Anyone Buying Class-A Single Family Homes?
Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes
Anyone Buying Class-A Single Family Homes?
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Real Estate Agent · Washington, D.C. · Member since 2012 · 17k+ posts · 30k+ votes
8yMy favorite assets in my portfolio are my A/B class single family rentals in the DC suburbs. Purchase prices in the $400-$500k range and rents in the $2500-$3000 range. Rents go up about $100 per month each year and value goes up about $20-$25k per year. High quality tenants generally. Usually break even on purchase, but with patience they cash flow more with the rent growth than my cash flow properties. I have one property that Ive owned about 10 years now I have free cash flow of about $1700 a month, and the value is up about $140k (it went down in value the first 2 years I owned it)
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Originally posted by @Dave Vu:
Originally posted by @Matt K.:
Originally posted by @Dave Vu:
Originally posted by @Matt K.:
Originally posted by @Dave Vu:
Hi All,
I am newbie from San Jose CA. I am also a very conservative RE investor. I also want to invest in A/B+ properties
I want to invest OOS for a better return. The problem for me is finding these deals
what's the requirement for it to be a "deal" to you?
For a truly class A property, I would be happy with a 6-8% cash on cash return.
https://www.redfin.com/KS/Overland-Park/14427-Russ...
rental comp at 2300
https://hotpads.com/14416-russell-st-overland-park...
That'd be close to 6% and that's about 5 min search.... if I really tried I could find better deals. That's a clear cut definition of A (low crime, prestige, top schools)... stretch that out more and you can def hit better returnsMatt,
Thank you so much for being so helpful. I really appreciate if you should share your process of screening . This will help us newbies to learn a lot quicker. I have seen people in here mentioning about KC, but I am sure that is not the reason or the only reason you picked it as an example. It would be great if you could share the process and any tool that you use for your search. I have always used zillow to find out rent estimates. Now I know hotpads is another one. Please do not take me wrong, I will need to to put in my own effort to gain knowledge in RE investment, but people like you could really help us cutting down the learning curves...
Thanks again for your help,
Dave
I invest in KC, I know the market well and have the resources out there to help me maintain a high level of knowledge for it.... that's why I picked it. I don't know other areas that well because I don't invest in them, but it'd be easy (time consuming) to figure it out though.
I can't stress this enough though, the definition of a A area can take many shapes. There's plenty "A" areas that have terrible schools and even crime, but they carry prestige which bumps up their rating. It's the communities strong identity that needs to be considered, less so when you get to the burbs, but still there. Think old money vs new money...Rents, use craigslist that's the best to get a TRUE sense of what they go for. Zillow is meh just like they are with home prices. They can be right, but you need to understand the market.... Hotpads uses users listings from zillow and truila etc (same company).
Here's how I would do it.... figure out average rents for an area on hot pads, sideline that w/ prices from redfin (better than zillow).
Create a target area (zip code, radius whatever)Create a min/max value for houses (example 1k-2k rents, 75k- 250k).
Then find prop managers in the area and see if they have listings etc in the area... to verify YOUR numbers.
The more you observe an area the more you see trends, you see the ads stay up/get taken down.... you can tell what's a good deal or bad deal. In essence pretend you're going to move there and rent...Originally posted by @Matthew McNeil:
Originally posted by @Martin L.:
@Steve K. I actually have these conversations with my wife all the time, and HER risk tolerance is far lower than mine. She wants everything paid off, while I want to expand at a moderate rate. It all comes down to risk. "Risk" is not inherently good, or bad. High risk just means that there can be a very large "swing" - basically a large variation in outcomes. Low risk means that your outcomes are more predictable, not wholly predictable, just more so.
I'm okay being a turtle. The other guys have been doing great, many have made fortunes, but I don't want or need the kind of stress that operating like that would bring me. Sometimes I'm envious, but it's just not me. What good would an extra million or two do me if I die an extra 10 years earlier because of the ulcers? I'll just turtle along with Matthew, and let those guys make their fortunes. They've certainly been RIGHT this past decade, but that doesn't mean that I've been wrong.
We could start a Turtle blog :) I know a guy who got burned out trying to manage and oversee 100 doors. He was wealthy by my standards, but he didn't look happy. His adult kids helped take up the slack, but it wore on them as well.
