Hello BP Experts,
I am sure this question may have been asked and answered multiple times before. I was just not able to search and find the needed answers, so i am trying to get some expert opinions. Apologies for the repeated question.
I recently purchased a Brand new Townhome in a developing neighborhood in the Raleigh-Durham area and leased it out as a real estate investment. Now i see that a second townhome is becoming available for sale by July 2014. This is a brand new construction as well. The price range is ~120K. The community amenities include clubhouse, gym, swimming pool, tennis courts, etc.
Is it a wise idea to investment in two townhomes in the same community/neighborhood as a REI. Any pros and cons to this approach/strategy. The area is fast developing and is located ~10mins from downtown Raleigh area. The typical time to lease out is approximately 1 month from closing.
Your expert opinions is highly appreciated.
@Pradeep C. I don't see where there would be any issues with having 2 untis in the same development. If it's a good development with demand, seems like a wise move. As a real estate agent, I've seen investors buy homes in the same subdivision many times.
My husband and I used to think that we liked to be geographically diverse, to mitigate our risks from local area economics. However, I've become and expert in certain areas and now those are the only places I'm comfortable buying. Plus, I have good team members (PMs, contractors, etc, in those areas.)
I think there are two sides to it. You could be putting all your eggs in one basket, but if you know the basket inside out and backwards, and you know it is stable and strong, why not?
Thanks a bunch for your prompt responses Karen and Kate. I sincerely appreciate it.
I'd say go for it. If all the numbers on the first townhouse are working out in your favor then I don't see why the additional townhouse wouldn't follow suit. Also, with the rapid influx of people moving to the Raleigh area it's not likely that you'll have any problems keeping those places rented. Speaking from my personal experience as well as others I've talked to who have recently relocated to this area the trend seems to be renting for a year and then looking into purchasing a home.
It isn't necessarily wrong to "double down" if your first townhouse is making you happy financially. From that perspective, go for it. Another angle to cover though... ask yourself what sort of investment this is for you. Capital Appreciation? What is your ROI on that? Steady Rental Income? Does it meet the 1% benchmark rule where %1 of the purchase price is paid to you in rent? Figuring out what has "worked" for you only matters if you know what your goals are, and how you would define a good investment had you never owned any townhouse, or ever been a part of this neighborhood.
Given the above, let me make the case against the purchase. I know Raleigh, and the $120k townhouse will most probably not get you even close to the 1% rule... $1200 a month in rent. If you look at the NC Capitol's capital appreciation over say the last 10 or even 15 years, what do you think a reasonable % increase a year would be in appreciation? 4 or perhaps 5 percent, maybe? You could find far better rental scenarios from lower priced rental units, and you could easily double to quadruple your capital appreciation in a mutual fund. Really good rental units that produce great rent a year often don't appreciate much, and boom-town capital appreciation usually happens in developments that are far to expensive for rentals.
Do it your way... but decide what you're really after first, then define success from that... before you simply do what you've always done.
There's nothing wrong with buying two properties in the same subdivision. If the numbers make sense to you, I'll say go for it.
@Pradeep C. , not knowing you at all, I just imagine that you want to be a landlord but don't want the a lot of hassle with it. A town home with a lot of facilities like that will attract and keep good tenants. The new construction will keep you from doing maintenance work for a while. However high HOA fee may it into the return. I'm sure you know what you are doing, just want to break it down from my point of view.
It really depends on what your investing goals are and there are tons of ways to look at it. For me, I look at the cap rate and the cash on cash return. The cap rate is a percentage obtained by dividing the amount of money you would make in a year minus all your expenses by the purchase price, if you bought the property for all cash. (Example: if you bought the property for $100,000 in cash and the property netted you $8,000 in a year, your cap rate would be 8%. Do not include mortgage payments in your expenses.) The acceptable cap rate is a choice that you would make based on your own goals and should be influenced by the prevailing cap rates of similar investments in your area.
Cash on cash is more accurate if you're using leverage. It calculates your percentage based on how much of your own cash is in the deal. (Example: You buy the above property for $100,000 with $20,000 down and an $80,000 loan. You still net $8,000 in a year but you only have $20,000 in the deal and not $100,000. Your cash on cash return is $8,000/$20,000 = 40%).
There's more detail to cap rate and cash on cash return but those are the basics and they're ways that investors (especially commercial) use to evaluate deals.
If you want a simpler answer, as long as you're positive cash flow every month after you include all of your expenses (vacancy, taxes, insurance, maintenance, management, utilities, and repairs), it's probably worth doing. I personally would stay away from doing this if you anticipate being cash flow negative. If you have to add money every month to keep your investment going you put yourself at unnecessary financial risk. Just my opinion. I hope it helps :)
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