Purchasing Rental Properties in an Expensive Marketplace.
Real Estate Agent · Victoria, British Columbia · Member since 2016 · 7 posts · 0 votes
Purchasing Rental Properties in an Expensive Marketplace.
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Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10yI invest in an expensive area, SF rentals for nearly 15 years, and have a vastly different take on things than most. High demand and limited supply is what generally creates an expensive market. If the conditions that cause that high demand and limited supply are persistent, then these conditions also cause high appreciation rates in both purchase price and rents. You can confirm this by studying the historical pricing and rents over the long term. For example, coastal Southern California is very expensive, but the long term average appreciation rate is 6%-8%, depending on the specific city, and rents have increased at a similar clip, and this is average over the last 40 or so years. So, the question then is are you speculating by assuming the same 40 year average rates of appreciation and rent increases? Are the conditions that cause the high demand and limited supply persistent? Is it true that these properties offer lower cash flow in the long term if the rents go up rapidly vs a market with higher initial cash flow but lower rates of rental increase?
Also, another hallmark to be aware of in these markets is that prices tend to be more volatile then less expensive markets. Not always, and validate this statement with your own independent analysis, but in general this tends to be true I believe because people tend to stretch more than they should financially at times to get into these markets and when a downturn hits that strategy backfires on them. This is actually good news for the conservative, patient, and prudent investor who can use this volatility to their advantage to ocassionally pick up properties at bargain basement prices. It also means that risk management, multiple exit strategies, and conservative financing are also especially important IMO in these type of markets.
A few things to consider as you do your own independent analysis and make your own decision ...
24 Replies
- Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes10y
Hey, @Taylor McMullen, I'm in NYC and feel your pain.
I recommend looking at areas an hour or 2 outside your city. The problem with an expensive area isn't just the cost of the down payment. You won't see great (if any) cashflow. You're really betting on appreciation, which might be great. But what happens when there's an unexpected roof leak or the furnace breaks down? All of your cash has gone to a big down payment and you're not bringing in any money to rebuild your reserves.
There are places to invest closer than you think. Focus on areas that have solid working-class populations. The BRRRR strategy is a great way to obtain properties and continually recycle our capital.
- Real Estate Agent · Ashburn, VA · Member since 2016 · 107 posts · 31 votes10y
I've been running into this predicament just moving to the northern Virginia area.
- Brandon, FL · Member since 2016 · 19 posts · 3 votes10y
Welcome to Northern VA Nick. Yes, this area can be a challenge if you're looking to invest but not impossible.
I agree with Jaysen. Taylor should search outside of Victoria city where he'll most likely find better opportunities for cashflow.
- Specialist · Vancouver, BC · Member since 2016 · 63 posts · 7 votes10y
@Taylor McMullen It's a rough entry point for sure. I've been trying to find a market that would cashflow and the local meetups suggest that Abbotsford might be a potential.
- Real Estate Agent · Northern Virginia · Member since 2016 · 61 posts · 15 votes10y
I am currently in the same predicament. It is very tough to find a property that I can afford to put 20% down on here in Northern Virginia. However, I will say, if I am able to clear the cash down hurdle, there are definitely properties here that will cash flow. Maybe not more than $100-200 a month in the first few years but they are cash flow positive (and I always build in room for a property manager, even it I plan to manage it myself initially, so if I don't use a PM, my monthly cash flow jumps up another couple hundred a month). I've explored HELOC's for help with a down payment but, to my surprise, they are expensive too and would take my positive cash flow down to just about nothing. Have you read The book on investing in Real Estate with No (and low) money down by Brandon Turner? It is really helpful in this scenario - I'm about half way through and it has given me some ideas. Also, what about partnering up with someone? I would also say, talk to as many lenders as possible. I've found that I've learned a little from each one that I speak with and they do offer different rates and different financing options so I it is definitely worth shopping around. Especially for HELOC rates. If you don't have equity in your primary residence or if you don't own a home, have you considered house hacking? If you have a brokerage account, you can also borrow against that. I've never done it but have heard it can be less costly than a traditional loan.