Some people do a really poor job at putting an accurate value on their time... I found this cool calculator while back
http://programs.clearerthinking.org/what_is_your_time_really_worth_to_you.html#.UxoAGPldU1M
- Real Estate Professional · Brentwood CA / Dallas, TX · Member since 2016 · 185 posts · 146 votes8y@Matthew McNeil haha thanks for the generous offer!
You have a well thought out strategy that fits your risk tolerance. Thanks for the reply.
You have some of your money making 20-40% per year yields....and you "diversify" and limit your leverage by having other money making 4.75% APR.
One thought: I don't know your portfolio size....but rather than paying down your cheaper mortgages (perhaps obtained 1 or 10 years ago) and taking new mortgages at 5.75% APR.....isn't there a chance you can be your own banker and loan a portion of the equity in your own homes to yourself at a cheaper APR?
thanks...best wishes, Steve
Originally posted by @Martin L.:
@Steve K. I actually have these conversations with my wife all the time, and HER risk tolerance is far lower than mine. She wants everything paid off, while I want to expand at a moderate rate. It all comes down to risk. "Risk" is not inherently good, or bad. High risk just means that there can be a very large "swing" - basically a large variation in outcomes. Low risk means that your outcomes are more predictable, not wholly predictable, just more so. An example of extremely high risk would be something like betting on a number at the roulette table, you might lose your money but you also might hit a pretty big return (typically 35x your bet). If you bet $100, that's basically a range of -$100 to $3500, hence "high risk", a less risky bet (less risk, not low risk) would be betting on black or red giving you a range of -$100 to $100. No risk would be keeping the money in your pocket and walking away because gambling is a pretty bad idea in the first place (I work in casinos, so don't tell my boss I said that).
Strategies like BRRRR are high risk for many people, because frankly... far too many get excited and want to "strike while the iron is hot". They don't maintain enough cash reserves for each property, because it would slow down acquisition... grow Grow GROW! And they're right. If they can keep striking while the iron is hot, they will continue to grow wealth at a fantastic rate. Get rich quick. But if they don't slow down in time, when a large dip in the real estate market happens... some of them won't be able to weather it.
Don't get me wrong, I'm envious of the ones that grow like crazy. Striking when the iron is hot and making a fortune before resting on their laurels. They are a lot braver than I, but hindsight is 20/20. The funny thing about the economy is that.... no one can really predict it. If the economy crashed before they became stable, they would have lost all of it. Prior to the trade war, we were in the midst of a near record-setting decade long bull market. Keep in mind that we are STILL in that bull market, but the trade war has been making it fizzle a bit. The fact that it is very close to record setting means... we're in totally uncharted territory and some people may say "overdue" for a correction. But once again... it could collapse tomorrow, or go on for another decade. People said the real estate markets in Hong Kong and China was unsustainable and in massive bubble territory... about 10 years ago. Some of the people who didn't listen have seen their properties grow 500% or more.
There are people out there that will only do cash outright, they miss a lot of opportunity that way but they have almost zero risk. If the economy collapsed tomorrow, all they need to worry about are insurance, taxes, and maybe some repairs. There are people like Matthew that like to play it very safe, aiming for some leverage but carefully measured. I'm a little more risky, especially now that I'm looking to diversify a little more, but that's because I've "built in" some security first. But that's a key word. Security. Better properties, mean you're less likely to have issues with both the properties and the tenants. Matthew and I belong to the turtles of the real estate world. Slow and steady wins the race.
Then you have the early birds that catch the worm. An early bird that started when I did would probably be in dozens of properties right now, possibly worth double, triple, 10x what mine are worth. Or... the early bird might have gotten unlucky on one of the early acquisitions and ended up 20k in the hole for major foundation issues that somehow got missed, or 5k for a new AC unit. (Did I mention that my one B-/C+ property had the copper coil stolen from the AC unit on the DAY I signed escrow? 4K to replace that one.) One or two really big setbacks early on can break a new investor. A big slide in the economy could break many investors. Or... we could have a record-setting, decade long bull market, and the ones that made it look like geniuses right now. They're in the strike while the iron is hot camp, and they've been the real winners for the past decade. But it could have just as easily gone sideways much sooner.
