Is DC-metro a good area for Buy-And-Hold strategy?

28 Replies

Hello BP community - I am a complete newbie and trying to embark on my first project. The education I have gained so far is pointing me to the direction of Buy-And-Hold strategy, but I have heard that DC area is not very good for this strategy as most, if not all, of the rental income goes to mortgage payment.  Contrast this to the 2% rule (which says that your rental income should be 2% of your home purchase price) or the 50% rule (which says that after dedicating half of your rental income to non-mortgage expenses and then paying your mortgage, you should be left with $100-$200 positive cash flow).  

For those investors living in DC (VA/MD/DC), would you agree that our area is not great for rental strategies as prices are so high? If so, how do you determine what geographical areas in the country to invest?

Hi Weis,

I think it is safe to say that there are definitely better markets for buy-and-hold investments. Other parts of the country have way better cash flow potential. With that being said, I am an investor in DC and primarily invest in buy-and-hold properties. I know I could get better cash flow in other markets but DC is home and I like being able to invest in my backyard. There are opportunities for buy-and-hold in DC but they are hard to find. And they go fast. So when you find one you need to move quickly. 

Best of luck on your journey! 

Thanks @Eric Dembinski  

That's my hesitation as well.  The other areas in the country look good for rentals, but I feel uneasy investing thousands of miles away when I can't visit my property.  Having said that, may I ask if your rental properties in the DC area are just breaking even?

@Weis Sherdel  

People want to live and work in the DC area, that alone beats all other areas where there is not the same high demand.  Whether the area is good for B&H is not the question, the question is with the high demands and high prices can you have positive cash flow.  If you look hard enough you will find areas that are positive cashflow areas. 

Hey Weis,

I will admit that the numbers can be a little shaky in the city with high purchase prices but you also have higher rent prices as well. The best deals and cash flow your are going to find are going to be out of the city though if your looking to buy low do the work and hold. A lot of people are buying like crazy in P.G. and you can find great prices there but it is so competitive that if you are not aggressive with your bidding you get out bid constantly. I do not know if you are interested in working in bmore but it is hot out there. You can get properties for very very low and rents out there aren't that bad and can go from $500 to about $1500 give or take on either end. It all depends where in Bmore you invest though and I would just say do your homework because it is a whole different animal out there. If you haven't hit the REIA's yet I would suggest doing so because they are great for getting info. Are you looking to buy move-in ready properties or buy distressed and fix? If you are going to fix are you contracting or doing the work yourself?

Thank you very much, @Gary Alford  .

Yeah, it's incredible how low the prices are in Baltimore.  I am getting these WholeDeal alerts for $50,000, but I don't know the Bmore market and the neighborhood school/safety conditions to take a bet.  As you said, it all depends on the area.  PG is more close to me, so I'll look into that.

I prefer move-in ready, but don't mind some rehab costs as long as the deal is good.

My first question would be to define "DC area". 

I own a couple of rental properties in Northern VA (Herndon). Both properties are cash positive but I got lucky with them and would probably argue that Northern VA is not generally a good area for buy and hold. You will make some money but not much.

On the other hand, Washington DC itself is completely a different story and probably one of the hottest buy & hold markets in the country because of all the government workers and several universities in the area. I know several investors that are making $1500-2000 monthly profits on their properties. It is all about location and numbers. The going rate in NE, DC is anywhere between $1000-$1200 per room so you just need to look hard and have the assets to put down a decent down payment for the numbers to work. 

I am not familiar with Baltimore/MD so I don't have any suggestions there. 

While DC has some deals and can cash flow, arnt the tenant laws there really bad? (as in a huge hassle for the owner)  I've heard it from several sources including from the podcast.

Hi Weis,

I completely disagree with the notion that Washington DC is not a good area for the buy-and-hold strategy.  I would actually argue the complete opposite.  Washington DC has one of the strongest rental markets in the country.  And while it's true that property acquisition costs are high, the significant rents make finding a successful buy-and-hold property relatively easy.

I personally own a number of positive cash flow rental properties in DC and I've helped several friends find good rental properties to buy over the years.

-Rob 

Sorry, I wasn't saying its not a good area necessarily for Buy and Hold, I was mostly referring to the issues relating to tenant and owner (if you get them), especially evictions.