- Rental Property Investor · Arlington, VA · Member since 2015 · 160 posts · 53 votes10y
Hey @Taylor McMullen, 20% can seem daunting on a $650k SFR. In Northern VA (NOVA), we do experience higher than the national average on home purchase prices. But that does not mean that a deal can't be found. As mentioned by @Kristina Inglis, the key is to be creative! One silver lining to being in an expensive market is that a lot of folks will simply be priced out of the game and/or simply hit a mental block. While a lot of the investors I work with through the purchase process are putting down a substantial down payment. By far the most productive investors are those who can think outside the box.
@Brandon Turner's book on Investing with No (and low) Money Down is a great place to start! One of the most used strategies I see is simply a partnership. Family/Friends/Co-Workers create an LLC and pools some funds together to get in the game. Smaller returns but they're in the game. Try and find an agent that specializes in working with investors we tend to have a bit more patient than your traditional listing/buyers agent :) .
Good Luck!
- Real Estate Agent · Northern Virginia · Member since 2016 · 61 posts · 15 votes10y
Yes! I forgot to mention that. Finding an experienced investor friendly, experienced realtor is KEY, as @Sam Valme suggests. I've found one and she has been fantastic in understanding the meaning of 'deal' from an investor perspective.
- Vancouver, British Columbia · Member since 2016 · 15 posts · 4 votes10y
I see you're on the Island - Have you taken a look at Nanaimo? Much lower cost of entry, with the ability to cash flow.
- Flowery Branch, GA · Member since 2016 · 23 posts · 7 votes10y
I feel like if you have the money to invest in these areas, you have the money and the ability to build a solid relationship with a turnkey provider or a property management company and invest outside of your immediate area. Is one property and a lottery ticket at appreciation really better than 5 or 6 that cashflow?
Virginia is a big state, and there are a lot of areas to invest in outside of the immediate NOVA area. - Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes10yAt $650k you will not be getting a buy and hold that will cash flow. I recommend getting to know the area very well before investing any money.
7e investments53 Reviews - Real Estate Agent · Victoria, British Columbia · Member since 2016 · 7 posts · 0 votes10y
Hello everyone!
I appreciate your responses to my question! I am beginning to search in markets outside of ours here in Victoria. The trouble right now is, Victoria and Vancouver are in very short supply of inventory. This is driving prices up like crazy at the moment. i.e Home listed at $699,000 last week sold of $1,019,900. INSANE.
I was lucky enough to purchase a home in a great location. I can rent the house for about $3000 per month. However, I am not cash flowing at the moment, but my property value is around the $800,000 mark now (purchased for $630,000 Oct. 2015). I am considering either borrowing against the equity to purchase a second property, or attempting to aggressively pay down the mortgage on this house, become debt free, and allow that process to compound my results. I realize that is a very ambitious strategy, but I feel could be a viable solution to investing in an expensive market place.
Thanks again for your response. That was my first post. Loving the support of the community on here.
- Vancouver, British Columbia · Member since 2016 · 15 posts · 4 votes10y
@Tom Stromar Is an agent/investor in the Nanaimo area - If you're interested perhaps get in touch, he's been really helpful when I've messaged with him.
- Rental Property Investor · Victoria, British Columbia · Member since 2016 · 36 posts · 25 votes10yHey Taylor McMullen , I am working on putting together some meet ups, teams, and information for vancouver island based investors. We have some very knowledgeable service providers available, as well as some very experienced investors. If you are interested in chatting and hearing about what we are putting together please feel free to message me and id love to fill you in. Cheers.
- Developer · San Diego, CA · Member since 2015 · 1k+ posts · 1k+ votes10yTaylor McMullen To answer your specific question, yes I do - my market is one of the pricier ones in the States. The only rental assets here that make sense to me are small multis. On expensive properties, financing terms make a big difference, so FNMA terms can be advantageous over larger buildings. That, and some other reasons (arguably, turnover lower in properties where people tend to nest - private yards, garages, etc). Regardless, it's definitely a different beast than lower value markets.