I'm okay being a turtle. The other guys have been doing great, many have made fortunes, but I don't want or need the kind of stress that operating like that would bring me. Sometimes I'm envious, but it's just not me. What good would an extra million or two do me if I die an extra 10 years earlier because of the ulcers? I'll just turtle along with Matthew, and let those guys make their fortunes. They've certainly been RIGHT this past decade, but that doesn't mean that I've been wrong.
Martin, I'd actually suggest you "tweak" your vocabulary a little....I wouldn't say you're "risky". People are on a continuum from extremely "risk averse" to extremely "risk tolerant" or even "risk seeking". To me, "risk" is the chance that an investment could lose money. All else are "uncertainties" in the future surrounding my investment (both up and down). If you took the time to analyze all the possible future outcomes for buying a new REI today, (economy, inflation, local appreciation, local job market, uncertainty on repairs/maintenance/capital improvements, uncertain how long the A/C will last, uncertain how long the tenants stay, uncertain vacancy period, uncertain tenant destroys your property).....then map it all out....I only invest when the reward greatly outweighs the risk (of losing/failure).
This is where the gambling analogy doesn't apply in total. In gambling, the house takes a cut, and thus the "weighted average expected outcome" is negative. It's a poor "investment" because the risk outweighs the reward. (Think $1 to play for average reward of $0.95)....in the long run the house always wins.)
In REI with uncertainty...we can be investing where the "risk weighted average expected outcome" is extremely positive. Yes, you can earn high yield most the time, you could have a mediocre return, you could buy at the peak and suffer a recession, and you could lose money.
I was merely thinking that in the Boise +10% annual appreciation story/opportunity.....the rewards would greatly outweigh the risk, and the "expected returns" justify a Mr. Turtle accepting a little risk for a greater reward. A Mr. Turtle that clearly knows what he's doing can see the opportunity as a low-risk way of making 40% returns, with little risk in the short term. Then, you keep aware of market changes and shift your money elsewhere if the risk/reward shifts.
Best wishes in your investing.
Steve@Steve K. I was basing my definition of risk off my memory of one of the definitions of "risk" when it comes to investing, different than adventurous or daring "risk" or "risk of failure".
"A high standard deviation indicates a high degree of risk." This was excerpted from
The term risk has like... several dozen definitions depending on what it's referring to, and "risk" doesn't even need to mean that you lose money. You could literally make a positive return, but still have "risk" if it didn't perform as well as you expected. Also excerpted from Investopedia:
"A better way to think of risk is as the possibility or probability of an asset experiencing a permanent loss of value or below-expectation performance. If an investor buys an asset expecting a 10% return, the likelihood that the return will be below 10% is the risk of that investment."
"If investors accept the notion that investment risk is defined by a loss of capital and/or underperformance relative to expectations, it makes defining low-risk and high-risk investments substantially easier."
I actually learned this definition of risk in business school, I can't remember if it was economics or finance (it was a VERY long time ago). I tried to define it from memory in my earlier posts, and it was slightly off target, so hopefully the excerpts from Investopedia help. Your definitions of risk are also correct in their different settings. I did try to define it from memory in my earlier posts, and it may have been slightly off target, so hopefully the excerpts from Investopedia help. Lastly:
"Low-risk investing not only means protecting against the chance of any loss; it also means making sure that none of the potential losses will be devastating."
This was really a biggie for me. You're at your most vulnerable when you're just starting off. One bad deal can absolutely break you and put you on hold for a year or more, especially when you're on a limited income. When you're making 35k or 45k a year, it takes years of sacrifice and saving to make that first down payment. I really needed my risk to be as close to zero as possible, regardless of the possible reward. I didn't have BP when I started, and didn't know of any alternatives, and would have never imagined OOS as an option.
P.S. Your use of "uncertainty" is usually referred to as "volatility", but is also often confused with "risk".
