I understand that finding the "perfect" buy & hold property is rare. I understand the concept of analysis paralysis. I even have a quote sitting on my desk right now that says "Every successful man I have heard of has done the best he could with conditions as he found them and not waited til next year for better." But It also makes sense to me to pass on just "okay" properties if they run the risk of becoming a long term headache. So here's my question: How can you tell when you are being too picky? VS just being strategically selective? Here's more backstory: For the past 12 months I have been actively searching for buy & hold properties to purchase here in Utah. I've found many properties that I liked on paper. I've been under contract on quite a few (probably 12 or so). But in my due diligence I find too many imperfections such as: • Zoning issues • No building permits pulled with city/county • Too much rehab needed for the price • Conventional lenders won't lend on it (non-warrantable condo, two houses on one parcel, etc...) • The improvements I want to make aren't allowed by the city I struggle to find anything that comes close to the 1% rule here in Utah, Wasatch, and Salt Lake counties. When I do, it has the above listed issues. I also, feel like (at least in Utah) we are at the peak of the market. Things still could go higher but I feel like I am buying high. So I am hesitant to tie up all my available down payment funds on properties in the peak of the market when, should things stabilize in the near future, it would be better to buy low if it did stabilize. I'm well aware of better buying power in the Midwest and how ROI is better there. But I'm not there and don't like the idea of owning out of state. I know there is money to be made in real estate with any market. So am I being too picky? Do I need to change my strategy? What should be my mentality here?

If you want to win the lottery, you need to buy a ticket. We've done a lot of great deals, we buy distressed, rehab ourselves, and rent out. I'm sure there's an acronym somewhere but it really doesn't matter. But, we've also done some deals that probably aren't as great as they could have been, we could have waited and got better deals, but we have one small problem - we don't have a crystal ball. So we play the game the best we can today, rather than worry about the deal that may or may not happen tomorrow. However, of the bad deals, although they may not be as good as we want it opens doors (both physically and metaphorically). For instance, we got to a size of SFRs (with the bad deals - grass still needs cutting) where my wife employed a gardener for two months whilst I was away. We got on really well with him. Out of the blue a few months later, he's working on a house, thinks the owner landlord wants to sell. House too trashed, owner too old. So we saw the house, bought it for $25k, put $6k in it, and our realtor handily sold the house across the road for $98,000, which made the instant valuation of this house up around $80k, and rents for $700pm. It'll be going to $800 early next year we think. Had we not played the game, we wouldn't have got this house. So although I admire your tenacity to look for a good deal, don't overlook the joining the game. If you want to win the lottery, you need to buy a ticket.

Such an amazing thread @Chris Watkins packed with wisdom and experience. The title is an echo of the sentiments of a lot of Real Estate friends of late. I try to analyze a few properties a day especially in the Holladay and University of Utah area and have seen 100 year old properties that only have monthly rents of a little over 2k get listed in the 400k range... People are just getting greedy in this market. Ready to jump on a deal anytime but excited for winter where I hope this market cools off with the temperature.

Do your best w/ current market conditions or wait for better?

Anthony Colonnetta

Investor · Houston, TX · Member since 2015 · 39 posts · 8 votes

10y

Chris, I have not invested in a property (yet) but have been asking the same question you have. I think you have to be super picky in a hot market like this because of the risk of it going down. Obviously, if you find a great deal you should pull the trigger but I believe you are doing the right thing by staying picky in a market like yours. -Anthony

1 Reply

Chris Watkins

OP

Rental Property Investor · Payson, UT · Member since 2016 · 68 posts · 11 votes

10y

Thanks @Anthony Colonnetta for the response. I agree - the risk of it going down is great. But then again, the Utah economy is really strong right now with a ton of job growth expected so it may go up for a number of years. The question that I don't have an answer to is "in 10 years from now, will I regret waiting to buy properties, or will I be glad I was picky and waited..."