- Rental Property Investor · Chilliwack, B.C. · Member since 2015 · 115 posts · 37 votes10y
I've had my rentals been between 500 - 700 k purchase price here on the mainland but the way I allow them to cash flow is to do the value add of putting in a suite and renting out the house; I include yard maintenance and all utilities on the properties. Was the home you purchased suitable and how do you find the market in Vic? I'm noticing a bit of a lull, a very minimal one here in Abbotsford, and by lull I mean houses aren't selling in a day - more around the month mark; opposed to Vancouver where as far as I know it is still an extremely hot market.
- Investor · Abbotsford, British Columbia · Member since 2016 · 1 post · 0 votes10y
How much have you been able to rent an upstairs and downstairs to maintain positive cash flow? Are you putting more than 20 percent down payment down? Are you looking into getting into Abbotsford or are you already here?
I'm new to the real estate investments and am looking at chilliwack, Abbotsford and mission but just getting started.
- Rental Property Investor · Chilliwack, B.C. · Member since 2015 · 115 posts · 37 votes10y
@taylor
@Taylor McMullenundefined
I'll first start by saying my niche market is mid level executive style rentals in east Abbotsoford priced between 600 - 700 k, just to narrow it down my rule of thumbs don't apply for all of Abby, just my "farm" area.
I've been doing rentals now for four years now - the market has changed and what cash flow positive means in our market where a entry level home runs 550 k. As an active investor I buy low, do a value add (I am a carpenter) put in a suite and the houses have been cash flow positive by 1000 a mo, with my value add's and appreciation I have put two properties up a quarter of the original purchase price but with a substantial amount of work. Our last reno was 70k and is across from Sandyhill elm. school.
Upstarirs I price at the high end of the market, 2000 - 2500 and downstairs which are typically a 2 bedroom suite for 1100 ish.
I am not a mortgage broker, but this is my understanding; anyone please correct me if I'm wrong on any of this.
My wife and I just restructed our niche so to speak and we will be doing two more buy and holds in east abby this year. We avoid 20 percent down on investment properties by switching our primary shelter to the new property we are buying, yes the down payment s get higher than the minimum, 5% down on the first 500 k and 10% on the balance. Switching your primary shelter/dwelling/house, what ever you may call it, allows 80% of the current address to go towards your over all income. If you do not have a lease in place you can get a independent assessment which a bank can use on a rental worksheet I believe there called.
All areas have there peaks and valleys although I'v bought both in Promotory in Chilliwack and obviously Abby.
- Real Estate Agent · Victoria, British Columbia · Member since 2016 · 7 posts · 0 votes10y
Originally posted by @Kris Mcfarlane:
I've had my rentals been between 500 - 700 k purchase price here on the mainland but the way I allow them to cash flow is to do the value add of putting in a suite and renting out the house; I include yard maintenance and all utilities on the properties. Was the home you purchased suitable and how do you find the market in Vic? I'm noticing a bit of a lull, a very minimal one here in Abbotsford, and by lull I mean houses aren't selling in a day - more around the month mark; opposed to Vancouver where as far as I know it is still an extremely hot market.
Hey Kris,
I am definitely noticing a bit of a lull as well. It usually does get a little quieter just before summer I find. Families getting ready for holidays. If a home is on the market for longer than a week, I am wondering what the problem is.
With that being said, homes are still going well over asking price in hot areas. We had one the other day listed at $699,000 go for $1,019,900.
The house I purchased already had a suite in place. I am starting to look to Nanaimo for my next purchase.
I appreciate you sharing what has been working for you. I am starting to explore the idea of value adding, especially in market places like Vancouver & Victoria.
- Developer · Vancouver, British Columbia · Member since 2014 · 122 posts · 26 votes10y
Hi @Taylor McMullen fro your figures it seem you only have about $10 in home equity to use as the banks will generally only loan up to 80% of current home value and this is based on the assessor they send and how good he is.
I'm looking into northern BC.
