Help me make a decision on my first buy and hold

15 Replies

I have been going back and forth trying to decide where to look for our first deal. Narrowed it down to two areas: one with great schools, a very desirable to live Ellicott City, MD, expensive also; and second - immediate area right outside of the state university campus. Analyzed, both markets, demand for rent should be great in both areas, except in the first scenario cash flow is near zero or slightly negative, but I would most likely deal with middle class families with kids; in second scenario it should bring 300-400 per single family per month, but the area is iffy and dealing with students may bring a whole tone of issues with police/parties/extra repairs etc.  I would appreciate any advice from anyone who has experience with either student rentals or properties that do not cash flow but are set to appreciate over time. Can't decide which way to go. Thanks!

Hi! I just happened to read your other post right before this, the one about the underwater condo. Frankly, I'm wondering why you'd want to consider banking on appreciation after your last purchase.

Student rentals are more management intensive, but I would include the cost of professional management in your estimates. Find a management team that works extensively in that area. (This is a great time of year to do that- just drive around and see which companies are on the "for rent" signs.) Interview a few companies and get plenty of references to call. Try to talk to clients like yourself  (that own only a few properties) and see how satisfied they are and what issues have come up.

@Jean Bolger  

I wouldn't mind purchasing in well established neighborhood because should something go wrong and I decided that the whole rental thing is not going great for me, I could move in into that property and ensure that my son attends a good school.

Thanks for the tip about the rental signs, I'll go check them out this weekend.

Also, I am thinking I may be late for the "student season"... By the time I close on the property it will be September most likely...

@Nadiya Lonkevych Here is my view on the exact same subject from a few months back.

I had found over the years (by accident since I had no idea what I was doing back in the 90s) that areas with the best schools make the best long term investment properties.

My real "wakeup call was " in 2007, when I was talking to other investors from the Baltimore city/County, and they had told me their homes went down to the same price as they purchased those properties 15 20 year ago) Some of the houses they purchased ten years ago for low $60s, are now 5-6 year later worth in the mid $60s $70s at the same time I purchased some of my properties out here in the AA County(HO county is the same or better) for low$100s and they worth low $300s now.

Obviously there are exemptions based on neighborhoods etc,, and my statements are a sort of generalization. But in my view the point of long term rental is to "seat on" a low risk property which we can "cash in" just about anytime even during a low economic cycle and reword ourselves for our efforts times.

. I know some might say that it is almost impossible to find deals out here in the great areas, but in my view with some patience and with the knowledge of the area you can find some really nice deals. And when you look back in a few years, does it really matter that it toke you a few weeks or even a few months longer, if your property worth $100s of thousands more and is a lot more immune to the economy's ups and downs. Also rents better sometimes with waiting lists :)

By the way another advantage of investing in HO county that the quality of tenants has been shown an increase over the years as the "flakes" has been continuously priced out of the area and tend to be moving towards Baltimore County, Glen Burnie etc...and this trend with tenants seems to continue for the foreseeable future as BRAC, Cyber Security, Verizon and other project are bringing more jobs into our area etc.

ps I would definitely not buy anything even in first class location UNLESS you can brake even from day one! By brake even i mean to have a some money left for repairs as the next furnice brake-down or complete roof replacement will sneakup on you soon :) Good luck to you!

Sounds like you're on the right track. For me personally, I go with neighborhoods that attract clientele that I feel comfortable working with. Some do things differently but that's how I operate.

If you're just starting out, you may want to connect with @Ali Boone . She's done quite a number of write-ups on the BP blog for beginner investors and seems to have a fresh perspective on the subject.

Hope that helps!

I'm going to throw in my 2 cents here. Howard County, to me, has been a stronger homeowner area than it has been a rental area, save for spots in Laurel and Elkridge. Our neighbor was military and rented because he was on a 2-3 year assignment and Columbia was an easy 20 minute commute, but he was in the minority. It would seem that with prices what they are, your cashflow in Howard County will be tough, not leaving much room for CAPEX or routine maintenance.

If you are looking in College Park, some family members and family friends invested there about 10 years ago and it was good at first, but the city has become very anti-landlord. They could collect $2800 rent on a property that was acquired and renovated for $200k, and they were cashflowing nicely. They put money into making them more suitable for college-aged renters, and screened well, but there were still headaches. Then the towers went up, economy went down, and filling the units got harder. I'm not up to date on the goings-on, but I think the city capped rents at a certain percentage of property value falling well short of the 2% rule.

What is right for you depends on several things not mentioned in your post. What is your capacity to cover negative cash flow? What kind of reserves do you have? How are you figuring your cash flow?

I suspect just because of the neighborhood you  mention, Ellicott City, and where you live, your estimation of break even or $300-400 a month are way off. (have you looked into the 50% rule here?) Most new investors that buy "break even" deals are actually buying negative cash flow and just don't realize it. Few investors can carry that load. 