0 Reply

Becca Summers

Real Estate Agent · Highland, UT · Member since 2015 · 407 posts · 272 votes

10y

@Chris Watkins My advice, unless you're paying cash now is a great time to buy because your interest rate will be possible the lowest you will ever see in our lifetime. Yes your tenants are paying the interest rate for you in the long run but when rates go up your payment goes up and then rent rates have to go up and you're already having a hard time hitting the 1% rule. To be honest in the last year I've only seen one property that hits the 1% rule and it wasn't on the MLS. I don't want to say it's impossible but because of other factors I'm willing to still invest not hitting those numbers.

To answer on if you're being too picky maybe. In all the inspections I've been through the building permits to finish the basement have only been pulled once. If this is a criteria that is important to you then you'll want to stick with condo's and townhomes, single family homes with no basement so the builder has finished everything in the home. I'm sure you know the mindset of people around here, if they can save money doing renovations and repairs they will.

Have you approached the non-warrantable condo owners to see if they'd be willing to do seller financing? I'm sure they have struggled to sell the property and might be interested in alternatives to get out.

I agree with you, I think we are close to the peak in our market. You can see some of the signs inventory is starting to build up, a few months ago we had 1.9 months supply in Utah County and now we 3 months worth. Still a sellers market but very odd to have inventory build up in the middle of summer. However with that said if you buy it right it shouldn't matter what the market does if it's meant to be a true buy and hold. One of the big reasons that will help the market into a buyers market is interest rates going up, which we've thought they'd be higher by now. After the election I can see rates going up. Then you have to look at affordability.

11 Reply

Chris Watkins

OP

Rental Property Investor · Payson, UT · Member since 2016 · 68 posts · 11 votes

10y

@Becca Summers, as always, very insightful. One thing that I sometimes forget is the fact that I can get a 4% interest rate on an investment property and it will be fixed for 30 years. You are right about that, hard to ignore the interest rates. Thank you for reminding me of that.

Great perspective on the pulling of permits, etc... The more I look back on it, the more I regret passing on that duplex. It's good to know that it's super common for them not to pull permits on finishing the basement.

I have approached the non-warrantable condo owners about seller financing. Maybe I need to market to them with that angle with a little more emphasis.

Thanks for taking the time to provide your valued input!

0 Reply

Steve Theobald

Real Estate Broker · Salt Lake City, UT · Member since 2015 · 145 posts · 150 votes

10y

@Chris Watkins, Thanks so much for sharing your struggles. I am impressed with your persistence and wisdom during Due Diligence as an investor.

I have been fairly candid about a lot of issues on BP. Your story really hits home, and I will share a bit more than normal.

For the past 5 years I have made my living as a bird-dog and then agent (4 years) by finding deals for investors. The last 6 months have almost put me out of business because the "deals" have dried up in the strong seller's market. I have started doing some of my own marketing and even doing the dreaded door-knocking (with some success), but I am about 12 months late to the party. I had great success finding the needle in the haystack on the MLS for so long I became complacent perhaps. Last year was actually my best ever with 31 transactions, and I only have 6 so far this year, so I am woefully behind.

This being said, I also think the market is poised for a leveling off, if not a minor adjustment. This means the deals will soon return! And perhaps no one has the evidence like I have because I make so many offers. I am getting more counter-offers on my low-ball offers, so the excellent litmus test tells me that sellers are becoming more willing to negotiate as the buying pressure slows. And yesterday and just 15 minutes ago both I got agents calling me back on my offers after their deals fell through. I like to call these "resurrections."

So I am cautiously optimistic about the market right now. Don't give up. These are strange times, for sure, but the persistent will win. Just stay the course.

-----------

This graph shows the issue very nicely. We can't keep going down on inventory! The average over the last two months in Salt Lake County is less than a month of inventory (.92 months). It must snap back a bit soon:

5 Reply

Chris Watkins

OP

Rental Property Investor · Payson, UT · Member since 2016 · 68 posts · 11 votes

10y

Thank you @Steve Theobald, I have followed your advice on several other threads and appreciate your knowledge in this market. The beauty of all of this for me as I get established in real estate investing is that I can chalk up the last 1.5 years to "education". If time is money then I have really invested a lot in education the past 1.5 years. Fortunately, I have more time than money put into this so far...

