Buy and hold - what is a good deal?

Question

I have just started my journey in RE investing by reading books, listening to podcasts, and hanging around bigger pockets. I am interested in the buy and hold strategy. I understand some of the simple math on analyzing deals and my cash on cash return on investment. On most of the deals i have practiced on they may not be great deals up front with cash on cash return on investment - maybe less than 7%. However, I know this doesn't account for appreciation, and loan pay down over time. My big question is if it is worth it to take less return (with small, but positive cash flow) early if you plan to buy and hold for the long terms, say 15 or 20 years or more? Thanks for your time.

Andrew Powers · Answer

Depends on your risk tolerance and your drive to get the first deal done. Is 7% return based on being conservative with the numbers or not? Without being able to see into the future, are you willing to buy at a lower return based on the information you have about potential market growth? Can you justify this first deal as a property to learn with and have the cash reserves to cushion you in case things go bad in the market or with the property? Just some things to think about as everyone and every situation is different.

Michelle Fenn · Answer

I wholehearted agree. Rentals in a high end neighborhood worked well for me. I purchased a foreclosure in 2014 for 89,000, put in 40,000 in renovations. Rented for $1,400 per month for more than 5 years. The last renter was in charge of an Amazon distribution center and fenced my entire yard and installed a shed at their cost. When they left to go to AZ, I listed it and sold for 169,000 in two days. My 1031 Swap is in an even better neighborhood and the new tenants there are already asking about a purchase.

Joseph Cacciapaglia · Answer

A lot of my most successful investor clients do exactly that. When you're buying in good areas where you expect both appreciation and rent growth over the long term, you won't usually find the level of cash on cash return that a lot of the gurus are suggesting. If you're getting 5-7%, and you expect decent rent growth and appreciations, then your total return should be pretty amazing. I have several clients that will accept even lower cash on cash, because their analysis points to rapid rent growth and appreciation in the areas that they're targeting.

Alyssa Dyer · Answer

@Brad Van Epps - there's nothing wrong with taking a 7% cap rate. If you've got a complete cosmetic upgrade, a good area and all new major mechanicals, it's a route a lot of investors choose!

I do personally know more investors who look for a bit of a sweet spot deal. This might be closer to an 8% cap rate and have some updates. So maybe cosmetics are in line with what's expected for the area and furnace has been replaced. At a 60k purchase price you've saved 12k on a downpayment vs a 120k 6% cap rate house. So you have the budget to replace AC, hot water tank if and when they go out and you have the budget to do a light cosmetic upgrade to raise rent rates a bit when you're ready.

At the 120k make you're absolutely spending 24k at close and getting a 6% cap rate. At the 60k mark you're spending 12k at close, getting an 8% cap rate and have the potential to push it higher. On both if you hold for 20+ years you'll likely replace AC & hot water tank.

Brad Van Epps · Answer

@Joseph Cacciapaglia awesome! Appreciate the feedback.

Buy and hold - what is a good deal?

Buy and hold - what is a good deal?

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