- Rental Property Investor · Chilliwack, B.C. · Member since 2015 · 115 posts · 37 votes10y
Sounds like value add is where you can turn a good buck, I was just reading what you house rents for and purchase price, you can get the same results here in Abby for 575 000 in a C+ to B- neighbourhood. You made a killing on that house though, 170 k in two years! Was that all in appreciation or did you do a value add, as it has a suite in it I'm assuming in just appreciation?
My favourite type of house to buy is the old bilevel entry BC box, 3/2 up and a great room and 1 bath down. I turn it into a 3/2 up and a 2/1 down; with keeping the garage open, and a window in it it gives me that option of doing a 3/1 down. Adding a bedroom and living space in half of the garage, opening up the man door to create more of a welcoming opening into a new space as well.
- Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes10y
I invest in an expensive area, SF rentals for nearly 15 years, and have a vastly different take on things than most. High demand and limited supply is what generally creates an expensive market. If the conditions that cause that high demand and limited supply are persistent, then these conditions also cause high appreciation rates in both purchase price and rents. You can confirm this by studying the historical pricing and rents over the long term. For example, coastal Southern California is very expensive, but the long term average appreciation rate is 6%-8%, depending on the specific city, and rents have increased at a similar clip, and this is average over the last 40 or so years. So, the question then is are you speculating by assuming the same 40 year average rates of appreciation and rent increases? Are the conditions that cause the high demand and limited supply persistent? Is it true that these properties offer lower cash flow in the long term if the rents go up rapidly vs a market with higher initial cash flow but lower rates of rental increase?
Also, another hallmark to be aware of in these markets is that prices tend to be more volatile then less expensive markets. Not always, and validate this statement with your own independent analysis, but in general this tends to be true I believe because people tend to stretch more than they should financially at times to get into these markets and when a downturn hits that strategy backfires on them. This is actually good news for the conservative, patient, and prudent investor who can use this volatility to their advantage to ocassionally pick up properties at bargain basement prices. It also means that risk management, multiple exit strategies, and conservative financing are also especially important IMO in these type of markets.
A few things to consider as you do your own independent analysis and make your own decision ...
- Member since 2016 · 13k+ posts · 12k+ votes10y
Speculation on appreciation is the only way to make money in an expensive market. All the areas where investors are paying $500,000 and up with rents that do not accurately reflect the price range are taking huge risks and are in reality negative cash flow with out knowing it. If rent does not meet or come close to 1% you are deluding yourself into thinking you have positive cash flow.
Numbers do not lie but can be very easily manipulated any way a investor chooses. Unfortunately these investors are only considering yesterdays numbers and do not accept any numbers that would work against their bottom line.
Whenever I hear a investor throw out a positive cash flow number on these types of properties or talks about paying down a mortgage to increase cash flow you know they have no concept of the real numbers of the business. They are short sited investors that only consider todays bank balance. They are not investing in rental income properties and hopefully they sell and reap the rewards of appreciation before the shoe drops hard.
- Real Estate Agent · Victoria, British Columbia · Member since 2016 · 7 posts · 0 votes10y
Originally posted by @Kris Mcfarlane:
Sounds like value add is where you can turn a good buck, I was just reading what you house rents for and purchase price, you can get the same results here in Abby for 575 000 in a C+ to B- neighbourhood. You made a killing on that house though, 170 k in two years! Was that all in appreciation or did you do a value add, as it has a suite in it I'm assuming in just appreciation?
My favourite type of house to buy is the old bilevel entry BC box, 3/2 up and a great room and 1 bath down. I turn it into a 3/2 up and a 2/1 down; with keeping the garage open, and a window in it it gives me that option of doing a 3/1 down. Adding a bedroom and living space in half of the garage, opening up the man door to create more of a welcoming opening into a new space as well.
I was very lucky with my purchase. The home went up in value purely through market appreciation. The market was just starting to rise when I purchased the home. It completely exploded from there.
Vancouver's market is dripping over to Victoria. I believe the average home price in Vancouver is around the million dollar mark now. Victoria went from $575 last year to $700 present day.
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