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Rookie Podcast 112: Rookie Reply: Should You Invest in an Expensive Real Estate Market?

Rookie Podcast 112: Rookie Reply: Should You Invest in an Expensive Real Estate Market?

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Real Estate Rookie Podcast

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This week’s question comes from Scott (@hotdads1) through Tony’s direct messages on Instagram! Scott is asking: How are expensive properties profitable? Is it a mindset shift to buy expensive properties, or should I look in cheaper areas? Should I purchase in a quickly appreciating market

This is a very 2021-type question. We’ve seen numerous markets around the United States (and the world) see massive appreciation over the past year and a half. Now, real estate investors wonder if it’s even worth pursuing deals on the market. Although prices may be higher than they were before, you still have numerous options when trying to purchase a profitable rental property.

Here are some suggestions:

  • Price becomes irrelevant when looking at cash on cash return and true cash flow
  • Look at creative financing solutions (like FHA loans) to close on a home with low money down
  • Calculate your numbers for the long term to get rid of any short-term price dropping fears
  • Stop looking at past prices and ask: “Is it a good deal today?
  • And more in the episode…

If you want Ashley and Tony to answer a real estate question, you can post in the Real Estate Rookie Facebook Group! Or, call us at the Rookie Request Line (1-888-5-ROOKIE).

Click here to listen on Apple Podcasts.

Listen to the Podcast Here

Read the Transcript Here

Ashley:
This is Real Estate Rookie, Episode 112. My name is Ashley Kehr, and I’m here with my co-host Tony Robinson, and we are back with another rookie [inaudible 00:00:14] Today we are not picking a topic, we are not pulling one off Facebook, we actually have someone that slid into Tony’s Dms. And Tony, what does that DM say?

Tony:
So this message came from Scott Morris and his Instagram handle is HotDads1. So HotDads, number one. And he said, “Hey Tony, I’m a huge fan of what you and Sarah, my wife, what you and Sarah are doing in the short term rental space. I’m having trouble wrapping my head around the prices in the Smoky Mountains, and how can those properties even be profitable at the current market value? Am I looking at things the wrong way? And does the price not make that big of a difference in strong markets like Tennessee? I’m just trying to figure out if this is just a mindset shift that needs to happen, or if I should be looking in different markets?”
So Scott, great question and I think it’s really part of a bigger question around should you continue to buy in a market where things are appreciating quickly, where prices are rising relatively quickly. Things are heating up in the Smoky Mountains. We bought our first cabin there a year ago for 590. That same cabin today will probably sell between eight, maybe even $900,000. So crazy, crazy appreciation in the last year. But for us, we’re not as concerned about the purchase price as we are about the overall cashflow that’s being generated, like what’s our actual revenue on that property, and what are the profits in the cash on cash return.
And for us, as long as we’re still able to hit the numbers that we want on those cabins in terms of revenue, in terms of cash on cash return, then even if they get up to a million dollars, then maybe it still makes sense for us to buy. And people always say, Hey, maybe you don’t want to buy at the top of the market, because what happens if prices swing again or home values decrease? And my thought process on that is even if my home value goes down a little bit, say today it’s worth $800,000. I buy it and it’s worth $800,000. If 12 months in the value drops down to $700,000, as long as that price decrease isn’t tied to some bigger financial distress and the economy where people are no longer traveling, if people were still traveling and I’m still making my money on a monthly basis than the actual value of the home in the short term isn’t super important to me. Because I can confidently say that if I hold this property for 30 years, I’m probably going to make money on it from an equity standpoint.
But for me, as long as there are people that are traveling to this market, as long as people are still booking this on Airbnb, as long as we’re still generating revenue, then for me, even for buying at the top of the market, it doesn’t matter a whole lot. So I don’t know, that’s my thoughts, Ash. What are your thoughts on buying and appreciating kind of expensive markets?

Ashley:
Well, Tony, are you seeing a correlation in the Smoky Mountains when you’re purchasing? As the prices increase, you’re seeing that your daily rate is increasing too?

Tony:
We are, but it’s kind of a weird situation we’re in, because we first started this cabin in 2020, in COVID time, so there’s just less people traveling in general. The summer of 2021 has been reported as like one of the busiest vacation summers ever. So I think that’s playing a lot into it, but probably, if this was like a regular market, I would assume that even if the prices are going up on a purchase price, you’re probably not going to see a direct correlation in your average daily rates, so you got to balance those out a little bit.

