Buy and Hold, how much do you pay?

Question

Hi we are looking to buy our first rental property, what price range do you use when buying a rental?  Market, 90%, 80%, 70% ARV?  I realize situations are different but just as a "general" rule?  Thank you, Robyn Green

Martin Zawarski · Answer

I am a buy and hold investor.  there are as many different answers as there  are people answering this question.   We all have different wants and needs and each market is very different .  I work with other investors and I show him properties I pass on and he shows me properties he passes on.   My point is we have different criteria on what we look for in an investment.

I look for undervalued detached single family homes between 1100-1500 sf 4/2 or 3/2 priced between 100-130,000. I do buy homes that fall outside of that parameter at times if I see value in them .   I typically invest 15-30,000 per home in improvements and I receive 1350-1550 a month in rent.   I typically make 350/450 per home after PITI .   I upgrade all appliances and mechanical so I see no major issues for several years.

I spend a good portion of my time working on the homes which is sweat equity, but as I progress in this business I am spending less time doing its and more time managing.   But this is my focus and I have no problem finding homes that fit my criteria.

I do not have a 70/80/90 percent rule.   I look for bargain priced homes that are undervalued as compared to surrounding homes.  I look for trends in the neighborhood.   If the comps are let say 150,000 in the last 12 months then 152,000 in last 9 months, 155,000 in the last six months this shows me that there is a good upward movement in value.  I have seen this trend go the other way, and if that is the case, I tend to shy away from the property.  I will look at the property but will try to figure out why this trend is occurring .

If the value of comps is 150,000 and I can get the property for anything less than this after I buy and improve the property I am ok with it.   The property will appreciate ,  I get cash flow, I pay off about 1200-1600 a year, the first year in principle.  Inflation which will happen again will be a big plus on my value, I have depreciation.  I have solid assets that I built and I rebuild the homes like I would live in them.  Many of you will think this is a mistake but it is my preference.   I will take a vinyl sided cape cod and add $6,000 in fake lick and stick stone on the front, take a single car width driveway and make it a double width.   Do these things help my bottom line, no.  It just makes me proud of work I do.  I just built a custome wood over mantel on a brick fireplace.  Why? Just to make it nice!

I love this business.

Ali Boone · Answer

It totally depends on what kind of property you are buying! If it's a dumper, it better be wellllll below market value. If it's in perfect shape, market is fine. Totally depends.

David Hutson · Answer

Robyn,

I'm a buy and hold investor in Sacramento with eight buy and hold properties locally so I'm not a major investor but I do have local experience.  I agree with those here who say to look at the cash flow.  If you can get a property at below market value and cash flow, even better.  It's been really difficult around here to find really good deals unless this is your full time job or have a great agent.  I personally look for $300+ per unit.  If I can get that and pay almost full price then I am happy.  I do look for the good deals but you need to be prepared to move quick and have cash or be pre approved for a loan.  Definitely check out the local REIA groups for more info and contacts.  There are two locally and Elk Grove is said to have one but I haven't ever been able to make contact with them.  Watch on here for a local BP meet up.  I'm going to keep hounding @Al Williamson to host the first meeting, which should be in a month or so.

Elizabeth Colegrove · Answer

I am a buy and hold investor. My goal is to find higher end rentals with $200-$600 a month in cash flow plus the mortgage being paid down. Appreciation is a fact.

Andy Collins · Answer

Two years ago I tried  to be "all in" at 70%,,,today in the same area, I'm probable closer to 90%,,,to a large degree the market will influence how good of a deal you can find.

As others have said, I'm looking at cash flow,,if it fits the area/size/neighborhood specs I use, and still cash flows what I'm trying to achieve,,I'm not too worried what discount I'm getting.

Robyn Green · Answer

Thank you Sharad, it's great to have input from people who are actually doing it.  Even if I am in a different market.

Sharad M. · Answer

Robyn,

It will vary a lot from market to market. The properties I am purchasing in my area are roughly about 80% of ARV. But I am purchasing them as long term buy and hold.

You live on the west coast and the prices will be very different for your market.

There are some markets in my area which are very high cash flow markets, where you get in at about 90% ARV, but your cash flow will be very high. For example, under $30k for about $600-$750/mo in rent, but there won't be very high appreciation.

So you have to see what you feel comfortable with in terms of location, price, etc.

Eric Black · Answer

Hi Robyn,

I assume you already know your other criteria, what you can afford, what areas you would be comfortable buying in, etc. Those play a major part as well but ultimately yes, you need to decide how much a property needs to cash flow per month for you to consider it a deal.

If you need recommendations for a realtor or handyman in the Sacramento area let me know.

Robyn Green · Answer

Thank you Eric, I guess we need to decide on what we want for monthly cash flow.

Buy and Hold, how much do you pay?

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