Buy & Hold - If you could invest anywhere in the US?

34 Replies

First off, Happy Friday!

This question has been asked before, but let me clarify and put some parameters around it:

"Where would you invest for long-term buy and hold (5-10 years) if you could go anywhere in the US, assuming your goal is total ROI?"

Include an expected ROI from rental income. If you have an idea, include expected ROI from appreciation. More important than an ROI number on the appreciation side would be an assessment and reasoning of the potential.

Assumptions:

1. You don't have the concerns that go with managing property from a distance.

2. You have and must use (so we compare apples to apples) a good property manager anywhere you buy.

3. For the sake of keeping everything normalized, you would buy and hold all cash.

4. Cost basis must be at market price (i.e. no wholesale deals or value-added methods of picking up the property). Must include transaction and rehab costs to get property rent ready.

5. One expense ratio does not fit all. Use a ratio from 40-60%, but state what ratio you use. Adjust for knowledge of what the expenses would be (i.e. older properties have more expenses, taxes are higher/lower in certain states). Expense ratio used should include everything (vacancy allowance, mgmt fees, taxes, insurance, maintenance, etc).

6. Exclude extremely subprime, crime-ridden areas. If you don't want to walk down the block during the day, it's out.

7. Residential, 1-4 units only.

Selfishly, I'm posing this question because I've been looking into non-local markets myself. I don't have an answer to kick things off with. Instead I'll provide an example based on investments I made a few years ago.

Answer (back in 2010):

Palmdale, CA SFHs. East Palmdale, slightly better return but West Palmdale, lower chance of buying in the wrong neighborhood. Driving around the area will lower most but not all of that risk. East Palmdale SFHs pretty much fit the 1% rule (West Palmdale more like 0.9%).

Typical East Palmdale 3bd/2ba, 1300sqft, 1980-1990s build, SFH about $90k at MLS prices. Expected cost basis of $100k, including some rehab. Market rent of $1000/mo. Apply 40% expense ratio = rental income ROI of 7.2% of $100k cost basis.

Expect capital appreciation of at least 50%, as high as 100%, in the next 5-7 years. Based on the following observations and assumptions:

1. Economy will recover in a 5-7 years. Expect 10 years as a possibility but unlikely.

2. Construction cost of a new 1300sqft home is at least $162k ($125/sqft). Being that's the cost of a new home without land, it is a good basis for the intrinsic value of the property + land. $150k valuation in 5-7 year is reasonable if not conservative. Passes the "sniff" test.

3. Current (2010) market prices are 65-75% OFF their 2006 highs. This means that said $90k ($100k ARV) SFH, based on comps, was valued at least as high as $300k in 2006. An expected 5-7 year value of $150k would still be 50% off 2006 highs. Again, IMO, a safe expectation.

4. 1% rule properties anywhere close to Los Angeles are tough to find. Investors will provide support at current prices and probably far beyond.

There you have it. It'd be nice to keep prolonged back and forth debates to a minimum but follow up questions are great. If you disagree with someone's numbers or assumptions, post your own!

Raleigh, NC

Since this is all hypothetical and we're investing with imaginary unlimited cash...I would think that looking towards the expensive markets would be the way to "win" this game, so I'd be looking at NYC or Southern California.  The reason I suggest this is that the upkeep for a 1500 sq ft 3/2 in the burbs is probably not going to change a whole lot whether you're in Raleigh or Southern California.  A roof is a roof, and electrical work is electrical work, and plumbing is plumbing.  Appliances cost what they cost, as well.  So with that in mind, I'd likely be able to keep my SoCal units in better shape than my Raleigh units with the higher rents that I'd be commanding.  

So while the numbers might look about the same or worse, I'm thinking that as long as I have a decent property manager, I'd have a more sustainable property, and that's truly the big idea when it comes to buy and hold investing.  

@Matt Rothwell  Not sure about that.  If the market is already high, how much higher could it go.  Besides that, wouldn't it make more sense (dollars) to invest low...in an area that dropped and is poised to recover?

First, those areas would be cash cows, and the appreciation would be much large and faster.

Keep the answer coming, but this is less of a poll and more of a query of actual reasoning behind your picks. If you have further to elaborate please do!

@Matt Rothwell  Perhaps I wasn't clear but this isn't purely hypothetical nor am I suggesting unlimited funds. I just didn't want financing concerns to complicate matters. Everyone has access to capital in different forms. Keeping things all cash simplifies the answers.

Keep in mind the ultimate goal is total ROI, so how much you pay for a property absolutely has an effect on performance of your investment dollars.

@Bill Fennelly  ....I am curious about someone from MA saying Tampa, FL.  

OK @wes  How about these numbers?

Property #1:  3/1 - 1000 sf ranch

$110,000             Sales Comps last 60 days within 1 mile
$  50,000             Cost all in (Purchase/rehab/closing/etc...

