Anyone Buying Class-A Single Family Homes?

91 Replies

@Andrew Neal I was basically like that, mainly because I started by accident, renting out my previous homes as I upgraded. You could basically say I currently have almost only done A. Except for one, the rest are less than 20 years old, one brand new. In my experience you can cash flow immediately, but it won’t be much. Rental rates have been about .6-.8%, (but I typically rent sightly below market) appreciation has been good, and turnover is very low with high quality tenants so far and almost no vacancy. Also no major repairs needed so far. The drawback is that it’s much slower. Needing to build up 100k or more in downpayment plus reserves before you can pull the trigger on the next one, so it’s definitely slower to ramp up. Compared to what some of these people are saying, you could buy two 50k cash outright with beter cash flow. I feel it’s built a good base for me to start so now I’m looking to diversify and get into some more of these higher return markets to supplement, but I personally would have never gone straight into those markets if I didn’t have a stable base first.

@Martin L. glad that has been working out for you. I love that there are a million and one ways to invest and what works for one person doesn't necessarily mean it will for another.

I would have kept my last home however my wife and I made about 100k in appreciation in 2 years, sold it to get out of our FHA loan and there was no way it would have cash flowed with the FHA payment. We used the proceeds to buy the cheapest home in town with a conventional loan in the most desirable part of our town and put about $7K into rehab to raise the value about $30K (est.) before ever moving in. Moving in this weekend!

I have 6 new homes that are crash pads in A neighborhood. Have a deposit on #7 with my builder. Just rented my primary residence in A+ neighborhood for $4800 a month.My other rentals are all B neighborhood's. 

I do buy C and D homes but they are all flops which I immediately sell to local buy and hold investors. Until this last Monday I have never keep any. Keeping these 2 because one is going to be a place for us to stay when in town. The other I gave to a house moving company because I'm building a new office building on lot. Closing on 2 more flops on Friday. 

Originally posted by @Andrew Neal :

I'm just curious as to who in here is buying more of the Class-A type single family rentals? ... How do your numbers look? Are you playing the appreciation game or are you also seeing cashflow?

 I buy rent ready 3 bdr /2 bth Class A SFHs using conventional loans.  $200k - $250k price range.  I usually pay 30-35% downpayment.  Avg rent in my area is $1600/month.  Cash flow works, and I Recast at years 1 and 2 resulting in new amoritization and increased cashflow.  Appreciation is healthy; double digits.  My strategy is buy and hold.  

Oh... so far my strategy has been more like "please don't go broke" :)

I have never heard single families referred to as class - A.  It is always a multi family term from the world I have come up in. It works though. It makes sense.

Regardless of the class of property rent must be in the 1% range (minimum) of property value to achieve positive cash flow. Class A properties are a appreciation move and very rarely show any positive cash flow except in special markets. Class A property ownership is primarily a prestige purchase for home owners and as a result are generally over priced and much larger than needed. With negative cash flow and unpredictable real estate markets Class A properties are very high risk as long term holds. Primarily appreciation speculation.

A 250K property in a A class neighbourhood with rents at $2500/month would be a gem.  

@Andrew Neal Everyone is different but don’t just assume that a 50k house is in a bad area just because of the price. You can find lots of B minus type houses in some markets for 45-60k each. For each 250k rental you buy I can buy 5. If you pay 500k I can buy 10. If your 500k rental got you say 3500 in rent, my 10 would get me 7500-8000 in gross rent. I’m not saying it’s a bad strategy. I’m saying you should consider doing both.

@Andrew Neal Tim Shiner bought right and continuously kept buying in some of the nicest parts of DFW (Southlake has a higher median income than Highland Park). 

I agree with @Russell Brazil point. If I was buying SFRs, I would focus on Class A/B. Simply because I want a higher quality tenant and I want to hold for over 7/10 years. I'm willing to strike a balance between cash flow (must cover all expenses including R&M) and appreciation.

