Buy and hold in non-ideal markets

17 Replies

In my location the houses are relatively expensive compared to the rental rates. A really good deal might hit the 1% rule and 2% seems out of the question. There are still plenty of people that buy and rent property in the area. I am curious if they are just earning lower returns or have other strategies to boost their ROI. If you invest in a tough market, what kind of strategy do you use? How are your returns?

Originally posted by @Anthony Atyeo :

In my location the houses are relatively expensive compared to the rental rates. A really good deal might hit the 1% rule and 2% seems out of the question. There are still plenty of people that buy and rent property in the area. I am curious if they are just earning lower returns or have other strategies to boost their ROI. If you invest in a tough market, what kind of strategy do you use? How are your returns?

You see a lot of rentals in the area, but that does not mean that the owners paid the going rate for those properties. Imagine if the landlords purchased their rentals in 2009-2011, when the real estate market was at it's bottom, foreclosures and short sales were everywhere, and great deals could be found in any market. 

The challenge for those of us who are buying now is to find deals that meet our price criteria. It isn't easy, but if you buy right, you make way more money in the long run. 

You may literally have to create a good deal through doing a value add. Basically buy an extremely distressed property at a steep discount, and rehab it.

@Anthony Atyeo Although I don't know your market, your problem seems to be a common one. We are buy and hold investors based in California, yet choose to invest in Cleveland where cashflow is far better.

Our philosophy is to buy SFRs in 'B' neighborhoods that are primarily owner occupied and also have decent school zones. This certainly shaves the 'theoretical' margins when compared to 'C' and 'D' neighborhoods but in the long run we feel it should equal out. This strategy should also protect the downside a little better by offering a larger pool of buyers in the future.The way we try to claw back the cahsflow/equity is by targeting short sales or wholesale deals that may require rehab but are priced well below market value.

We are not reinventing the wheel, simply implementing a tried and tested method. This somewhat mirrors the BRRRR strategy coined by @Brandon Turner and referenced regularly here on BP.

Good luck finding the right strategy for you!

Hi Anthony

There are so many considerations when trying to give you a response that you could take away and implement without fully know everything about your situation and the market.

But here's a few thoughts for you.

1.  There is a strategy of buying a home to live in as your primary residence, lock in a good low interest rate with a lender because it's your primary residence, maybe on a 20 year loan, 15 year would be better, and of course you could always do a 30 year loan.  This depends on the property costs in your area.  So you live in the home for a couple of years, instead of paying rent to someone else, you are paying your mortgage.  Maybe you can rent out rooms, or maybe buy a duplex and rent the other unit.  If you bought a single family home, move out after a few years and make it a rental.  You benefit because you've locked in a lower interest rate on fixed terms.  This is a very good strategy.  This would be similar to the House Hacking method Brandon Turner talks about.  You can buy a home every few years normally just by using this method.

2.  Another strategy is to look outside of your market.  There are many people in the higher priced areas of the USA who invest out of state.  These days it's very common.  There are a number of very good locations and there are lenders and turn-key operators that can assist first time investors to get into the market.

All the best

Nate

Thanks for the responses. I appreciate all of you taking the time to help out.

There's a few options. You can buy turnkey properties out of state (which I would be kind of weary about because you won't have boots on the ground and really know the area or be able to fix things easily). If there's cheaper property within an hour of where you live maybe consider going outside the city a bit. Or you can buy a cheap property in bad shape and rehab it to really create value and then sell it or rent it out and then do a cash-out refi

@Anthony Atyeo What price range are you looking in? Most of the properties that fit the 1% or 2% rule are between $60-$200k.  Also, I think the 1% and 2% rule are good places to start but every market is different. I have colleagues that have done very well in higher priced markets buying properties that don't fit this box.

@Zach Evanish - Thanks for the input

Most of what I have seen is in the 150k-200k range. An typical property would be a 1000sf, 3 bed 1 bath house, built in the 50's, in a decent location, and in decent shape would go for 160k. If I had to guess it would rent for $1200. That is off the MLS, so I am sure better deals are out there. It is a college town so it is very easy to fill a vacancy and possibly get more rent through individual leases. How have your friends been successful going outside of the box?

@Vincent Crane

Thanks for the reply. The surroundings area are much cheaper but are also in shrinking cities. I have seen some of properties around that look pretty good for now, but I would have concerns about the long term. I like the idea of a rehab rent. I will have to keep my eye out for that type of property.

@Anthony Atyeo

I presume you're talking specifically about State College. Obviously a difficult area to break into because demand is outrunning supply causing prices to go up not down. My assumption with buying in State College is that you're not too concerned with cash flow. You're looking for long term equity. I look around for rentals there once and awhile and never see much. I'm a PSU grad and would love to get my hands on a nice rental but it's all "retail" and I want "wholesale" and don't see much of that in SC. 

If you want cash flow, try looking a little east an hour or so. Lots of small towns where you can cash flow; long term equity won't be as great though. If you're comfortable having rentals outside of State College but within a driving distance so you could check them out once and awhile, look into turkeys. If you want to explore Lehigh Valley, I'd be happy to help. 

$160k purchase price with $1200/month rents is a 9% gross yield which is a bit low but not horrible especially if you think rents and values in that area are headed up. My friends that have gone outside the 1% rule are fine with a lower return because generally they are buying larger/newer homes in higher appreciation markets. 

I think if you run the numbers on the deal above with financing you will see that the return is actually pretty attractive. Home Runs are great but a lot of investors have built really impressive portfolio's with a bunch of singles and doubles.

@Zach Evanish

You make a good point, if my IRA or 401k was consistently getting 9% I would be pretty happy. It is a good reminder that I do not need the perfect property to do well and I would probably be better off getting started than waiting for fantastic deals.

Exactly! Feel free to reach out if there is every anything I can do to help.

I live in CA and completely understand your issues with this.  A strategy that I have learned in my research is that you can always force appreciation.  Buy a house for less that could use a good spruce up in a decent neighborhood and then raise rent.  But be careful here as you need to make sure that the new raised rent is comparable to the area.  Also, don't get too carried away on rehab as you may not get back what you put in.  Renters will not pay more  for rent in a home that has nice expensive counter tops if the neighborhood isn't worth the price.  

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@Anthony Atyeo

I like to invest my self-employed 401k in buy and hold properties.

I'd venture to say a) most people don't know how to actually run numbers on rental properties, and know what constitutes cash flow, and b) if most are like me, they grow up thinking if you just own rental properties you are good to go! It wasn't until I started shopping for properties out here in LA to buy as investments when I really started questioning where the profit was. Finally I learned more about it and realized that it's just a lack of education.

So to answer your question, if you are in an area that really doesn't allow for cash flow, my assumption is usually one of two things: 1. the owner bought the property decades ago when it was cheaper (whether they meant to or not or even knew what they were doing), or 2. they are losing money at a decent speed.

Although, with all of that said, the 1 and 2% rules are much harder to come by these days than they were even 2 or so years ago. 2% is pretty much out of the question unless you buy in the ghetto, but 1% is still decently doable in a lot of markets. May not be yours (it's certainly not my own, which is why I drifted out of state to buy), but it's doable.

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