$950/m                Rent
$208/m                T/I
$  95/m                PM
$297/m DS on 55% ARV REFI in 6 months
$351/m                Cash Flow (after year 1)
$512/m                Avg CF year 1 (6 months no debt/6 months with REFI debt)

$  6,141               Cash Flow 1st Year
$11,500               Cash Out REFI
$49,000               Recover of Original Cash In at REFI
$66,651               TOTAL Cash Return 1st Year


Property #2: 3/1 - 1036 sf ranch

$  72,000             Sales Comps last 60 days within 1 mile
$  47,000             Cost all in (Purchase/rehab/closing/etc...

$950/m                Rent
$219/m                T/I
$ 95/m                 PM
$265/m DS on 75% ARV REFI in 6 months
$371/m                Cash Flow (after year 1)
$515/m                Avg CF year 1 (6 months no debt/6 months with REFI debt)

$  6,557               Cash Flow 1st Year
$  2,500               Cash Out REFI
$47,000               Recover of Original Cash In at REFI
$56,057               TOTAL Cash Return 1st Year

I like Fort Worth

Originally posted by @Eric Odum :

@Bill Fennelly ....I am curious about someone from MA saying Tampa, FL.  

I have a fondness for Tampa having gone to school there is a previous life...and have been tracking the market there for some time, and am giving serious consideration to coming down there to start investing, buy and hold, fix n flip, my market area is super expensive and difficult to gain entry at certain price points...based on what I have been reading it appears that the future of Tampa is going to change, for the better I believe...just my opinion ! 

St Louis.  Especially south st louis. 

Cupertino CA   hands down... or Palo Alto.... East palo Alto East Menlo 

North Side Chicago - perfect balance of cash flow and appreciation IMO

@Joe, where exactly are you getting those kind of numbers? I grew up just outside of Ann Arbor, and have really taken a long look at the Ypsi area the past few years.  I'd be curious to get a better understanding of what you're seeing.  

Originally posted by @Joe Villeneuve :

OK @wes  How about these numbers?

Property #1:  3/1 - 1000 sf ranch

$110,000             Sales Comps last 60 days within 1 mile
$  50,000             Cost all in (Purchase/rehab/closing/etc...

$950/m                Rent
$208/m                T/I
$  95/m                PM
$297/m DS on 55% ARV REFI in 6 months
$351/m                Cash Flow (after year 1)
$512/m                Avg CF year 1 (6 months no debt/6 months with REFI debt)

$  6,141               Cash Flow 1st Year
$11,500               Cash Out REFI
$49,000               Recover of Original Cash In at REFI
$66,651               TOTAL Cash Return 1st Year


Property #2: 3/1 - 1036 sf ranch

$  72,000             Sales Comps last 60 days within 1 mile
$  47,000             Cost all in (Purchase/rehab/closing/etc...

$950/m                Rent
$219/m                T/I
$ 95/m                 PM
$265/m DS on 75% ARV REFI in 6 months
$371/m                Cash Flow (after year 1)
$515/m                Avg CF year 1 (6 months no debt/6 months with REFI debt)

$  6,557               Cash Flow 1st Year
$  2,500               Cash Out REFI
$47,000               Recover of Original Cash In at REFI
$56,057               TOTAL Cash Return 1st Year

@Wes Shive  

  sure   let me start with Apple,  Google,,, Facebook,, HP,, Varion, Stanford University, the 49ers, Sisco, Oracle, Genetech, The Giants, the Sharks The warriors, the Raiders,  and of course the new comers like linkeden and another 100 to 500 high paying jobs.. now compare that to anywhere else expect maybe Atlanta,, Dallas Houston and LA with Chicago right up there and of course NYC and Boston... WA DC.. Charleston is cool

These are the cities were you can be passive and get rich over the years.

@Kirk Berryman Both deals were from Livonia. I have one right now in Ypsi. Just south of St Joes. Bought and rehabbed for just over $100k...ARV $190k. In the process of refi for $140k. Cash flow over $1500/month.

@Wes Shive Yes they are market prices. Both of these are/were off the MLS. It's the market I'm dealing in...and I'm not talking "war zones" or anything like it.

Hi, 

   This is always an interesting question. But here is my experience and opinion.

When I started back in 2010 I only did flips.  In between flips, I thought of diversification to other regions and I invested in Plano, TX,   South FL & OH. 

Plano, TX  and South FL have been consistent appreciation and never been a problem with renting them out. Well employed tenants too.  While I was doing all that, I actually lived in MA and did my day job in both 3 days a week in MA and 2 days in NH.  I never was able to acquire anything in MA due to cost. Did not find a deal to make it work or may be was too busy with other work. 

Based of last 4 yrs experience: 

Plano, TX has appreciated atleast 30% in last 2 years.  2 props each 3b/2b with large lots. 

FL, shows about 15 -18% appreciate and consistent annual rent raises. 

I expect both of these places have potential. 

In CA ( Bay Area) I did about 13 flips and although I made enough to buy other properties, If I had kept all the properties I had bought, each of them has now appreciated mo re than 60%. But then all properties bought on auctions.  My recent flip in CA ( last month), bought at 278 and upgraded, flipped it for 365. As it was financed, my effective roi based on down payment is nearly 27%.

