Is there any decent market left to still get a decent return?

Registered Representative · Bend, OR · Member since 2018 · 91 posts · 38 votes

8y

This is a really good question to post ... I hope a lot of people respond. I see in this market, people selling and moving into either lower value markets or passive investments. It's a cycle that seems to repeat.

1 Reply

Russell BrazilBusiness Member

Moderator

Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes

8y

Estimating 50% costs might be accurate at the cheaper price points.....but if 50% of my rent was going to costs, that would mean I was replacing the roof, hvac, water heater and two bathrooms every single year on each of my properties.

[email protected]301-893-4635 Podcast Guest on Show #192

District Invest Group545 Reviews

Website View Page

6 Reply

Alexander FelicePro Member

Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes

8y

I just bought an overpriced foreclosure this week, still gonna make a slam dunk.

Lots of people are buying houses, all the time, lots of money to be made.

I agree that things are in a crunch and some markets (like here in Vegas) aren't viable, but that certainly doesn't mean nobody is getting deals.

also, it sounds like you aren't pursuing value-add and just want to buy a house retail and cash flow, this is probably a much harder strategy in an up market especially with where rates are moving.

[email protected]Podcast Guest on Show #301

3 Reply

Will G.

Rental Property Investor · Maryville, TN · Member since 2009 · 529 posts · 414 votes

8y

50% expenses may be a little high, but if self managing it is nice to have something in expenses for your time. Saw a great post here about an investor who bought a new home and had a single tenant for 15 years. At tenant move out he had some $26k of expenses redoing the house, which effectively wiped out all cash flow. His only benefit was from equity paydown(paying the mortgage) his advice was count on 50%, obviously heavily influenced by tenant turnover.

On current strategy, the world is yield starved with low rates of return on everything, so many are accepting formally unthinkable returns as "better than money in the bank"

I would be firmly in the "time to re-strategize" camp, and think the artificially low interest rates will cause a lot of malinvestment as financial engineering usually does.

7.5% should be doable with multifamily or syndication

Although there seems to be no end to those who will overpay, perhaps not understanding actual costs or investing for other reasons(besides cashflow) on the commercial side. Hence the record low cap rates!

1 Reply

Mike D'ArrigoPro Member

Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes

8y

@Ryan Z. Unfortunatley, the day's of 10-12% returns on cash purchases are over. We used to see them routinely on our turn keys 3 or 4 years ago but now they're more in the 7.5%-8.5% range depending on the neighborhood class. That's what we're seeing these day's in Indianapolis and Kansas City which are still good cash flow markets.

2 Reply

Dave FosterBusiness Member

Qualified Intermediary for 1031 Exchanges · St. Petersburg, FL · Member since 2013 · 9k+ posts · 9k+ votes

8y

@Ryan Z., If you're a buy and hold then that means you hold when the time is not right. If you're positioned well you can hold through a downturn and then double down after the correction. That's the cycle. A 1031 investor never gets hurt that way. Successful companies and individual investors never hesitate to liquidate to cash and go the the mattress while waiting for buying opportunities. With real estate the carrot of the 1031 opportunity minimizes that need to go to cash but does create a dilemma of when to make the last move before holding. In real estate the buy and hold investor just sits tight instead of selling and holding cash - typically.

The 1031 Investor5137 Reviews

Website View Page

2 Reply

Matt Millard

Lewisville, TX · Member since 2015 · 341 posts · 264 votes

8y

Diversifying into real estate private placements & partnerships across a broader geographic area & starting a 2nd business mining & using Cryptocurrency!

0 Reply

Jay HinrichsBusiness Member

Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes

8y

this is why notes are pretty hot right now 9 to 10% on really secure performing notes Is quite doable ..

and I fine that many that have had rentals for years will morph into notes as they become less interested in dealing with the PM's and tenants ..

so that's what I see happening.

Podcast Guest on Show #222

JLH Capital Partners51 Review

Website View Page

4 Reply

Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

8y

You can get 9% in a senior facility Reit. Good luck!

0 Reply

Michael Bishop

United States · Member since 2015 · 401 posts · 394 votes

8y

@Ryan Z., if you're not stubborn on active buy and hold play only, consider investigating syndicated opportunities. A lot of Sponsors offer an 8% preferred return, I.e. you see 8% before they take anything, and returns are often greater than that with downside protection modeled in (if you've got a good Sponsor, that is).

MFH syndication is a popular one, but you can also find deals in SS, MHP, etc which have the potential to offer even more lucrative returns. A couple of articles I've written on MF syndication specifically:

Recipe for Successfully Investing in Multi-Family Syndication

8 Reasons Why Apartment Syndication is an Appealing Investment Vehicle

Happy to discuss if interested so don't hesitate to connect

2 Reply

Steve K.