I agree about the adjustment coming and wonder how the election will affect this (if any). @Becca Summers mentioned the idea that interest rates may change soon as well. So here's a question:

Is it better to buy high with a good interest rate or buy lower with a higher interest rate?

It obviously depends on the numbers involved (what interest rate differential are we talking about, how much higher are you buying, etc...), but with the future unknown, it has me thinking...

1 Reply

Steven Bond

Developer · Provo, UT · Member since 2015 · 141 posts · 89 votes

10y

Chris Are you after cash flow, equity, stability, or all three and what is the priority? If you haven't looked into FIG we have had a solid track record for going on four years of providing all three of the above with over $100M in sales. Love to meet up with you. You can bring along Becca who already knows us or Steve so you have unbiased representation to verify with if you're more comfortable with that. Thanks! And best of luck with your investment choice!

0 Reply

Chris Watkins

OP

Rental Property Investor · Payson, UT · Member since 2016 · 68 posts · 11 votes

10y

@Steven Bond, would love to meet up. I have known about FIG and followed your work for the past few years. From my limited understanding, your ideal client is someone with over 140k to invest in a down payment on a triplex or fourplex. I don't have that kind of cash to invest at this point. Am I missing something? Either way, I would love to meet all of you and learn more.

0 Reply

Steve Theobald

Real Estate Broker · Salt Lake City, UT · Member since 2015 · 145 posts · 150 votes

10y

@Chris Watkins, Someone around here must have an interest rate crystal ball. . . ! 30 years is a long time, and I would lean toward the first option. If you spend $5000 more on the house at the current historical low rates, how do things compare to $5000 less and 0.5% more? If you are financing the deal at 20% down and that $5000 really means just $1000 extra out of pocket, it seems like jumping in now is a great way to go. I would say now AND later! Get that cash flow started right away. Just don't do it because you "have to have a deal" like I have heard some investors say.

0 Reply

Chris Watkins

OP

Rental Property Investor · Payson, UT · Member since 2016 · 68 posts · 11 votes

10y

@Steve Theobald - have you been talking to my broker? J/K ... he did say essentially the same thing to me last week - "don't just buy a property to have a property". But at some point I wonder if I am a little too picky (which is why I asked this to you and the forum). I like your numbers showing the difference. I agree. Thanks again!

0 Reply

Becca Summers

Real Estate Agent · Highland, UT · Member since 2015 · 407 posts · 272 votes

10y

Steve is right I shouldn't speak in absolutes when talking interest rates because we could go into a civil war after this election for all I know. With that said if you look at election years historically rates almost flat line during election years and then gradually raise or drop until the middle of each presidents term and then go the other direction. Is this tied to the elections perhaps not but it's an interesting trend line to watch.

I my research an interesting thing I saw was December the month after Obama was elected the first time rates jumped a full 1% even though we where in a recession. However if you remember they where offering the first time buyer incentive at this time that rebated a percentage or set amount back to the buyer and money was "running out" so maybe there was a jump of mortgage applications. The money lasted another 6 months so rates went back down shortly after.

The best thing about real estate is the more you give the more you learn and the more you can service your clients. Even though you've spend all this time analysing properties with no luck at least you know more than you did.

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Mike Palmer

UT · Member since 2013 · 164 posts · 55 votes

10y

Bear with me here--this is a long post and I am going to go out on a limb because my take on the interest rate vs. price is a little different than most. It seems EVERYONE says that interest rate is most important. Well it probably is in general and for the everyday homeowner's monthly payment, and if you are only talking about paying an extra $5k for a property and getting a super low interest rate I would typically agree. People often even pay $5k or more just to buy down their rate, or overpay by that much or more to get seller financing or better terms, etc.

But the flip side that I never hear ANYONE talk about, is that if you overpay for a property you have overpaid and there is no way to change that. There are multiple ways to manipulate the interest rate (refinance, sell, pay off, etc.), but you only get one shot at buying for the right price. Most people tend to sell or refinance every 7 years anyway. If you are planning to buy and hold for 50 years and never refinance, you may have a lot of capital locked away that is no longer helping you buy more property.