However NorCal properties have gone way too high and so has rents, and rental proportion may not work out. I would say unless one is very careful about the property in NorCal, it has reached risk levels.  Interesting to note the SoCal still has opportunities, but the areas that I know, OC and parts of LA, like Buena Park, are same as comparable to NorCal situation.

The best opportunities to look now in NorCal are in range of 800K to Million plus. That is the sweet spot to flip and make cash.  This may not at work for buy-hold option.

Based on these factors, I would be still comfortable to go back to TX and FL. 

Since I read NC, may be  will look into that as well.

Welcome to BP. 

1. San Diego, CA

2. Miami, FL

3. Houston, TX 

Hope it helps.

@Naveen Desai  

 I did not think the scene in your avatar was anywhere in Mass. that is a CA scene all day long brown hillside with water.. Clearlake ?  Lake Berryessa?  maybe a lake in the Sierra foothills.. am I close?

Portland and Seattle are hot right now.. so is some EAst coast areas

@Wes shive here you go let me know if you have any questions.

I have several great rentals that i own. Here are some of the # i don't know what all you guys want. 

2 family in 63118

unit 1: 800 been there 4 years pay on time and never late. 

unit 2: 750 been there a little over a year. There ok i usually make another 50-100 off there late fees a month. I would rather have them pay on time. 

$1,550 is what the leases are at. 

purchased the property in 2009 for $14,000 rehabbed the property for a 56,000. with a total of 75,000 its worth at least $160,000.  

I dont have a loan and the taxes are $360 paid them this week, and the insurance is 560 for the year. 

Maintenance for the year was $600. Water sewer, and trash run $45 a month. 

$75,000 purchase price

$1550 monthly rent lease rate year 18,600

$360 taxes for the year

$560 insurance

$600 for maintenance for the year. 

45 a month for Water sewer and trash year 540 

16,540 yearly cash flow. 

22.05 cash rate of return 


Single families i have several of these. I bought 2 more early this year

2 bed 1 bath 

$40,000 purchase price. Could sell for 65,000 or more

$850 monthly rent year 10,200

$600 taxes for the year

$435 insurance 

$300 for maintenance for the year. 

Tenant pays for water sewer and trash. 

$8,865 yearly cash flow.

22.16  rate of return

2bed 1bath

$30,000 purchase price. could sell for 55,000

$650 monthly rent year $7,800

$400 taxes for the year

$435 insurance

$150 for maintenance for the year. 

Tenant pays for water sewer and trash.

$6,815 yearly cash flow.

22.71 rate of return

4 family 

$150,000 ($80,000 purchase price 70,000 rehab) The property is worth $220,000 

$2200 monthly rent year 26,400

$1800 taxes for the year

$835 insurance

$650 for maintenance for the year.

$1,400 water sewer and trash.

$21,715 yearly cash flow.

14.47 rate of return

It is pretty easy to find a property to return 14% rate of return. Iet me know if you need more information.  

Well the fact you said to assume all cash you are pretty much saying that is unlimited since you can compare the same house that in one market would cost $20K and in another might be $2M.

Lots of people can buy a $20K for cash not that many can a $2M one.

So if you have enough cash to be able to play in most any market then it will usually make sense to work in the blue chip expensive as all hell places since they will retain, and most likely go up the most.  Fly over country is more risky in that way.

For example lets say you have $1M burning a hole in your pocket.  If you were in my area you could go to some of the decent Boston outer suburbs and buy 3 good size single family rentals with that cash and probably get on average around $2,800 a month rent (about a 0.84% rent ratio which is about right mostly here).

If you wanted to get cheaper places and went out of area, but didn't want to go low end you find a market and buy 11 places for around $91K each.  Get something around 1.3% or average $1,200 a month on them looks about right for any place that has any real appreciation potential without crazy volatility.

For the local stuff I'll give a 5% annual appreciation which is good but not ambitious.  For the out of state stuff I'll go with 2% which I think is realistic at this price point but might be slightly ambitious unless there is something about to "hit" that could make the place go up fast.

Just going to call expense ratios 50% on both.  Not sure why you want people fudging that one when you restrict purchases to all cash.

On a 7 year hold for the Boston suburbs I'd get:

Rents: $2,800 x 3 x 0.5 x 84 = $352,800

Appreciation of 5% for 7 years on $1M is $1,407,100 for a gain of $407,100

Total: $759,900

On the out of state I'd get:

Rents: $1,200 x 11 x 0.5 x 84 = $554,400

Appreciation of 2% on that hold would get $1,148,685 for a $148,685 gain

Total: $703,085

So the pricey stuff wins by just under $57K

BTW I did purposely pick the 2 set to be around 10 places so if you did allow financing it would be possible to more or less use the same cash.  While being a little more work you should be able to buy 10 of those 11 out of state places with conventional financing.

If you wanted to say buy 25 houses at an average of $40K you will have a lot harder time doing that with the banks.

However if you want to work your *** off and have $1MM cash your returns on that cheap portfolio will be better over that period if they meet the 2% rule as the rents alone exceed both of those numbers (Which is good since even using a 1% appreciation value at that price point is really ambitious).

@Wes Shive 15 minutes from my house.

I usually make the deal, not the market deals to me.

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