Ashley:
Okay, yeah. I was just reading an article the other day about how much rents are increasing across the US and housing prices are going up, so rents are increasing and then also the eviction moratorium. So landlords are trying to be extra cautious by charging more upfront in case they don’t have to do an eviction. So I was just wondering if you were kind of seeing that in the short-term rental market too? But as far as investing in a hot market, I invest in really small rural towns, don’t see a ton of appreciation, but I think that a way to get into a hot market is to find creative ways to purchase property. And like Tony said, make sure the numbers still make sense and you can make the deal work.
Last week we had Nick Cooley on, who’s buying in Denver, Colorado, super hot market, but he’s making it work and being profitable off of it. So there are definitely ways you can do it. So I’ll give you an example. In South Buffalo, I bought a property in 2017, right when that area was starting to get hot. I got in a really good time. I bought it with 20% down, conventional 30-year loan. Well, fast forward two years later, I’m still looking at properties in those areas and just the prices have increased so much and gotten outrageous that for me to come and bring a cash offer, or a 20% down offer as an investor, it just did not make sense. So what I did was I partnered with my sister who did not have a house and was eligible for an FHA loan. So she only had to put down 5% on the property and we were able to buy a property with only 5% down instead of me going and doing 20% down.
And how we did that was she went and got the mortgage, I’m not on the mortgage at all, I’m just on the deed. And I wrote a gift letter to her that I’m gifting her the down payment fund. So the benefit to me was I’m owning 50% of this property for only 5% of what it was worth at the time of purchasing. And then my sister, she gets to house hack it, she pays, I think, $45 a month towards her mortgage payment and then the tenants are paying the rest of the mortgage, the insurance and property taxes. Not seeing any cashflow right now, but it’s a long-term play for me. This property is building tons of equity. When my sister moves out, I’ll get some of the cashflow. If we decide to sell it, I’ll get 50% of the equity in it.
So you have to get creative, I think if you want to get into these hot markets, get into creative ways that you can purchase these properties to make the numbers work instead of dumping a ton of cash into them, or just relying on equity only too. You don’t want to do that either.

Tony:
I love the idea of getting creative. That’s the best way to find success as a real estate investor. I think the only other thing I’d add, Ashley, is that like say that you’re looking at an expensive market and you look at this property, you run your numbers and you’re like, okay, I’m happy with this. But then you see, man, this same property sold for $300,000 less two years ago. The fact that it sold for $300,000 less two years ago doesn’t change the fact that it’s still a good deal today, it just means that three years ago it was a really, really good deal. But it could still be a good deal today, so I think that’s like the other thing that people see as they’re like, man, this household for way less 12 months, 24 months ago, it can’t be a good deal. But it’s like, if you run the numbers today based on the purchase price today, and it still meets your criteria, then it’s a good deal, it doesn’t matter what the price was in the past.

Ashley:
That is such a great point. I think a lot of people will look at houses that are flipped too and be, oh my God, six months ago they bought this for 100,000 and now they’re trying to sell it for 250,000. Wow, we should’ve gotten it back then. Okay, we’ll try and do a rehash. But you’re right. Just because it sold cheaper before, doesn’t mean that it’s a bad deal now. It probably actually is a bad deal if it’s selling for less than what it sold for two years ago, that there’s something really wrong with it. People are trying to unload it and not even get their money back, they want out of it so bad.

Tony:
Well, HotDads1, hope we answered your question. I hope that gives you some value. Real estate rookies, hope you guys get that too. I know it’s super crazy out here in 2021, and it can feel that sometimes finding a good deal is impossible, but like Ashley said, some creativity, a little bit of patience, that’ll go a long way for you.

Ashley:
Yeah, you didn’t tell me that was his Instagram handle before we started. I mean, it’s going to get blown up now, I’m already checking out who the hot dad is.
Thank you guys so much for listening. I’m Ashley @Wealthfromrentals and he’s Tony @TonyJRobinson on Instagram, and we will be back on Wednesday with another episode with an investor to hear their story. Thank you guys so much for joining. And if you love the podcast, please leave us a five-star review on iTunes, or whatever platform you’re listening on, we would really appreciate it. Have a great weekend.

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