Is there any strategy in which this would work?

Question

There is a house for sale that is a 3 bedroom, 2 bath, 1300ish sq ft single family, listed for $329,000 that has been renting for the past 4 yrs at $1400/month, but could "probably" be rented for $1600 a month. As well, the house needs some updating.

I don't see how it could be a good investment for anyone (outside of maybe a flip) when the rents are so low compared to the cost of the house, unless there is another strategy that I am missing? It would seem even with buy/hold you would be having too much negative cash flow every month on the house.

It also seemed odd to me that rent would be so low for an area of high priced homes but maybe that is not so uncommon?

Aaron Mazzrillo · Answer

Just because somebody bought an investment, it doesn't make him a good investor.

Scott W. · Answer

some people just want to own a property to say they own it. others may have gotten caught in the hoopla of pre-2007 & are still stuck with.

my parents paid cash for a townhome to have my sister live in; my sister & her husband got back together & stayed in their house. my parents have rented it out for 7 years. it's underwater & their cash-on-cash return is like 3%. what're they gonna do?

so to answer your question, different strokes for different folks.

Jeff S. · Answer

The return w/o any other considerations is 2.5%. A 10 year treasury is under 2%. If you paid cash and had tax deferred income through depreciation and possible appreciation in 10 years, then you could possibly justify it. In other words it is a place to park some cash. Ok if you are a doctor or something and believe inflation is on the way.

Amie D. · Answer

That is true, there are probably several in this neighborhood who bought the houses long ago for a lot less money and perhaps have them paid off right now. Just as a buyer, I wouldn't see a reason to enter into that neighborhood as an investor, but I wanted to check if there wasn't some aspect I was missing out on.

K. Marie Poe, yes, I can't realize what the current owners reason must be, I was just trying to see if there was a reason a new buyer might want to buy into that situation.

Adam Stelmaszynski, yeah, I know.... I already have a management company in place in Cincinnati, too, so if I bought more investment property it would be out there, here in Seattle the market is too competitive, inventory is too low, and too expensive for my taste. I can see getting something better for appreciation value, but it seems like the hold time would eat away at that value because you'd have negative cashflow each month.

I think like what K mentioned, this neighborhood is better for people looking for a home for themselves, it is in demand and though the ratios don't work for rentals, it is one of the lowest priced properties now available. That's why I thought possibly good for a flip (would have to see the other numbers on it, just a thought right now).

Aaron Mazzrillo, LOL...

Pat L. · Answer

We own a couple of similar properties free & clear.  I rent for the minimum just to avoid land-lording per se.
They get the cheap rent just to maintain the property. The reason being the properties continue to appreciate significantly because of the area & demand. So its basically a hold for appreciation & it has been very good over the years. Admittedly if the property was purchased at the current market value & financed the highest mkt rent would barely cover your costs.

Account Closed · Answer

Amie: in desirable areas with limited inventory (no new construction, no inbuilding) you'll always see property values that don't make rentals a good investment.  However, eople still need/want to own in those areas.  I live in an inner city neighborhood of a very nice city where 2BDR SFHs rent for max. $2750.  You can't buy anything under $650K, maybe a fixer for $500K.  Plenty of the houses in my neighborhood are non-owner occupied.  Some people moved and rented, some people inherited.  Some people bought a LONG time ago and now own free and clear, and some buy now for long term appreciation. Others bought in the bubble, with no concern for cash flow, hoping they could sell within a year or two but got stuck with the property.  There are two houses on my block that sold for $950K in 2007.  They got rehabbed and then couldn't sell for what they owed.  One of the owners moved into the house.  The other is renting for negative cash flow.

Without knowing the reason and time when the house was bought, you can't really analyze cash flow very well.

Bill Gulley · Answer

Steve makes a good point, what the seller gets in rents has little to do with a deal.

Another slice, I know many who own properties and are landlords, residential and commercial and they do not consider themselves "in the business" they would rather have a good quality tenant, long term, buying the property for them, depreciate it, have some tax benefits and just keep it simple, that is "investing" in real estate.

Not to start anything, but most properties here won't come close to the 2% rule, not even close, an $80K house can rent at 750, given current rates, that cash flows, piti and 5% on your money is at $550.

You need to look to the market in your area, they all won't meet all the target ratios, which usually means they need to be structured differently. It's all well and fine to look at your operations as a business, especially if that's all you do, then you're an operator/investor, the guy at the factory who buys homes to rent on the side is just an investor, IMO.  :)

Steve Babiak · Answer

Do you know what the owner's of those properties PAID for those properties?  Just because they want to sell for $300K or more does not mean they paid anything close to that.  They might have paid $100k a few years back and those rents give them nice cash flow even.  Otherwise, they are probably speculating, hoping for appreciation in values that may or may not happen.

Adam Stelmaszynski · Answer

In theory,  there is an axiom to purchase the best property in the best neighborhood at the lowest price.  A ten percent increase in the value of that best home starting at $325K is much larger than a ten percent increase of a home purchased at $85K.  Perhaps that $325K property may be available for a large addition or tear down and replacement with a new larger home;  perhaps the land can be divided to create two or three lots.  The current rent is a subsidy until the master plan may be determined.  In Cincinati,  there are opportunities to acquire existing buildings for under $15K,  suitable for re-hab into three, four or five apartments.  So leveraging your own money depends on your own strategies and the type of property that you may be interested in.  Hope this helps?  Adam

Amie D. · Answer

Adam Stelmaszynski, thanks, but yes I know there are other areas that have better cashflow, I own a rental property in Indiana and another in Kentucky outside of Cincinnati.

I am just wondering what the strategies or theories would be as to why someone would buy a property in an expensive area but the rents are lower, in case there was something I was missing outside of what I already knew.

Is there any strategy in which this would work?

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