offer up my perspective.

1st, I agree that you absolutely should NOT buy something turnkey at current retail market price ... that is risky regardless of if you are buying for cash flow or appreciation. Part of how you run the numbers should be like a flipper would, even if you intend to hold as a rental. I always say I've flipped every property I've ever bought, I just flip them to the rental market instead of the sales market, but I still flip them for the short term forced appreciation bump. This insulates me to some degree from short term market fluctuations and gives me multiple exit strategies to sale for profit at any time should I need or choose to. That alone will go very far in mitigating risk.

2nd, when evaluating buy and hold rental property, I believe it is critical to analyze appreciation as well as cash flow, as both will significantly affect your profits over the long haul. For cash flow, you want to look at the long term cash flow and not just the day one cash flow ... what was the place renting for 10, 20, 30 years ago? What annualized rate of rent growth is that? I'd underwrite to that by taking day 1 cash flow and projecting it out using the long term historical average rates of rent increases (as well as other costs to arrive at cash flow). Similar thing for prices ... what was it selling for 10, 20, 30 years ago? What's the long term average appreciation rate? I'd underwrite to that. Frankly, if the house is only selling for ~$130k, I doubt the long term historical appreciation rates will come out that great, but check it and analyze projected returns based on that. Also, you can factor in forced appreciation in the short term as mentioned above. How do you put all these numbers together to analyze your expected return? IRR ... you can google it and compute it in excel. I'd advise factoring in all of these things, and comparing across properties and local submarkets. Do this regardless of if you are investing for cash flow or appreciation because the market doesn't care what your strategy is, it will still affect you either way.

Finally, long term appreciation or cash flow do you no good if you can't make it to the long term, so be sure to stress test your analysis. Have multiple exit strategies and make sure you can afford to hold onto the property under any reasonable worst case scenarios so that you will not be forced to sell or give it back to the bank at the worse possible time.

I hope this helps and offers a different view of things from the POV of an appreciation investor. If done right, it is NOT speculating and can be a sound investment. Others obviously will disagree, but that is my perspective having done it in CA for the last 15 years, through the great recession, and never once taken a loss on any single investment (knock on wood) ... so if it is speculation, I'm one damn lucky speculator :)