Honolulu, HI · Member since 2017 · 247 posts · 315 votes

8y

Originally posted by @Michael Bishop:

@Ryan Z., if you're not stubborn on active buy and hold play only, consider investigating syndicated opportunities. A lot of Sponsors offer an 8% preferred return, I.e. you see 8% before they take anything, and returns are often greater than that with downside protection modeled in (if you've got a good Sponsor, that is).

MFH syndication is a popular one, but you can also find deals in SS, MHP, etc which have the potential to offer even more lucrative returns. A couple of articles I've written on MF syndication specifically:

Recipe for Successfully Investing in Multi-Family Syndication

8 Reasons Why Apartment Syndication is an Appealing Investment Vehicle

Happy to discuss if interested so don't hesitate to connect

i agree, i have transitioned into syndications in the past few years

2 Reply

Todd Dexheimer

Rental Property Investor · St. Paul, MN · Member since 2016 · 3k+ posts · 3k+ votes

8y

@Ryan Z. I would not lower your standards below 10%. You can passively get 10% or better return investing in a syndication, holding notes, being a hard money lender and investing in commerical NNN lease properties. You can also expect 8-9% returns on REIT's.

1 Reply

Jon HuberPro Member

Rental Property Investor · Boca Raton, FL · Member since 2014 · 1k+ posts · 713 votes

8y

@Ryan Z. If you can't find any deals to invest and get your 8%, why not get into hard money lending. With HML, you can let other's take a swing a the riskier markets and still get your 10-12%.

1 Reply

Dan H.Pro Member

Investor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes

8y

I agree with @Russell Brazil on more expensive units have less than 50% costs but ran the numbers from my most recent purchase (last Oct) using my cost estimates (the same cost estimates that I used in determining to purchase the property). My purchase even with my estimated costs did not meet his criteria if using a PM (used average national full PM costs). In reality we are the PM on this property and do not have that expense but agree that PM fees should be included in cost analysis.

I ran the numbers using the 50% cost ratio on my most recent purchase and came to 4.5%. Seems poor. However, the rent on the property is $3200/month. Do you really think I will have $1600 expenses (50%)? 5% vacancy ($160), $400 maintenance/cap ex estimate, 12% PM ($384) , Misc $100 = $684. Estimated expense to rent = 21%. Run the same formula using 21% instead of 50% increases the number to 6.9% which still falls below OP 7.5% target.

Would I have paid this much in 2010 to 2014? No way. Do I believe the property is positive cash flow at 80% LTV? Yes. Do I think it is a lot of cash flow? No! Do I think it is a good investment? Depends. If I compare the expected return to the quality of RE investments from a few years ago then no. If I compare the expected returns to other investments available today, I think so but admit that it needs some long term appreciation (rent and property) for it to be a good investment. It is in San Diego county which has outstanding historical appreciation, a rental shortage, projected rent increases (every study), huge supply issues, rising minimum wage and wages in general, property tax protection, a cost to break ground on a SFR that is ~$100K. I think in 10 years it will be worth more than at purchase. I think less than 5 years from now the rent will be above the $3200. If I am wrong then it may not have been my best investment option.

Have I lowered my standards? No doubt. I would never have paid this much for this property 3 to 8 years ago.

Good luck

3 Reply

Jennifer BeadlesPro Member

Rental Property Investor · Phoenix, AZ · Member since 2016 · 424 posts · 261 votes

8y

@Ryan Z. its definitely tough out there right now but I'm still finding good deals on small multi-units in Atlanta (outskirt areas), Spokane, WA, Oklahoma City and Indianapolis.

Most of the small multi-unit properties in these markets can achieve low double digit returns IF you're willing to buy a property that needs to be renovated and re-rented. These are usually older properties, built in the 1950's - 1980's but if you're willing to take something on from out of state they can be great options.

I just missed out on a 4plex outside of Atlanta for $365k with potential rents of $4500 after some cosmetic renovations.

I also picked up a rambler duplex in Indy last year for $155k, put $19k into it and that rents for $2235 per month.

So deals are out there, you just have to find the right agents & property managers who can tell you what the after repair rents will be and have some systems in place for overseeing an out of state renovation.

I wouldn't recommend going into the war zone that is Detroit. I've been there and it's not pretty. I'm sure people who really know the market and have good local connections can make it happen, but if you don't know people it's super risky.

1 Reply

Ryan Z.

OP

Investor · Bakersfield, CA · Member since 2016 · 25 posts · 11 votes

8y

Wow, great responses everyone!

