Is Little Rock Too Good To Be True?

Question

I'm looking at homes in and around Little Rock, AR and it seems that there are countless homes under 40k that could rent for 550-700 per month. Even factoring in unfavorable expenses, many of the nicer homes in that price range are showing a cash on cash ROI of more than 25%. The numbers just seem too good to be true.

Someone, please enlighten me about the market in Little Rock.

Jared Larry · Answer

Little Rock is very economically segregated city between well off and poor with not much between (few non-government, corporate employers and about 20% below poverty line). A lot of those 40k houses south of I-630 and in the south-west part of town are in depressed areas, and I'd be very wary of purchasing sight unseen unless you are VERY close to the university or have trusted boots on the ground.  As @William Porterfieldsaid, local investors passed on those properties for a reason.

Paul Thompson · Answer

@William Porterfield really could not have said it better. You're buying cash flow, very little potential for appreciation, and high maintenance tenants. Also factor in these homes tend to be fairly old and good degree of wear and tear. So your 25% ROI may not actually be that high when you factor in high turnovers rates, high property management costs, and unexpected capital improvements. Ask me how I know... ;)

But there is still money to be made if you're willing to deal with the above. Just know the market for what it is.

I'm not sure how experienced you are so I'll just say invest where you know and in what you know, wherever or whatever that may be. Someone is making money in real estate in your backyard. Why can't you? Be wary of chasing the perceived higher ROIs from another market with its unique dynamics.

Diane Trotter · Answer

Thank you William.  I don't think it is done that way in California ... is it done that way nationally?

Chris, I purchased a 3 bedroom 1 1/2 bath in zip 72209 for $50K  I'm renting it for $765 w/ gas and water paid.   I just took carpet out of bedrooms and discovered nice hardwood floors.

William Porterfield · Answer

The rental market, like everything real estate related in Arkansas, is steady and stable. If you're targeting the $500/month market, you'll have a steady flow of calls on your vacancy. Also, at this price point it would not be uncommon for the property to be in need of repairs/cleanup after a tenant leaves. In my experience, expect a 30 day vacancy during turnover. This allows time to find the right tenant and make any needed repairs.

Chris Searcy · Answer

Thank you for your inputs and advice. I live in the DC area, so "low income" housing starts at 150k while rents can be well under 1300 in those areas. On most deals, it would be a dream to get 12% Cash on Cash.

Fortunately, my parents live just outside of Little Rock and have graciously agreed to see a few houses before I go visit.

How is the rent market?

If a home is competitively priced and in good condition, how long can I expect to have it sit vacant waiting for a good tenant?

William Porterfield · Answer

A couple of things to keep in mind about the Zestimate...

1. It's based on public data and user input. Zillow no longer gets a direct feed from most MLS systems, therefore their information isn't real time. For instance, they won't get the SOLD data on a property until the information is updated in the the county's system. *Some real estate agents / companies manually enter the data.

2. Zillow's website states they are only within 10% of the sales price 48.8% of the time and 26% of the time the Zestimate is not even within 20% of the sale price.

Diane Trotter · Answer

I notice that homes don't appreciate much anywhere around Little Rock.  I looked at properties in Hot Springs Village.  It was a trip to see a listing for $225,000 and Zillow's estimate of value is $175K.  What is up with that?

Eric Metz · Answer

You are spot on. It makes my life as a wholesaler very hard being that there are so many "deals" on the open market. It's a great market for those with money!

William Porterfield · Answer

Chris, there are plenty of homes in and around Little Rock that can provide a 25% Cash on Cash return. The returns can seem unbelievable for someone coming from a more "in-demand" market. If you're planning to buy and hold, there are opportunities galore. However, keep in mind there are plenty of local investors that have passed on these properties (especially those that are listed). That's typically because they've found better returns elsewhere or they know how hard it can be to consistently collect in these areas. My caution to any out-of-state buyer looking in central Arkansas below $40k, don't buy expecting appreciation... and find a good property manager that works with lower-end rentals if you plan on holding.

Is Little Rock Too Good To Be True?

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