Rental Property Investor · Cary, NC · Member since 2014 · 89 posts · 10 votes
Hi! I am a total newbie so please take it easy on me. =) But I'm wondering if it's worth it to consider buy and hold investing in the Triangle Area, NC (Raleigh-Durham).
I just learned about the 2% rule and it doesn't seem to apply for this area. For example, look at this 3 bedroom, 3 bath property in Morrisville NC (MLS 1963147):
Sale Price: $210,000
Size: 1,856 sqft
Built: 2000
HOA: $40
Zillow Estimated Mortgage: $1,070 per month
Zillow Rent Zestimate: $1,340
If I am to apply the 2% rule, then I should try to rent this house at around $4,000 !!!
But the Rent Zestimate is about right for this place, around $1,200 to $1,400 per month. I'm thinking I'll be getting a negative cash flow for this property, and for most properties in the area.
Are some ares just not ideal for buy and hold investing? Should I instead look at another city? I am considering the Triangle area because I live her.
1. Generally speaking, I think it's advisable to invest in the area where you live. But at the same time, there are a lot of people who are successfully investing in out-of-state properties.
2. Generally speaking, you are likely to get better ratios in lower-priced properties. But, if you go too low, you run into other problems (higher turn-over, higher maintenance, more crime, etc). I like the price-range for first-time blue-collar workers.
3. Finally, and probably the most important - it ain't as easy as just go find a property on the MLS and, bang it's going to be a great deal. There are good deals on the MLS, but you often have to really hunt for them, and you sometimes have to wait a while to find one.
Also, don't trust anything that you find on Zillow.
My point was that a foreclosure rarely requires only <5K to make it rent-ready. It may be REO now, but it's still in the same shape it was when it was a foreclosure - I doubt the bank improved anything in the meantime.
I understand that this was only an example and it's a moot point to discuss the specifics of this property - I just wanted to raise the general point that the "all-in" cost is usually very different higher than what first meets the eye.
I also agree with you in that I don;t understand how a 210k property can cash-flow in that scenario. It's a pure appreciation play, which is quite speculative (though may fit someone's investment strategy just fine, depending on their goals).
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
12y
Regarding, "My point was that a foreclosure rarely requires only <5K to make it rent-ready. It may be REO now, but it's still in the same shape it was when it was a foreclosure - I doubt the bank improved anything in the meantime." Not the case for this property. I pointed this out in my posts. My comments: "From the pictures, the owners (JP Morgan per property card) put a few $$ into it so they could make it GSE financeable." The tMLS says they put in a new HVAC system with duct work (last 2 pictures)... which per the permit
(#2140416, pulled 6/5/14) included electric and HVAC install. They also upgraded the service to 200A. Like I said... they are trying to make it conform to FNMA underwriting.
The rent/cost ratio with the property I was quoting, and most properties in the area is 0.6%
I'm thinking that to cash flow, I need to put more money down. This will definitely delay my buying other properties. Should I do this or look at other areas?
Needing to put more money down will mean as you said that it will delay hou buying otherproperties. The key issue here is opportunity cost. I reaaly think there is a better place to invest your money than an area that has a 0.6% rent/cost average. I would personally recommend you look elsewhere.
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
12y
Originally posted by @Dawn Brenengen:
...Owner paid $165k for the home. We rent it for $1300/month. In the two years the girls lived there, the only expenses we've had so far are:
gutter cleaning for $40
register the home with City of Raleigh $60
Disposal + handyman items yesterday - $450
Cleaners - $100
HVAC filters, smoke detector batteries, CO2 detectors - $60
... Taxes, Insurance, Property Management (assuming you don't work for free... if you do, please email me;) Yes, sometimes you can go for months or years without having expenses. Then the A/C fails or the 15 year old roof starts leaking or the hot water tank fails, or appliances act up.
Even if you don't have a reserve set up in your management agreement (many owners don't), you should do the analysis annually for your owner. That way, when a big expense item is needed, they won't blame the agent for putting them in a jam. Just my 2 cents
Those numbers are extraordinarily thin - congrats if that was really your expense, but rest assured it is NOT going to be your long-term average. If you count your own capital, the mortgage, as well as the costs Chris mentioned above (incl PM), I'm actually struggling to see ANY cash flow at 165K cost and 1300 rent. I have properties near NCSU too, and it is true, they are generally easy to fill. However, sooner or later, you will have larger repair/maintenance items that will necessitate a longer transition than 2 days. That cuts into the income as well as bumps the expense side. I think those numbers are basically an appreciation play (nothing wrong with that either, if that's the longterm plan).