To clarify a few things. When I said 50% cost I was referring to lower end properties, really at the very lower end because those are the ones where I seem to be able to find decent returns even at higher costs. With higher grade properties I normally use 40%. Also, that would include property taxes and property management. I also think sometimes people underestimate or don't properly account for longer term cap ex costs so there is some money allocated there as well (maybe more than some people allocate). Having said all that, if someone out there has, say, 10 or more properties in one of the lowest class peoperty/neighborhood types and they are using property management, if they aren't at 50% for their costs they should probably take a second look to be sure they are including everything. Like I said, over 15 years doing this and we have properties all over and with different managers in different states and that is the reality for us anyway. Sometimes we've experienced even higher costs than that! That's just an average!

The other thing is that if I wanted to find a property that met my numbers I am sure I could. Like some of you mentioned it's simply a matter of looking hard enough and being willing to put some reno into the property. I guess what I am really saying is that if somebody needed/wanted to invest bigger sums of money in rentals in a relatively short period of time it would be very difficult to do that and still make a return better than 7.5%. More than likely I would have to purchase out of state, quickly and probably find multiple properties which makes it that much more difficult. 5 years ago or even before the crisis, it was totally possible but now it is more like finding the needle in the haystack and all the extra work limits how many you can accumulate quickly at those return levels.

We actually flipped our entire portfolio recently just because the value no longer made the returns good. The only way we were able to do that was because we found that great deal on a bunch of SFRs. Like someone else said, we sold in a higher value market and 1031'd into one of the few undervalued markets that are left. But we were sort of lucky to have found that deal and I don't want to be any heavier in that particular market.

Oh, and I agree about Detroit. I actually flew there a year ago and met with a number of agents/turn key people and I left without buying anything. If you don't live there and know that market inside and out I think you have to be lucky not to get into trouble.

I think, at least for the near term, I will look into some of the alternative methods of investing in real estate like some mentioned in this thread. But, I still need to invest that 1031 money in like kind property somewhere so hopefully I can find some decent returns in the next month or two.

1 Reply

Jay Helms

Rental Property Investor · Gulf Breeze, FL · Member since 2014 · 1k+ posts · 733 votes

8y

Great question @Ryan Z.. I'm under the 1031 clock myself. Sold a B&H that I thought I would hold onto forever, but receive an unsolicited offer I couldn't refuse. I actually have a self storage facility under contract for the 1031, which is a new asset type for me to handle. Are you focused on particular asset class / type or are you looking at all asset classes / types as long as they meet your investing criteria?

1 Reply

Lane Kawaoka

Rental Property Investor · Honolulu, HAWAII (HI) · Member since 2011 · 4k+ posts · 2k+ votes

8y

Ryan Zaninovich even in places like Indy/Memphis it’s harder not to find d class and meets the 1% rent to value. The thing is not you have to find undervalued properties with undermarket rents. Good or bad market those properties will likely be ok.

0 Reply

Will G.

Rental Property Investor · Maryville, TN · Member since 2009 · 529 posts · 414 votes

8y

i recently saw a listing for a huge batch of sfh's, in tennessee for $5 mil in case your interested.

0 Reply

Derek Dombeck

Real Estate Consultant · Wittenberg, WI · Member since 2014 · 572 posts · 572 votes

8y

Ryan,

Some previous answers are spot on with possibilities to safely get 8 to 10% returns and the answer I would offer is in regards to becoming a lender. We have been lending hard money for years along with buying, selling, and holding long term rentals. The beauty is the safety of lending only to 65% of value in a 1st mortgage position. If the borrower fails, we take the property and we have much greater returns. This seldom happens, but its ok if it does. In Wisconsin, we do not have usury restrictions on commercial loans. This gives us, the lender, all the control from application to completion of the borrowers project. There's a huge demand from borrowers and good deals that can cashflow or be flipped are not hard to find in the midwest. The best part is your money is not tied up for more than a year, so when your own deal arrives, it's not hard to stop lending and start buying again. Feel free to contact me if you would like more info. We are also, always open to partnering with others if it make sense for all parties involved.

Happy Investing

Derek Dombeck

4 Reply

Mike Dymski

Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes

8y

It's not hard to find a decent return TODAY but it's challenging to predict what that return will look like TOMORROW (under different economic conditions).

2 Reply

Rachel Fazio

Rental Property Investor · Little Rock, AR · Member since 2017 · 134 posts · 71 votes

8y

I would encourage you to look at Little Rock. I had mentioned in another forum post that I had a SFH under contract, 3/1. I bought it for 31k. I sold it owner finance for 55k. I also advertised it for rent for $800 a month as it had a large workshop in the back, whereas standard rent for a house in that area would be closer to $750. I had applicants for that marketing as well. Anywho, with the 31k purchase, paint throughout, pressure washing the outside, and carpets in two rooms cleaned (haven't added it up yet, less than 4k though), I did that in about 26 days. I would say it's a class C/C+ area, I don't do class D. I'm thinking about posting it as a success story along with some of my other buys here soon. I have 7 units altogether, most are 2% rule +, all in Little Rock proper.