@Martin L. .....great. All good, thanks for reply
Originally posted by @Martin L.:
@Steve K. I actually have these conversations with my wife all the time, and HER risk tolerance is far lower than mine. She wants everything paid off, while I want to expand at a moderate rate. It all comes down to risk. "Risk" is not inherently good, or bad. High risk just means that there can be a very large "swing" - basically a large variation in outcomes. Low risk means that your outcomes are more predictable, not wholly predictable, just more so. An example of extremely high risk would be something like betting on a number at the roulette table, you might lose your money but you also might hit a pretty big return (typically 35x your bet). If you bet $100, that's basically a range of -$100 to $3500, hence "high risk", a less risky bet (less risk, not low risk) would be betting on black or red giving you a range of -$100 to $100. No risk would be keeping the money in your pocket and walking away because gambling is a pretty bad idea in the first place (I work in casinos, so don't tell my boss I said that).
Strategies like BRRRR are high risk for many people, because frankly... far too many get excited and want to "strike while the iron is hot". They don't maintain enough cash reserves for each property, because it would slow down acquisition... grow Grow GROW! And they're right. If they can keep striking while the iron is hot, they will continue to grow wealth at a fantastic rate. Get rich quick. But if they don't slow down in time, when a large dip in the real estate market happens... some of them won't be able to weather it.
Don't get me wrong, I'm envious of the ones that grow like crazy. Striking when the iron is hot and making a fortune before resting on their laurels. They are a lot braver than I, but hindsight is 20/20. The funny thing about the economy is that.... no one can really predict it. If the economy crashed before they became stable, they would have lost all of it. Prior to the trade war, we were in the midst of a near record-setting decade long bull market. Keep in mind that we are STILL in that bull market, but the trade war has been making it fizzle a bit. The fact that it is very close to record setting means... we're in totally uncharted territory and some people may say "overdue" for a correction. But once again... it could collapse tomorrow, or go on for another decade. People said the real estate markets in Hong Kong and China was unsustainable and in massive bubble territory... about 10 years ago. Some of the people who didn't listen have seen their properties grow 500% or more.
There are people out there that will only do cash outright, they miss a lot of opportunity that way but they have almost zero risk. If the economy collapsed tomorrow, all they need to worry about are insurance, taxes, and maybe some repairs. There are people like Matthew that like to play it very safe, aiming for some leverage but carefully measured. I'm a little more risky, especially now that I'm looking to diversify a little more, but that's because I've "built in" some security first. But that's a key word. Security. Better properties, mean you're less likely to have issues with both the properties and the tenants. Matthew and I belong to the turtles of the real estate world. Slow and steady wins the race.
Then you have the early birds that catch the worm. An early bird that started when I did would probably be in dozens of properties right now, possibly worth double, triple, 10x what mine are worth. Or... the early bird might have gotten unlucky on one of the early acquisitions and ended up 20k in the hole for major foundation issues that somehow got missed, or 5k for a new AC unit. (Did I mention that my one B-/C+ property had the copper coil stolen from the AC unit on the DAY I signed escrow? 4K to replace that one.) One or two really big setbacks early on can break a new investor. A big slide in the economy could break many investors. Or... we could have a record-setting, decade long bull market, and the ones that made it look like geniuses right now. They're in the strike while the iron is hot camp, and they've been the real winners for the past decade. But it could have just as easily gone sideways much sooner.
I'm okay being a turtle. The other guys have been doing great, many have made fortunes, but I don't want or need the kind of stress that operating like that would bring me. Sometimes I'm envious, but it's just not me. What good would an extra million or two do me if I die an extra 10 years earlier because of the ulcers? I'll just turtle along with Matthew, and let those guys make their fortunes. They've certainly been RIGHT this past decade, but that doesn't mean that I've been wrong.
I generally think that you can make a LOT more money on appreciation. But the flipside is appreciation is a gamble, you have to hit the right neighborhood in the right city and growth has to go your way. I don't know that is always possible.
Our strategy is to find houses that including capital/property management etc can break even/return a slight amount of cash flow usually about the 1% rule. 6-8% COC return, maybe a $100-200/month cash flow. IE nothing great.
But we like to layer opportunities on top:
We look for transitioning neighborhoods.
We like homes where we can do some forced appreciation via rehab. Something that will increase both the value and the rent.
We also like houses where with some upside of redevelopment, ie buy a house that you can rent out now and kinda break even on the cash flow, but knowing that the property can be torn down and redeveloped, or sold to a developer.
IE multiple ways to get a great return, but currently giving just an ok return.
I also am watching it seems as though the long time guys end up running with low to no leverage. Now some of that is the long timers are later in their careers and are more in capital preservation mode. While the young growth guys are pushing for everything that they can do.