Real Estate Broker · Raleigh, NC · Member since 2014 · 2k+ posts · 1k+ votes
12y
@Chris Martin I agree that there are plenty more expenses to consider than what I just listed. I'm just trying to exemplify that there are more ways to look at a purchase than the 1% or 2% rule. I also think the 50% rule often needs to be looked at more closely. Do you necessarily spend $7800 annually on a home that rents for $1300 but only $5100 on a home that rents for $850? I have two specific homes in mind, and the less expensive home is only 300 sf smaller and is much older. It has required more maintenance than many other newer homes I manage. It has also turned over every year.
Lastly, based on what you’ve provided, I suggest that you focus your search on the Durham, Garner and 27616, 27610 and 27604 zip codes in Raleigh.
John, thanks for your thorough explanation. I do want to ask you, what is it about Durham, Garner, and those 3 Raleigh zip codes. How are they different from Cary/Apex when you look at them with investor lenses?
Rental Property Investor · Cary, NC · Member since 2014 · 89 posts · 10 votes
12y
@Andrew S. and @Chris Martin : Have you found an area in North Carolina that has a good rent/purchase price ratio, good rate of appreciation, and low turnover rate?
@Andrew S. and @Chris Martin : Have you found an area in North Carolina that has a good rent/purchase price ratio, good rate of appreciation, and low turnover rate?
Well selected property in Wake county fits that description. I am sure there are other areas as well, but since I live here, I 'work' were.
@Chris Martin I agree that there are plenty more expenses to consider than what I just listed. I'm just trying to exemplify that there are more ways to look at a purchase than the 1% or 2% rule. I also think the 50% rule often needs to be looked at more closely. Do you necessarily spend $7800 annually on a home that rents for $1300 but only $5100 on a home that rents for $850? I have two specific homes in mind, and the less expensive home is only 300 sf smaller and is much older. It has required more maintenance than many other newer homes I manage. It has also turned over every year.
@Dawn I contend that over the long haul (e.g. 15 years) the 50% rule is pretty accurate. Regarding "Do you necessarily spend $7800 annually on a home that rents for $1300 but only $5100 on a home that rents for $850?" In one year, not necessarily. Annual averages over 15 years, probably close.
Let me ask you this. Is your commission the same ($ wise) on the property that rents for $1300 and the one that rents for $850? Probably not. It's probably based on a percentage of rent collected. In a similar way, taxes, insurance, and "system" costs will not usually be the same for both houses either... but these expenses are based largely on property value not the rent. There are some exceptions. If you buy outside the city limits of Raleigh, your costs are going to generally be less for Taxes and Insurance. Yes, rents are usually a little less, but not always. Wake County rate = .534 Raleigh rate = .3826. Combined Rate = .9166. A house 1 block outside the city, all other things being equal, may have a better return.
Just as an example, if the house that rents for $1300 is "worth" $130,000 and the house that rents for $850 is "worth" $85,000 then I'd say your statement (again, averaged over the long haul) is accurate.
Regarding "I have two specific homes in mind, and the less expensive home is only 300 sf smaller and is much older. It has required more maintenance than many other newer homes I manage. It has also turned over every year." Older homes usually have older systems. Older systems require higher reserves and will generally need more maintenance and attention than newer property. Older homes may have functional obsolescence, like no dishwasher, small bedrooms, small closets, etc. You can mitigate (for a price) somewhat by putting in new systems (hot water heater, HVAC, roof, siding, etc.) and appliances up front before the property is in service. But the reality is that everything wears out over time. Some "features" like bedroom size are hard to easily correct and your rent may suffer (through lower tenant demand, higher turnover) as a result.
I could also show an example of an older "smaller" (~1000 sq.ft.) rental on E. Franklin St. in historic Oakwood that rents for $1400, and a 1500 sq.ft. newer house a couple miles away in Victoria Place that rents for $1100. Location, property condition, neighborhood all play a part.
I'm definitely a newbie here, but I've been thinking about moving down to the Research Triangle, and have been looking at properties. I'm not quite seeing 2% properties, but I have been seeing properties for closer to 1.5%. I was just looking this morning and saw this one (1315 Juniper Street, MLS #1929079, if the link doesn't work), which is really only 1.26%, but it doesn't look terrible.
My sense is that multifamily properties often have better numbers than single family homes, right?