@Jay Hinrichs made a valid point about needing $50K to remodel and sell. But to my knowledge, Jay is in the business of developing/buying and selling within a few years. That's a different business than the typical buy-and-hold. He's also done exceptionally well... so maybe there's something to his model ;)

@Caleb Heimsoth I think that is part of my hang up. Living in California I have a tough time wrapping my head around a 60K house being something that wouldn't be in a bad neighborhood. I have really increased my out of state research in the past month and am connecting with realtors/project managers etc.

@Matthew McNeil Thanks for sharing. Are you buying in and around Boise? 

@Thomas S. I agree that most of the time those higher end big homes don't have favorable numbers. I think this question first came to mind in researching homes in my sister in law's Dallas suburb and knowing what they pay in rent (in the $2,500) range and seeing homes listed under $300K in that zip with a great school district. I have been the benefactor of appreciation only because my wife and I need a home to live in and happen to be in one of the hottest markets in the country. don't think I would go "all in" on it though.

@Omar Khan some great points. I have family in the Wylie area and that place has exploded as well. I love how many great suburbs are within 45 minutes of Dallas. We are suffocated by the coast here which is why I think the A/B neighborhood play could work out there.

@Andrew Neal I totally agree! Living in Toronto distorted by view of how much a house/condo even costs. I, still, get surprised that houses cost less than $200K (let alone $30K!). 

Nonetheless, I wouldn't touch a $30K house if my life depended on it. 

@Omar Khan haha I was just telling someone we had a manufactured home in a "fancy" mobile home park listed for $299K in my town just a month or so ago, I should look up if and what it sold at. But yes it is hard not to get a distorted view at times. I have spent considerable time in Dallas and could definitely live there if it weren't for my awesome family here.

There was a podcast with the co author of the Keller Williams RE book, who felt these type tenants suited his lifestyle more so than the lessor property classes. I think there are some who would feel the same. As Russell points out these eventually can cash flow significantly higher over time. 

Some part of this is who you want to deal with and pay your bills sort of speak. The numbers still have to work and for some they can. At a cetain point the cap ex % might very low too when compared to the sub 100k types. Lastly, since schools can be pretty good in the A class, tenants with kids can make turnovers few and far between thus making A stuff act more like an investment vs part time job. 

In general, class A SFH are better for flips and less for buy and hold cash flow. It is much harder to find a class A SFH that rents for as much as the lower classes for price of the house. Though the nice part about renting out a class A SFH is the tenants are the best.

For cash flow, I want to say the sweet spot is class B/B+ for the better rent to price value, the quality of the tenant pool is still quite up there, and it has better chance for appreciation (into a class A) one day.

@Caleb Heimsoth @Thomas S. I agree with most of what you've all said, but as I mentioned earlier, I really fell into all of this by accident. Two of my first three rental properties were actually occupied by me, prior to renting them out. The last one I bought was also before I found BP. Now I want to diversify and try some of these strategies, but I believe that I wouldn't have been able to ever move on a Class C if I didn't have these Class A's already under my belt. I do cash flow, but it's definitely not much compared to the value of the properties. However, the appreciation value has been tremendous. For instance, I put down 80K for one property that has appreciated by 250k in the last 5 years with a small net cash flow. 60k down on another property has appreciated by 80k in 2 years. Appreciation happens on the total value of the property, so the return on my cash down is fantastic.

Originally posted by @Thomas S. :

Regardless of the class of property rent must be in the 1% range (minimum) of property value to achieve positive cash flow. Class A properties are a appreciation move and very rarely show any positive cash flow except in special markets. Class A property ownership is primarily a prestige purchase for home owners and as a result are generally over priced and much larger than needed. With negative cash flow and unpredictable real estate markets Class A properties are very high risk as long term holds. Primarily appreciation speculation.

A 250K property in a A class neighbourhood with rents at $2500/month would be a gem.  