@Robert Williams  

This is really the first time I've heard someone argue that positive cash flow properties are easy to find in DC.  I'm from NOVA and recently moved back to the area and was looking for a property to purchase as my primary residence that I could later turn into a rental property.  So I'm very interested to hear what neighborhoods or areas in DC have positive cash flow properties.

As far as the topic of the thread, a property that cash flows $100 a month in DC is different then a property that cash flows $100 a month in the suburbs of Cleveland when property prices are so drastically different.  So I also look at the % return on my money.  That's my argument for why I invest in other markets despite living in this area.  I'm very interested to hear more from those that are buying and holding here though.  

There's definitely demand in the rental market, but it still hasn't driven rents high enough to compensate for the high prices and condo/HOA fees in everything I've seen. I'm sure there are deals out there, but could you explain to us how you've found these deals? Were these MLS properties or are you marketing to find them? Or are they neighborhood specific. Thanks for your input!

not sure if you are talking about the laws are the housing? But i do alot of work in the Dc area and people are going crazy with inlaw sweets  going up floors  adding addition to get two extra rooms so they can charge more money after the get the place so do not just look at the property look and see what you can transform it to also. The new laws are very hard for owner and may get harder .with some hard work and beating your feet you will find some deals wish you  luck on your endeavors . 

Dc is both bad for driving and for buy and hold investing due to prices....quite simply, the nut is just too high. Good news in dc, values will hold/appreciate. Can one find positive cash-flow deals in dc?? Sure. However, Nobody is breaking the a bank down there as a newbie buy and hold investor with normal money (not millions). Frankly, i see the same level of tenant in/around baltimore for a fraction of the price dc offers.

I'm surprised no one has mentioned the insanely anti-landlord slant of rental regulations here in DC. Some investors have told me they won't buy rentals here for that very reason. 

Even so, I know of a few investors who have been successful rental property owners in DC, but you'd better know the laws really well along with the numbers before acquiring anything. 

Good luck to you!

I agree @Account Closed with the fact that you need big money to invest in D.C. so regular guys with out a good HML or PL should probably wait. Unless you spend your money doing marketing which is not a bad bet. The thing about D.C. is you have a lot of long time residents with either a lot of equity or fully paid off homes. I mean I grew up running the streets in the city and every ones grandparents, aunts and uncles had houses in D.C. and still have them and have lived in them for 15-20 years or more. So seller financing could be a great strategy.

Although I do not agree that the tenant type is the same as D.C. in Bmore ( they have a lot more war zones that are 10x worse and the real estate climate changes from block to block) you can really make the same ROI in terms of % if not more there plus the amount of inventory is amazing but things can screw you quickly if you do not know the area.

I live in D.C. and after I watched my "old" craigslist roommate comfortably scam my landlord due to the extremely friendly tenant laws, I'm not sure I'd buy in D.C.

That being said, I do think the D.C. rental market is one of the strongest in the country. You will likely always have renters. I know firsthand that finding places to rent is difficult because they get scooped up so quickly. 

Whether or not you will make money depends on the deal you create. A few posters above me mentioned they are investing and are "cash flow positive," however that is not good enough for me. I've been watching the D.C. market for the past year and I can't help to notice I can get double the return in my college town and triple the return in Baltimore. 

Of course the disadvantage to investing in my college town and bmore is that it's not in my backyard, but I'll sacrifice distance for returns any day.

My conclusion is that D.C. is one of the best rental markets in the country, but that you can easily see better returns elsewhere. Of course if you are investing in commercial properties it's an entirely different ballgame. 

@Brandon Hall   can you share with us the scam your "old" roommate used? As a DC landlord I am curious and I am sure a few other people on this thread would also be interested to know how that scam worked. This way we can protect ourselves, hopefully, from that kind of situation with our own tenants. 

Thanks in advance,

Eric

@Eric Dembinski  Sure. I'll preface the story with: once my current roommate and I realized what was going on, we promptly moved out. 

In February, I was looking for a place in D.C. and found one posted on craigslist. It was in the Chinatown area with really affordable rent. I checked the place out (built two years ago so it was nice) and also met the guy who had posted the ad. He was also going to be moving in at the same time and needed two roommates (we will call him W).

I told him I'd like to move in with him and asked about signing a lease. He told me not to worry about it since he was going to be on the lease. I told him I want something in writing, so I drafted a sublease and made him sign it prior to me giving him a deposit or moving in. 