Yes, multis tend to cash-flow a little better but they SHOULD, because they generally don't appreciate as much as SFRs in my experience.
Be very careful with 1.5-2% properties in Raleigh. Those tend to be in very dicey parts of town. Like all markets, Raleigh is very fragmented. While there are those neighborhoods where you need to be very cautions, there are also pockets that are crazy hot (Oakwood mentioned by @Dawn Brenengen is one - Cameron Village, another, is getting SF Bay Area - like....
I personally wouldn't buy things in Raleigh that fall in the 1.5% or better range unless there was some sort of lucky pricing anomaly. These are great for cash flow, but they just don't fit into my investing model. I prefer to have tenants who happily pay their rent on time, call me when they think there might be maintenance issues to deal with, who have good credit, and I don't have to evict. I also like to feel safe during showings and to not have to deal with police calls at my properties. Some people prioritize the cash flow. I give that up in exchange for a good experience and appreciation in home values. I'll be able to live off cash flow once the homes are paid for, so that's a large part of my retirement plan.
Real Estate Broker · Raleigh, NC · Member since 2014 · 2k+ posts · 1k+ votes
12y
@Chris Martin I don't dispute anything you're saying, I just don't think that's the whole picture when deciding whether to invest in a particular home. I look at all those costs too, but there are certain ones that I think are actually higher on the less expensive home, assuming the neighborhood/demographic of tenant is also less desirable.
The 50% rule includes vacancies. Vacancy to me means any time at which rent is not being collected. Some homes will attract professionals with great credit, and high incomes. In our area, these homes are in high demand, and I typically have people ready to move in within days of the previous tenants moving out. I would contend that you typically have less vacancy in this kind of home because the likelihood of evictions, non paying tenants, etc is lower.
It also includes maintenance and repairs. I would also contend that the more desirable homes have less in expenses as an overall percentage of rent collected. Better tenants typically mean less carpet stains, less painting needed, cleaner homes when vacated, etc. The tenants have often been homeowners before and know when to call for minor repairs so that they don't turn into major repairs.
Of course, these are just generalizations. Good tenant screening, no matter which type of property you invest in can solve a lot of these issues, but typically "x tenant" is going to be attracted to "x house," and "y tenant" will be attracted to "y house."
The most important factor to me is the hassle factor. You can find 1%+ deals, but I'd rather take the .8-.9% and have an "easier" experience.
Lastly, there is the appreciation factor. The two homes I had in mind from my previous example were both bought in 2006 (top of the market). One was bought for 98k, and is now worth about 75k. The other was bought for 202k, and is now probably worth about the same. Most of the 1%+ deals are in declining areas. Again, a generalization, but for the most part, it's true.
From my few weeks of studying the Raleigh-Cary-Apex market, the best I'm seeing from properties listed at the MLS is 0.8%.
I'm starting to feel that to get a 1+ percent deal in a good neighborhood, I have to go outside of the MLS. Is this true?
Should I look at the ugliest/neglected house in a nice neighborhood and rehab it? Is this a good way? How about yellow letters? Pre-forclosures? Buy from wholesalers?
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
12y
That's the great thing about real estate. There is no exact "right" answer because everyone sets their own personal and financial goals (see my August 2 post on prior page.) "Should I look at the ugliest/neglected house in a nice neighborhood and rehab it?" Only if that fits for you. Regarding "The most important factor to me is the hassle factor. You can find 1%+ deals, but I'd rather take the .8-.9% and have an "easier" experience." There is nothing wrong with you doing that. Personally, I can't.
I'm also guessing that you are financing with government subsidized loans (GSE loans from Fannie Mae, FHA, Freddie Mac) and that changes the equation. My LLC members and I could get GSE loans a decade ago, but you will find that your expenses are a lot higher when you can't access the artificially low government money. Your rent-PITIA equation might be positive, but mine would not be since commercial lenders are driven by free market, non-subsidized, pricing.
Finding the right price is key: "I personally wouldn't buy things in Raleigh that fall in the 1.5% or better range unless there was some sort of lucky pricing anomaly." But in my world it has nothing to do with luck.
Regarding "...go outside of the MLS..." I generally don't buy from the Maximum Listing Service, I sell there.
Rental Property Investor · Cary, NC · Member since 2014 · 89 posts · 10 votes
12y
@Chris Martin You strike me as being very successful at what you do. As you said, you don't buy from the Maximum Listing Service. If you don't, what are the top two ways that you get your deals?