3 Reply

Jeff Kehl

Rental Property Investor · Charlottesville, VA · Member since 2012 · 1k+ posts · 726 votes

8y

@Ryan Z. I think pretty much you answered your own question. Those returns don't exist anymore. A pet peeve of mine is when I hear 'gurus' talk about how they bought a property very cheaply, fixed it up and made a killing refiing or selling it. And then talk like everyone should be able to do that today.

Generally they purchased it in 2009-2014 and that's when I made my best purchases as well. The cycle was at a bottom and people that purchased then were either lucky or smart. Personally I can tell you I was lucky and realize it.

How I'm dealing with this is A) Taking the onesy twosey good deals that still come my way B) Hoarding cash waiting for a better buying opportunity and C) Moving into different asset classes that are as out of favor now as residential real estate was in 2009-2014. Two examples being suburban office and shopping malls.

Of those three options, you are by far better just hoarding cash and waiting. Congratulations if you have the patience to do that because I surely don't :)

0 Reply

Matthew Iulo

New York, NY · Member since 2018 · 14 posts · 7 votes

8y

Super interesting thread as im in a similar case to you @Ryan Z. im a cash investor and having a hard time finding something that is going to cash flow over 10%. Will be following this thread closely to see what areas of the country people are finding success in or if like @Jeff Kehl said im better just hoarding cash and waiting for the downturn.

0 Reply

Scott Schultz

Rental Property Investor · West Bend, WI · Member since 2015 · 931 posts · 598 votes

8y

if I were to buy every deal you describe here i could be closing 10/week without looking too hard. once you are in the deal flow they just seem to appear. im having a hard time not buying a deal every 4-6 weeks because they fall in my lap. dont get me wrong, these are not turn key, they require some work, but my typical SFR is all in at $30-40K (Purchase and rehab) ARV $60-80K and rent $800/mo +/- there are plenty of markets where you can do this in, to find them you may need to look at small towns, I have found great success with rural properties, and cities under 50K people, with a focus on much smaller like sub 20K towns, they tend to have higher rental demand with fewer rentals available, many times they have plenty of multi family, but not as many SFR and duplex rentals, and the ones that exist tend to be dumpy, so I offer a nicer clean unit, we allow pets (for additional rent) and we do well with it, I have great managers I work with.

Most out of area investors look at Large MSA's with good reason, lots of data, stable employment, ect, but i will stick with tiny town USA and if im spread out over many little towns, i spread my risk of "the Big Employer" pulling out.

Originally posted by @Ryan Z.:

Hi Everyone,

My wife and I have been buy/hold investors for going on 15 years now. For most of that time you could find an okay deal as long as you did your homework and were willing to look outside your local market. I think it is sort of funny watching through the years as everyone's criteria for what they call a good deal keeps changing as the market keeps going up.

I guess each person's idea of a good deal is going to be shaped by their local market, so at one time when things were really good our criteria was that we netted out a 12% return with a rental purchased with cash. My defeinition of net usually ends up assuming costs of 50% of rent so that was a pretty good deal! It's been a long time since we've achieved anything close to that. We did make some large SFR investments recently and I hope to end up close to 10% on those, but it was in a very risky market and we sort of got lucky.

I'm writing this post because I'm curious what all the other buy/hold cash investors are doing these days? At this point I'd be willing to accept a 7.5% return on a house purchased with cash and assuming 50% costs. I'm not finding anything close to that anywhere (other than maybe Detroit and we are already heavy in that area). The other thing is I'm not really talking about finding one house and fixing it up. I'm sure with some effort and time I could find that sort of return on one house. I'm more talking we have quite a bit of money sitting and wanting to purchase a lot of houses and average out to that return. I've spoken to several of the turn key type businesses but by the time they take their cut almost all of them are in the 5% range. Oh they will tell you it's right up at 10% but conveniently leave out some major cost center or use anticipated appreciation or something else to arrive at that number. I find that their rents are almost always inflated as well. Even the foreclosure prices are too high, at the point where by the time you get them fixed up there goes your return.

What is everyone doing? Just accepting the low returns? Refusing to buy? Going to war zones like Detroit and taking their chances? To make matters worse, I have a 1031 exchange coming that is a result of something outside of my control so one way or another I am buying something! The last year or two is the only time in the 15 years I've been doing this where I really am starting to think it's just not a good investment any more.

0 Reply

Is there any decent market left to still get a decent return?

Is there any decent market left to still get a decent return?

Most Popular Reply

38 Replies