I moved in and met my current roommate (call him A) who had also found the craiglist ad online. He used my sublease and had W sign it. 

A few months go by and W is constantly having arguments with the landlord and complaining about things that don't work (i.e. a window wouldn't open and an electrical socket wouldn't work). Not huge deals, especially for easy going people like A and me.

One day the landlord finds out A and me are living there and flips out. Turns out we were not supposed to be there (as is clearly stated on the lease that W signed but neglected to inform us about). A and I began to look at other apartments in the area.

While we are looking to move out, W's scheme falls apart and we now understand everything that he has been doing. 

First, W couldn't afford rent by himself so he needed roommates. The lease clearly stated that he was not allowed to have roommates, but once A and I moved in, D.C. law protects the hell out of us. The landlord can literally never kick us out unless we stop paying rent.

Second, turns out W was not paying rent to the landlord (A and I paid rent to W and he would then pay the landlord). That entire time he was complaining about the minor repair issues, he was withholding rent (effectively stealing A's and my rent). Of course, in D.C., you have an implied warranty of habitability. If these minor repairs are not cleared up, you don't have to pay rent. He didn't put the money into escrow like he should have been doing, but in D.C., turns out, that doesn't really matter that much. I think he was two or three months behind on rent.

We found out the landlord filed a motion to evict everyone from the home. W promptly filed a complaint with the landlord tenant court to have the property inspected for the repairs that needed to be complete. He argued the implied warranty of habitability during his eviction hearing, and the eviction was put on hold. 

The inspection took place and the landlord was ordered to make necessary repairs prior to receiving rents. He did so within a week. At this time, A and I moved out and lawyered up. Turns out we were going to be fine. Since we never paid our landlord (we only paid W making him our "master tenant") we were not liable to the landlord (HUGE issue in D.C. in my opinion). 

W has two new guys move in. They each pay a big security deposit. W backpays rent and the eviction case is dropped since apparently that's all it takes. W then refuses to pay current month rent citing more damages and repairs that need to be made. Landlord starts eviction process. then after two months (Oct. I believe), W moves out and leaves the landlord with a trashed house, no rent, and no one to go after. W moves states and is difficult to find, and apparently even if he is found, he won't pay up because he won't really need to. There is very little you can do once someone moves states. 

Morals of the story: 

1) If you invest in D.C., I suggest you read the "Tenant Survival Guide" and understand every word of it. You also need to have a REALLY good lawyer ready to move and fight quickly. 

2) If a subtenant moves into your place, make sure you have them sign a sublease with YOU. The fact that I was not liable to the landlord because my sublease was with W and I only paid W is absurd. I could have stayed there forever if I chose to because the landlord cannot evict me since I am not liable to him.

3) Make sure you screen your tenants with the best resources possible. My landlord used a  reputable realtor for these services and look how that turned out for him (they dropped the ball). I also discovered that once a place is leased in D.C., it is technically perpetually leased, meaning at the end of the year lease it will transition into a month-to-month lease for the life of the tenant (as long as the tenant continues to pay rent and at the increased rental rate). So if you get stuck with a bad tenant, you are screwed until the tenant decides to move out.

4) This tenant was an outlier but these things CAN happen and D.C. protects its tenants like crazy. Just know the law and make sure you are getting high quality tenants. 

I hope this helps some of you D.C. investors. Let me know if you have any questions. This was a high-level overview of my story, there are many more details but I don't currently have the time to relay them all.

If you're willing to drive up to Baltimore, I think the market is great in Baltimore County. I guess I'll say it's good in Baltimore City too, but I much personally favor the County.

305-537-6252

Many thanks for sharing your experience @Brandon Hall  

I didn't know the unreasonably unfair rules in DC.  Your story alone, even if an outlier, compels me not to touch DC at all, coupled with the fact that prices are high.  Better to look elsewhere.

Originally posted by @Brandon Hall:

2) If a subtenant moves into your place, make sure you have them sign a sublease with YOU. The fact that I was not liable to the landlord because my sublease was with W and I only paid W is absurd. I could have stayed there forever if I chose to because the landlord cannot evict me since I am not liable to him.

3) Make sure you screen your tenants with the best resources possible. My landlord used a  reputable realtor for these services and look how that turned out for him (they dropped the ball). I also discovered that once a place is leased in D.C., it is technically perpetually leased, meaning at the end of the year lease it will transition into a month-to-month lease for the life of the tenant (as long as the tenant continues to pay rent and at the increased rental rate). So if you get stuck with a bad tenant, you are screwed until the tenant decides to move out.