But I also think there is something to the idea that the old timers who have been really successful, are those who the ability to take advantage of each downturn because they aren't over levered.
@Bart H. ,
Appreciate your approach. I too like the multiple components of wealth growth from buy/hold real estate....but I admittedly like the 8% appreciation in Denver now.
I think there are many REI on BP that are long time and hate too much equity in the property that returns small yield....but, we are a collection on the spectrum of everything from zero debt to 100% leverage.
So, you like to own the "future scraper lot". Do you find that it appreciates more than a long time buy/hold? A nicer quality rental in the same neighborhood?
I too look for these...an ugly house on a nice lot, I build one spec home per year.....but I never thought of buying today the scraper for 5 yrs from now.
S
Originally posted by @Steve K.:
@Bart H. ,
Appreciate your approach. I too like the multiple components of wealth growth from buy/hold real estate....but I admittedly like the 8% appreciation in Denver now.
I think there are many REI on BP that are long time and hate too much equity in the property that returns small yield....but, we are a collection on the spectrum of everything from zero debt to 100% leverage.
So, you like to own the "future scraper lot". Do you find that it appreciates more than a long time buy/hold? A nicer quality rental in the same neighborhood?
I too look for these...an ugly house on a nice lot, I build one spec home per year.....but I never thought of buying today the scraper for 5 yrs from now.
When I call it a "scraper". We like the house where it is decent enough on the inside to rent out and kinda "break even" on the cash flow. And yet the neighborhood around it is going up, so we can capitalize on either a complete remodel or making it a tear down in the future.
Its not so much about comparing what we like to do vs a long term buy and hold, but rather we have a long term buy and hold with multiple outs.
So for instance (a real example), we bought a 3 bedroom with a weird configuration, some odd things like 7 inches between the lower and upper cabinets in a transitional neighborhood right near downtown.
Purchase price was $180K, 2,700Sqft, the house most recently had rented for 1,300/M.......
Although it was configured as a SFH, the property is zoned MF.
We put in about 30K to turn a loft into a bedroom, added a couple of closets, closed up a door, painted, put in some flooring, redid the privacy fence, etc etc. We lived in it for a year, rented it out for a year at 2,300/M, we refinanced it got essentially everything out of it we put into the property, and now it rents for $2,800/month, and I believe the land is worth 400-450K or so as developers are really moving into the area and our lot is in a prime spot near the medical district and can be turned into condo/townhomes. Especially if lots get bundled together.
@Bart H. That's a great deal. Congrats!
Do other's appreciate that Bart did a BRRRR here? Guessing that you bought for $180k with 25% down ($45k), put $30k into it, and refinanced BRRRR style. It must have appraised for something like $280k, wherein you could get a 75% LTV ($210K Loan), such that your $45k down payment and $30k rehab is back with you. You have "Fix & Flip type" profit of $75k....so you have that amount of sweat equity into a $280k home.
How do you think of "opportunity cost"?
when you had $1300 rent on a $180k home, ratio was 0.72%
now that you have $210,000 in it and it rents for $2800, ratio is 1.33%
or, should you say $280,000 appraised value rents for $2800, ratio of 1.0%
or, now that you can sell it for $425k, ratio is 0.66% (is it time to sell???)
How did the developers let you buy this lot for $180k, when it is worth $425k?? How did you avoid that bidding war?
Originally posted by @Steve K.:
@Bart H. That's a great deal. Congrats!
Do other's appreciate that Bart did a BRRRR here? Guessing that you bought for $180k with 25% down ($45k), put $30k into it, and refinanced BRRRR style. It must have appraised for something like $280k, wherein you could get a 75% LTV ($210K Loan), such that your $45k down payment and $30k rehab is back with you. You have "Fix & Flip type" profit of $75k....so you have that amount of sweat equity into a $280k home.
How do you think of "opportunity cost"?
when you had $1300 rent on a $180k home, ratio was 0.72%
now that you have $210,000 in it and it rents for $2800, ratio is 1.33%
or, should you say $280,000 appraised value rents for $2800, ratio of 1.0%
or, now that you can sell it for $425k, ratio is 0.66% (is it time to sell???)
How did the developers let you buy this lot for $180k, when it is worth $425k?? How did you avoid that bidding war?