If you want to buy in areas that nice you can do it, but you have to find the exceptional deal.

@Ned Carey  is definitely right. Most investors buy into what Jon Holdman calls "phony cash flow" and that is that your cash flow will be what's left after you pay the mortgage, taxes, and insurance. Ha! 

The only thing you'll get investing like that is foreclosures and a bunch of sleepless nights!

The 50% rule Ned mentioned is the idea that 50% of your gross rent is probably going to go out the expense column. This does not include debt payments!! 

So, if your rental provides you with $2000 in rents then at least 50% will go out for expenses in the long haul. You may be thinking (and I did too!) that it sounds a bit much, but a lot of that money will be needed later for big ticket items like roof repairs. Always remain prudent and mindful of future expenses! Saving for a rainy day is taken literally by a lot of landlords!

Anyways... Now that you have $1000 left a month then you have to factor your financing. So if your principal and interest is $700 a month then you have $300 in NET cash flow!

BTW... Keep several months of reserves to cover your mortgage in case of extended vacancies. 6 months is a good bet.

Another BP rule you are going to hear a lot is the 2% rule. It states that your gross rents should be 2% of your purchase price. The way to go about buying properties the right way is to find out gross rents in your area and determine a price based on that. So if rents for a duplex come in at $3000 dollars then your target price should be 150,000. 

However, in many markets the 1% rule (same premise) is probably the only realistic rule. In this case the $3000 rents merit a max property purchase for $300,000. I'm in the DC metro area (you're close by too!) and property values are more inflated here, as you probably know, than a hot air balloon! 

Hopefully that helps!

@Ned Carey , I was referring to  $300-400 cash-flow in College Park when you rent to students, not in Howard County. After several months of market watch here in Ellicot City/Columbia I wasn't able to find any properties that would cash-flow, at best I could break even after all the expenses and loan payments, never mind 2% and 50% rules… I guess it requires lots of patience and waiting for the "right" house to appear on the market.

p.s. I really enjoyed your presentation at BWI Meetup! Thanks!

@Nadiya Lonkevych If you are looking in all the same places that other investors and buyers are looking (notably MLS) you will struggle to find a true "deal." If it was easy to make money, everyone would be doing it (thus driving the price up to no cashflow).

I don't know your area, but may be you need to keep looking for the right area for you. I wouldn't accept a property that had little/no cashflow and no/little room for CAPEX. I don't want to bank solely on appreciation or me having to move in to save my investment. Those kind of neighborhoods are great places to own something over the long-term but its hard to hold it with no cashflow.

Have you meet with any local buy and hold investors to see what their model is? I found my target area by meeting with people that had cashflowing properties. I can't find a good one in my neighborhood, but about 10 miles away cashflowing houses can be found.

Keep looking... there are deals out there. Don't settle until you find a deal with putting your dollars to action on. 

@Blake C.  10 miles away puts me into Baltimore city (Detroit-like market), and this is where I would really get scared to invest at this point. I do understand there's lots of potential, but I feel like you have to know what you are doing to get into that.

I'll keep looking, time is on my side I guess.

@Nadiya Lonkevych  May be 10 miles away is too close for you. Decide how far you are willing to go. I know on the podcast the guys talk about how there is a place within 2 hrs of where you live no matter where you live. Try to meet successful investors near you and find our where they are making money. See if you can do what they are doing.

Originally posted by @Nadiya Lonkevych:

@Blake C.  10 miles away puts me into Baltimore city (Detroit-like market), and this is where I would really get scared to invest at this point.

 There are some very stable areas both inside the city and in baltimore county that would cash flow nicely and not be scary neighborhoods. 

I'll keep looking, time is on my side I guess.

That is a great attitude. I see many new investors that become motivated  buyers. The best deals come to the patient. Of course that assumes you really are looking and not just waiting.

@Nadiya Lonkevych I agree with a prior post that Howard Co for the most part attracts homebuyers because of the excellent school ratings (which is why we moved here). You can get good rentals in Elkridge and Laurel (HC) area. Just keep in mind that unless you are planning on passing on all utilities to the tenant, water costs are 6-8 times higher in HW or PG counties. So make sure to add that to your costs.

Well, I just put an offer on a multifamily property in Ellicott City… This is my very first investment property. Scary… But keeping my fingers crossed! :)

Happy 4th everybody!!

Wow, it's incredible how much more there is to learn once you actually start the process… zoning, county regulations, permits, licenses, subdivision possibilities…. it's endless! BUT, once you're in the game, there's a timeframe for just everything you do, and it's an amazing motivating factor! I feel like I learned more over this long weekend than over the past 4-5 months!

I'll post all the details as soon as they become available. Thank you guys for great support!

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