Brandon... crazy story. A couple of questions. For #2 above. If you are not liable to the landlord and the landlord is not liable to you (there is no agreement between you and the landlord, AND the original lease holder (Mr. W) is in breach of lease thereby voiding the lease), wouldn't you considered to be either tresspassing or squatting in which case the landlord can then have you arrested and removed?

For #3. How can a month-to-month lease be perpetual based solely at the leasee's option? It's my understanding the whole point of a month-to-month lease is that it will continue on a monthly basis until either party gives proper notice to terminate the lease after which time there is no more lease agreement. I don't understand that at all.

Wow, @Brandon Hall, thanks for telling this story, which perfectly illustrates the kinds of problems DC law creates for landlords. Tenants who know the laws can squeeze the dickens out of property owners. I know someone who rented a house to a lawyer (big big mistake) who withheld rent and sued her for all kinds of expensive unnecessary repairs--just because he could. 

As I said before, I know people who rent out their property in DC with very good results. Unlike in Baltimore, you get both cash flow and appreciation here. Baltimore is cash-flow only.

But you'd better arm yourself with knowledge if you are going to take the leap in DC. You can take the same courses on rental law that realtors are required to take at the Greater Capital Area Association of Realtors (GCAAR--google it), for a slightly higher fee than realtor-members pay.

Nancy Roth

@Alexander Merritt  

Brandon... crazy story. A couple of questions. For #2 above. If you are not liable to the landlord and the landlord is not liable to you (there is no agreement between you and the landlord, AND the original lease holder (Mr. W) is in breach of lease thereby voiding the lease), wouldn't you considered to be either tresspassing or squatting in which case the landlord can then have you arrested and removed?

Technically, in other states, yes. However not necessarily in D.C. In D.C., only the landlord to the party can evict you. My landlord was the master tenant (Mr. W) and as long as I paid him, I could not be evicted. Now if the landlord evicted Mr. W, I want to say I too would be evicted. But the landlord cannot evict me without evicting W since I am not liable to the landlord. The best strategy for the landlord would be to get a lawyer to write up a sublease agreement, then ask (beg?) for me to sign it. Which he did, but at that point we had already moved out and W had two new guys in there.

For #3. How can a month-to-month lease be perpetual based solely at the leasee's option? It's my understanding the whole point of a month-to-month lease is that it will continue on a monthly basis until either party gives proper notice to terminate the lease after which time there is no more lease agreement. I don't understand that at all.

 It turns into a perpetual month-to-month lease at the discretion of the tenant. When the tenant wants to move out, the tenant provides 30-day notice. Landlord cannot provide 30-day notice to move out unless there is a legitimate reason to do so (think massive repairs and capital expenditures). Tenant simply has to keep paying rent and at the increase rental rate if rent has increased. 

Pg. 4 of the Tenant Survival Guide: "No matter what type of lease you have—written or oral, month to month or annual—your landlord cannot evict you without a legally valid reason. (See the section on Evictions for details on the eviction process.) In fact, after a lease expires you can continue to stay in your apartment as long as you continue to pay rent. The terms of your expired lease continue to be in affect with the exception that your rent may increase after a valid 30 day notice. To  increase your rent, your landlord must file a notice with the RACD. Any increase must meet certain legal requirements."

@Nancy Roth  I actually did a ton of research (hundreds of hours) on D.C. tenant laws during this entire experience in order to understand how to protect myself and roommate A from any liability we may have had (thank goodness we weren't liable for anything). I read a similar story to yours about a lawyer in D.C. who rented a place and screwed the landlord because he knew the law and exactly how to go about getting what he wanted. 

If anyone wants to invest in D.C., go listen to Michael Blank's podcast about when he bought an apartment complex in D.C. He has a story that parallels mine and apparently the tenant almost bankrupted him.

Investing in D.C. can be very lucrative. Hell, major Chinese investors are helping fund the SW Waterfront revitalization project which includes billions of investment dollars. However, I don't think I will be investing in D.C. unless I can bankroll a high-quality lawyer and I have a few more years of experience under my belt. And again, the returns (excluding appreciation) just aren't as good as other accessible locations. 

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