So this is a case of a unicorn, right place right time.
1) we drive neighborhoods months in advance, and we liked this area because it sits next to downtown, and is really close to uptown/Oak Lawn areas of Dallas. But this is an overlooked pocket that has historically been fairly rough.
2) The seller originally had been tied up for 3-4 months as a commercial real estate agent was trying to sell 4 lots together as a block. It was slightly over priced, probably a year too early to be sold as a block. But the seller lost his job and was frustrated that the block of properties didnt sell, so the minute he was out of his option period with the real estate agent, the seller put it up as a FSBO, I think he was at 170 or 175 I forget the exact details.. We saw it and had an offer on it within 24 hours. and a signed contract the next day for a little over asking.
3) we were a year early before all of the developers hit. I think it was worth $200-$225 when we bought it, but as Jay always talks the cash flow only crowd. It was a house with a weird layout and fetched $1,300/month in rent in what I am sure some thought was a class c- neighborhood when we bought it.
Since we bought, an 800K/3400sqft house has been built 3 doors up. There have been a dozen or so tear downs within a couple block radius. A developer has bought and torn down a 6-8 block by 3 block area and leveled a bunch of falling down apartments and single family homes. So people recognize it as a hot neighborhood.
As far as opportunity cost, I am always open to selling, in fact we look at every one of our properties every year and think thru what we want to do for the next year. The thing is as I said there is a LOT of development in the area. I think we are on the front side of an improving neighborhood. We have a property that we have refinanced and gotten essentially our initial investment back out.
We are collecting a nice annuity to sit and wait while the neighborhood continues to improve, and our exit might be us building a duplex, or us selling to a developer. So I think the price appreciation isnt done, and I think there will be additional and more lucrative exits in the next 3-5 years. And if we are wrong, we pocket a nice annuity.
I see a bigger risk in selling and needing to redeploy capital/pay capital gains taxes, and levering back up, or doing an awkward 1031 exchange. And frankly I sleep better at night having a property that cash flows like a banshee that we can sell at any time.
Originally posted by @Steve K.:
@Bart H. That's a great deal. Congrats!
Do other's appreciate that Bart did a BRRRR here? Guessing that you bought for $180k with 25% down ($45k), put $30k into it, and refinanced BRRRR style. It must have appraised for something like $280k, wherein you could get a 75% LTV ($210K Loan), such that your $45k down payment and $30k rehab is back with you. You have "Fix & Flip type" profit of $75k....so you have that amount of sweat equity into a $280k home.
How do you think of "opportunity cost"?
when you had $1300 rent on a $180k home, ratio was 0.72%
now that you have $210,000 in it and it rents for $2800, ratio is 1.33%
or, should you say $280,000 appraised value rents for $2800, ratio of 1.0%
or, now that you can sell it for $425k, ratio is 0.66% (is it time to sell???)
How did the developers let you buy this lot for $180k, when it is worth $425k?? How did you avoid that bidding war?
Yeah, you have the general gist of what we did. We just added a year of living in it, so we actually were able to put a little less down, so when we refinanced it, some of the price appreciation went to going from a owner occupied note with PMI to a "cash out" non owner occupied loan. There are some moving parts in there with prepays, us living in it, the repairs,etc.
You bring up some interesting questions about revaluing a property to determine what your current ratios are, and while I think it is worth $425 (or about), we would need to find a developer who is interested in redeveloping the area. I think it could be done, but the buyer pool is a lot smaller since it would really be to a commercial buyer.
@Bart H. , only you can decide if/when you want to sell. But, if your duplex or apartment zoned lot was in a desirable part of Denver, there are enough small time builders wanting a single "infill" lot to build a spec home on, that merely listing an available house or lot on MLS can cause a bidding war in the first 24 hrs. So, you may be surprised....it may not be that hard to find your ideal buyer. Best wishes to you.
- WI · Member since 2018 · 123 posts · 69 votes7y
@Amy Leonard what sort of reno criteria are you looking at with your properties? The neighborhood I am investing in is B-B+ and homes 230-250k. They are generally 1950s-60s built though with little to no cosmetic updates. Therefore most cash flow off the "higher rent" goes back to paying off rehab costs. at least in the first year or so.
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