Can buy and hold in a hot market cash flow?

10 Replies

I’m new to real estate investing and planning to buy and hold a rental property in the next few months. My husband and I are comparing possibilities where we live (Nashville, TN) to where we grew up in Indiana. The markets in these two cities are very different. Nashville is growing so fast and the market is “hot”. This seemed great to me as a homeowner reaping the rewards of fast-growing equity. However, as a potential investor I don’t understand how anyone can buy and hold small properties here and cash flow? An “as is” 2 bed 1 bath goes for 300k. There are “as is” duplexes in a great part of town listed for 600k. It seems that rent can’t be high enough to cash flow. Especially when there is constant construction of huge luxury apartment buildings. However, owning property here is alluring for the possible appreciation. On the other hand, the market in Indiana where we grew up is very stable. We could buy a turn key 2bed 1ba for 75k and rent it no problem. BUT, The properties there haven’t appreciated much over the past 20 years I’m just curious what’s the better bet for us just getting started? We’re leaning toward Indiana but I’m just curious how anyone can make money renting single families or duplexes in a market where home prices are high? It seems flippers are the only investors that could benefit from a market like this.

@Sarah Barrett It really depends on how you buy and structure the deals. 

Firstly i typically wouldn't get a 2/1 unless i had the capability to turn it into a 3/2.  preferably for rentals you want to stay with the 3/2's as they are the safer bet.  

If you're buying a turnkey property, then don't expect cashflow, you're most likely betting on appreciation. you need to follow the BRRRR strategy. Using your analogy with the 2/1, you need to find it for lets say ~130k and it needs 70k worth of repairs/remodeling to give you an APR in the 250-300k range and make sure you can rent it for >2k a month.

in order to make the greatest cash flow you need to find the most rundown houses to fix, or go on the less desirable areas. unfortunately that's where the majority of investors are as well. 


i'll give you an example of one i just completed. it is in an up and coming neighborhood. some parts are scary, while new construction of luxury townhouses are within a block. 

it's a duplex with a 3/1 and a 2/1 (i know i said i wouldn't usualy get these, but it was a really good deal). I purchased for the area and appreciation, but i knew it would cashflow as well. 

i was all in ~130k. added 100K in repairs/remodeling. the APR was listed as $340  and i'm about to refinance and pull all my cash back out. I have many offers on the property @ $1600 and $1500 respectively that i'm sifting through.

assuming they don't all fall through i'm in effectively for no money out of pocket and $3100 in cashflow - the mortgage which should be in the 2k range after the refinance. 


 

@Sarah Barrett This is exactly why some midwest markets are so hot for investors. Here in Cleveland you can pick up a Turnkey SFR for $50k and get $1,000 a moth in rent. Depending on the pocket of the city the house is in, appreciation might be limited, but the cashflow is substantial.

Well you're definitely not imagining the problem. It's a real thing. And I haven't known of any cash flow in Nashville for quite some time. You're correct about the equity in a hot market, but that depends on when you buy. Nashville has been getting pricey for quite some time so you certainly wouldn't be getting anything on sale there. Where the general real estate economy is in general makes it hard(er) to find things on sale. But then add a "hot" market on top of it and your options get pretty slim.

Indy and a lot of the midwestern cities are known to be "stable" markets. Meaning they don't typically tank in a downturn, but they don't experience a lot of appreciation either. So cash flow is the game there. Then there's markets inbetween the Nashvilles and the Indys that can get both cash flow and appreciation (not appreciation like California levels by any means, but at least more than Indy and crew). But again right now, appreciation everywhere is tough because of where we are in the broader market.

Sidenote- I graduated undergrad from MTSU! And the minute I get back to Nashville, every single time, I head immediately to Demos'. :) I LOVE Nashville.

I think the market in Nashville is slowing down on the appreciation side. Houses are staying on the market longer .  I agree that investors are buying houses at ridiculously high amounts and there's no way they're cash flowing.  I am anxious to see  what will happen  in a downturn in Nashville.  I would recommend holding off on Nashville  and see what happens.  I suspect that buyers who paid too much and have no cash flow will get out and then we'll see some  decent prices again. I think buying on appreciation is Risky Business. Have I done it? Yes,  but I think it was a risky move and I did it several years ago. My goal is to have enough passive income to live off of. Appreciation is icing on the cake. 

@Sarah Barrett Yes. No. Maybe. It all depends on your purchase price, rehab costs and your financing structure. If you can find a property that needs work and buy it at a price that will instantly build equity after rehabbed then finance it properly, you should be able to cash flow. The challenge is finding a deal in a hot market like Nashville. How are you finding your properties? Do you have a realtor? Wholesaler? I would suggest looking for an off market deal as MLS listings would be tough to find good deals.

Buy and hold is certainly harder in hot markets, so you may need to look into the cheaper parts of town and look harder to find a really good deal. But I think in most, although probably not all, hot and expensive markets, there are still some buy and hold opportunities.

@Sarah Barrett Yes you can find cash flowing properties in Nashville. We find them all the time. Set your goals, have boots on the ground, and plan your attack. Madison, Antioch, Goodlettsville, all sub markets of Nashville that will cash flow for you

@Devan Mcclish thanks! That lines up with what I was thinking. I was seeing duplexes near Hillsboro village and in belle Meade that just made me curious how rent could possibly stack up to the mortgage. We’re narrowing our goals and have only gone to see one triplex that was near TSU. We liked it but it also seemed priced too high to rehab and then see cash flow. We’re interested in Madison but likely will end up in Indiana for our first deal. I don’t want to rule out Nashville area in the next couple of years though.

High down payment or all cash. Many in West Coast bet the two digits (%) appreciation will be last forever.  Those over leveraged will be in hot water when they lose income and tenants have no means to pay mortgage. That is why you hear during recession there are those out of work go back to their old office start shooting at everyone.  

College town like West Lafayette is a favorite place for investors to boost income. Not sure abut Terre Haute, In.

You are right about dormant cities. Many metropolitan in Midwest do not have measurable appreciation when factored into inflation.


@Sarah Barrett it all comes down to what your investment criteria and objectives. If you're a long term buy and hold investor who's goal is cash flow, a hot, high appreciation market isn't going to help you achieve those goals. If on the other hand, you plan to be in and out in 5 years or so, you need appreciation. Choose the market that fits your own goals.

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