There is also a reason that hard money lenders exist--you can WAY overpay on the interest rate up front if you buy right, but you cannot ever get out from overpaying (except through foreclosure/short sale/etc., which I don't include).

I think you need to factor in both (among a variety of other things), but I certainly wouldn't overpay (by much anyway) to jump in now just because rates are low. And if/when rates go up, property values tend to stagnate or decline anyway...

It sounds like you are also only considering conventional financing. There are a lot of other avenues of buying/financing property (such as seller financing, private money, cash, options, sub-2, trading, partnering, etc.). The interest rate is only one factor to a deal, and frankly I think it is silly to overpay for a property just on the premise that interest rates are low. Yes the interest rate is an important factor, but it is not everything.

I remember sitting in the living room of the apartment I was renting in 2007 watching Suzie Orman babble something about buying a house, and I was going through the same thing then that you are now--thinking I have looked everywhere and tried everything and the numbers just didn't make sense, but to me they didn't so I didn't buy. I made offers and had a few things under contract, but pulled out of all of them for one reason or another. I was frustrated and didn't like the idea of continuing to 'throw my money away' on rent every month, but most of the people I know that did buy then regretted it. All that money I 'threw away' continuing to rent saved me 10 times what I paid in rent for a few years. I then came in and bought a house a few years later from someone that took the plunge and found out later the numbers didn't make sense...but they got caught up in the hype and the 'buying something to buy something before they were all gone', and they way overpaid. I would still say owning is better than renting, I am just saying it doesn't make sense to buy just to buy.

Look at the whole picture, establish YOUR criteria for what makes a deal worth buying, and then only buy if it fits your criteria.

9 Reply

Joe Au

Investor · Draper, UT · Member since 2016 · 120 posts · 57 votes

10y

I agree with @Mike Palmer. You can't turn a bad deal good. Also, @Chris Watkins you are not picky, you just have high standard. And that's not a bad thing.

1 Reply

Chris Watkins

OP

Rental Property Investor · Payson, UT · Member since 2016 · 68 posts · 11 votes

10y

@Mike Palmer - great point - I like that perspective. Knowing my personality I will probably look to refinance an investment property or sell it before the 30 yr term is up...

I also like the idea of being able to control your interest rate somewhat.

I have definitely been actively looking at alternative financing methods and have offered on several with seller financing, lease option, and even private money. I've learned a lot but most sellers I've talked to say the market is too tight for creative financing. Just gotta find that one exception to the rule though! Thanks Mike!

0 Reply

Steven Bond

Developer · Provo, UT · Member since 2015 · 141 posts · 89 votes

10y

Chris Watkins I'll be back in town near end of this Month and would love to catch up. You can also email me Personally and I can schedule something that works for both of us. Thanks. I love what Becca said as well. You're pursuit is making you that much of a better professional in the business!

0 Reply

Chris Watkins

OP

Rental Property Investor · Payson, UT · Member since 2016 · 68 posts · 11 votes

10y

Emailed you with the @Steven Bond - email sent. Thanks. I look forward to meeting with you.

1 Reply

Joe Au

Investor · Draper, UT · Member since 2016 · 120 posts · 57 votes

10y

https://www.biggerpockets.com/renewsblog/2016/07/0...

1 Reply

Hersh M.

Engineer · Carlsbad/San Diego · Member since 2014 · 285 posts · 97 votes

10y

@Chris Watkins About mortgage rates, check this out. I find this graph very interesting.

https://fred.stlouisfed.org/series/MORTG

Rates have been in a strong downtrend since 1981. It frustrates me when I hear people say that 'rates wont go any lower, this is the best time to buy'. Who knows. And I am in a similar boat as yours in that I am analyzing deals but not pulling the trigger yet.

