Asking Prices Too High?

17 Replies

Hey everyone,

I've been feeling a bit confused as of late. I am still looking to make my first investment purchase and am really interested in a small multifamily. 

I am getting updated with the latest properties available via auto-alerts and searching on Craigslist (I know these are probably not the best places for deals) but it seems like most of the properties make absolutely no sense as possible investments due to the high GRM. Meaning that the rents don't seem like they warrant the asking prices nor would they allow for any cash flow after running our expenses.

For example, a lot of the duplexes we are seeing are 140K+, but the rents may only be $1.6K combined. Although this may satisfy the initial screening of the 1% rent to purchase price, after I run our numbers there is barely any cash flow left.  And then the few properties that seem like they may provide cash flow are mostly C-class. 

Now, I obviously don't expect every property on the MLS to be a great deal, but does this also reflect that of other markets? Is this what others are experiencing as well.? The thing I am noticing though, is that these properties are still being bought by others in the area, fairly quickly, close to asking price. Do you guys think that I am being too conservative or are others just being too loose with their money?

I am running #s just like most others on the forums, so I don't feel like I am doing anything incorrectly. I don't know if my point came across as clearly as what I was hoping, but I needed to get my thoughts/frustrations out. Seeing others talking about getting 25+ deals in their first year makes me feel like I am sitting idle.

@Allyson Straka whenever I ran numbers with rent at 1% I just never saw how the property could  cash flow.  Today's interest rates are lower than when I started so maybe it works in some areas. 

My suspicion is that because of the hot market returns are being driven down. They are driven down to the point they don't' make sense to you or me. Good deals are out there it just means you have to look harder and they are much more rare.

Seeing others talking about getting 25+ deals in their first year makes me feel like I am sitting idle.

How do you think I feel I have been doing this 10+ years and have 10 units. Based on questions and comments here on BP clearly people are not considering all the costs and taking risks they don't understand. 

You mention Duplexes, Muti family of all sizes seems to be particularly overpriced. In my area you can generally do better with SFHs than with muti family properties. My favorite rental is a duplex though. We own it free and clear so it is a cash cow. This of course will vary by market.

That's about what multifamily properties are running in my area as well. I've been looking for a personal property to house hack and haven't found anything that makes sense yet. I can get lower end SFH any day that could meet the 1% rule, but the equivalent duplexes and anything above that are a lot more expensive compared to their rental returns. I just can't justify paying more per unit for a duplex than I would for the rental equivalent single family property.

@Allyson Straka A 140K duplex that rents for $1600 a month total is a great start , remember you will be raising the rents yearly . Next year raise each side $ 75 a month , and do that every year . Now where are you at year 5 ? You are looking at properties in " B ' areas . You have a MUCH better chance with appreciation also . And will draw a better tenant base . You wont find home runs on the MLS . And remember , the asking price is the start point .

Raising the rent $75 per month, per year, every year is damn steep increase. You're going to have a lot of turn over if you're doing that. Prove me wrong. 

Originally posted by @Matthew Paul :

@Jaron Walling I live in the Md / Dc ? annapolis area I have done it the last 3 years 

 Most of mine go up about $100 per month each year over the last 10 years. My increases are usually at tenant turnovers and are a few hundred bucks as I fall behind. The exception in my portfolio are a couple of condos I have in Frederick which Ive not really been able to raise the rents in 6 years. One of them actually had the rent drop $50 for a couple years before coming back to par. But thats why I like my Montgomery County properties. Low cash flow on initial purchase but with the average going up $100 a month each year, they cash flow heck of a lot more than the cash flow buys people buy in these secondary markets. Ive got one property in Rockville that I have free cash flow at $1600 a month after 9 years of owning it.

Originally posted by @Ned Carey :
In my area you can generally do better with SFHs than with muti family properties.  

Yeah, I have began to think the same for my area as well and have began to look at buying some SFH instead, which was not my original plan.

I doubt that some of the rent increases noted in this thread would be sustainable in my area, but it does make me realize that as a buy and hold investor I should also be considering the future calculations as well, such as IRR.

@Allyson Straka For anything < 5 units, the prices are set by comps. While GRM is a good metric to give you an idea of your internal value, these properties don't trade based on it. The market values will be set by local recent sales.

As others have mentioned, there are still deals to be had, just have to negotiate a bit and work a little harder.

Originally posted by @Jaron Walling :

@Russell Brazil  As you increase rents $100 per month, per year, at what point have you decreased rent? Post 07-08? 

 Rents actually increased strongly in most markets during the great recession and housing collapse. You had a ton of former home owners becoming renters, and that pushed up the demand for rentals almoat everywhere.

I tend to get strong rent growth in general as I specifically target locations with strong rent growth.

I have however had rents go down in my far far outlying properties from DC. (In Frederick MD about 90 mins from DC). What brought my rents down there for a couple years is there was a ton of new developments in the area (yes development can negatively affect your property) and with the increased housing supply and new apartment buildings that went up, it pushed my renta down in that area. Rents have come back to par there, but they are still at what they were 6 years ago. So I much prefer my properties closer to DC where the rents grow considerably.

The market on the whole is overpriced but it really depends on the specific markets as to judge whats really overpriced and what fair priced because of the economy. But I would say most the stuff on the MLS (and other sites) are going to be above fair market value just because people are trying to take advantage of the already high prices. Thankfully though, heading into the fall season, I am already seeing more and more properties dropping their prices in order to sell. Some more than others. Unlike just 3-6 months ago where almost everything was a bidding war (at least in my market anyways). For my location here in WA it is hard to find rental properties that even cash flow $100/door because the housing prices are so high. MF for sale is rare and usually WAY over priced but somehow they still sell. I run numbers on everything that pops up in MF just because I want the practice to be able to judge a property just by looking at it if its a good deal or not. From doing that I don't know how people are making money unless they are paying all cash but even then the CoC return is horrible. Even worse over the long run.

As for raising rents, again, its very market driven. You can only raise the rent to a point and then you price yourself out of you local market. If you buy a property based on rents you *could* get by year 2 or 3 that not a smart choice IMO. I almost never would choose a deal that hinges on speculative future rent prices. I say almost never because I'm sure there are scenarios that it works out but I'm just not experienced enough to try and bank on those kind of deals.

@Allyson Straka Most major MSAs are at or near-peak levels. You have a choice - wait or invest in deals the market is giving. 

Honestly, I would much rather take a low cash flow deal in an attractive market than a marginally higher cash flow deal in a secondary/tertiary market. But I am also not dependent on rental income as my major source of income. 

I would suggest developing relationships with realtors and other professionals in you area to source properties before they become public.