With little bargaining/luck  

https://www.redfin.com/MO/Kansas-City/7304-Walnut-...

https://www.zillow.com/homedetails/1008-W-70th-St-...

this would probably be close to 23-2700

https://www.redfin.com/MO/Kansas-City/6330-Oak-St-64113/home/93230324

I always wonder about the long term viability of those high end rentals because a) if things tank, spending 30k a year on rent because difficult for people and b) it seems like a lot of the renter pool (from what I have seen in my market) are short term renters, coming in to rent for 6 to 12 months while they relocate for work and buy a home during that period. This by designs just means your renter pool is constantly at risk of drying up. Thoughts?

I have a local guy near who has been in the game 30 plus years . He owns , A properties , and  B houses in A areas . He will rent the old B quality house  for 5 , 6 maybe 7 years collect rent and do minimal repairs , and then tear it down. And Build a brand new  A property in a great neighborhood . Then he doubles the rent .  He saves a boatload of money , HE IS THE BUILDER .  The guy is about 70 years old , drives a beater truck . When he calls a contractor , they are there right away . Why ?  When you are done you call him and he drives out and hands you a check . 

Originally posted by @Jameson Sullivan :

I always wonder about the long term viability of those high end rentals because a) if things tank, spending 30k a year on rent because difficult for people and b) it seems like a lot of the renter pool (from what I have seen in my market) are short term renters, coming in to rent for 6 to 12 months while they relocate for work and buy a home during that period. This by designs just means your renter pool is constantly at risk of drying up. Thoughts?

 depending on how you rate an area... they can weather the storm. But it depends on how well you enter the market....  Lot of established high end areas can insulate themselves from the downturn somewhat, but you're right about the rents. If the area (bay area for example) has lot of high wage earners then it can be better. Some people will rent because they "downgrade" into your rental after they lose their house in foreclosure. 3k might be half what their mortgage was etc... but they won't want to leave the schools/community for whatever reason.

@Jameson Sullivan yeah that's an interesting point but I know plenty of high wage earners here in the bay area who are choosing to rent because of prices continuing to go up so I guess everyone has their reasons. I know Tim Shiner mentioned this a bit in his BP podcast episode since he is in Southlake TX which is a high income area.

I guess that sort of speaks to relationship between the title of this post "Anyone Buying Class-A Single Family Homes?" and where we are in the market cycle. It probably doesn't pencil to buy in these areas currently, but if you either a) got a screaming deal with some value add or b) have held the asset for a number of years then you might be able to make your numbers work.

I think it's an interesting way to protect money as well for high earners. If you're able to put 50% down and have low mortgage payment then your monthly balance sheet will pencil and higher income Tenants generally are lower maintenance. Just another way that REI takes many different shapes and forms for different purposes!

Originally posted by @Andrew Neal :

@Caleb Heimsoth I think that is part of my hang up. Living in California I have a tough time wrapping my head around a 60K house being something that wouldn't be in a bad neighborhood. I have really increased my out of state research in the past month and am connecting with realtors/project managers etc.

Thanks for sharing. Are you buying in and around Boise? 

 Yes, I buy in Meridian which is the bedroom community for Boise.  Surrounding communities have a lot of potential as well; Kuna, Star, Nampa, MIddleton and Caldwell.  

Originally posted by @Matthew McNeil :
Originally posted by @Andrew Neal:

 I buy rent ready 3 bdr /2 bth Class A SFHs using conventional loans.  $200k - $250k price range.  I usually pay 30-35% downpayment.  Avg rent in my area is $1600/month.  Cash flow works, and I Recast at years 1 and 2 resulting in new amoritization and increased cashflow.  Appreciation is healthy; double digits.  My strategy is buy and hold.  

 @matthew , I like your double digit appreciation! I'm curious; why do you put 30-35% down (if 25% would do) and why refi in 1 to 2 years? I'm curious your opinion on how much leverage you like?

@Andrew Neal Pm me please.  Would love to share a lot of what you’re looking for.  I don’t live far from some of the areas you mentioned.  The reason I’ve not done what you’re seeking is because of my long term plans in Austin.  However it’s been heavily in my mind to invest in higher end community that screams location, higher income, extremely low vacancy due to highly rated schools and rent market being high!  Let’s talk.  I think I can answer a lot of your questions 

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