1 Reply

Chris Watkins

OP

Rental Property Investor · Payson, UT · Member since 2016 · 68 posts · 11 votes

10y

Thanks @Joe Au that was a good read. Maybe I am focusing too much on cash flow without taking into consideration the equity value. Following that article really makes me more interested in the BRRRR strategy mentioned here a lot on Bigger Pockets.

@Hersh M. - I love the graph, It puts into easy visual perspective the cyclical patterns of the economy (recessions every 10 years for the last 50 years) and how it hasn't affected interest rates in a negative way...

0 Reply

Randy Scott

Investor · Provo, UT · Member since 2015 · 16 posts · 19 votes

10y

Alright, I'll give you a real case study to answer the original question.

I bought a duplex on the Provo River in 2005. It was pretty beat up, but if I was I pioneer/Charlie Ingalls I could have literally done my laundry in the backyard. (and yes I have caught a couple small trout as well) As I'm from LA, the price was crazy cheap. I fixed it up a little and got it rented with no problem.

Two months later, the duplex next door (also on the Provo River) was listed for 190k. I got outbid by 2k. Some investors bought it and rented it out to some tenants who kindly filled the back yard with 70's car parts and 80's music. As Winter 2005, 2006, and 2007 passed the 2nd duplex began to look more and more like the set of Sanford and Son. (El Camino's on blocks. etc) In the summer of 2007, the investors decided to sell if for a their huge profit.

They listed it for 220k.

I told the realtor that I'm over paying 10k, but offer them 219k. The bottom line was that it would cash flow about $180 a month, and I needed to buy it because it was right next door to my property, and still on the river.

Now the question. I bought it in the summer of 2007, (for 219k, long term hold) at the absolute peak of the Utah County/World bubble, before the great recession.

Now you have to think the timing could not have been worse. The question is.....Did I overpay?

(I assume the Utah County people know the answer to this, but maybe not other non-Utah'ns)

Is July 2016 a worse time to buy in Utah County than July 2007?

1 Reply

Ian WalshBusiness Member

Lender · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes

10y

I like the topic title. Personally , flips are more attractive at the moment and I will be waiting for the next down turn before rentals can be swooped up again.

0 Reply

Manolo D.

Contractor · Los Angeles, CA · Member since 2015 · 4k+ posts · 1k+ votes

10y

@Chris Watkins This is a good thread and you've got great responses, one of the things that I noticed in your original post was that you pass on things that involves more active work, such as permits, improvement, and rehab. I'm sure you have your skillset and standard of what extent you are willing to accept, but I suggest you strengthen more that part of your skillset and expand that network. For instance, I love work that involves foundation repair, or uneven floor, or structural issues, etc, simply because you could strong-arm the price and people simply want to get away from it. My market is way different than yours, highly competitive where buy and holds are not always the first choice. The thought however remains the same to me.

2 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

10y

@Chris Watkins I tend to agree with @Becca Summers on the building permits. Some of your criteria are good due-diligence, but I have purchased several properties that didn't have a permit pulled to finish the basement. Look at the quality of work that was done and barring issues, I wouldn't let that prevent me from buying the property.

As far as the 1% rule, think of it more as a guideline or quick measure. Back in 2011, the market easily supported 1-2%. Even today certain locations may support 1%. In my market the number for me is closer to .8% for the type of properties I purchase. Just pick your number and you will have a fast way to do high-level property evaluation.

Another thing to consider is if this is your first rental property, there is value in just jumping in. Even if you are paying retail for the property, the sooner you start your hands-on education the better. The tax advantages of property one are usually better because you will have more tax write offs. For example, I expense a cell phone against my properties. It is the same expense whether you have one or 20 properties. Jumping in and learning is important for the first deal. It sounds to me like you need to do that.

I have never had a property fall out of contract, but I am also very selective on what properties I pursue. Whenever I have found problems, I have always gotten a seller concession to cover the issue.

1 Reply

Chris Watkins

OP

Rental Property Investor · Payson, UT · Member since 2016 · 68 posts · 11 votes

10y

@Randy Scott - I like your point. Something noteworthy is that you had positive cash flow so no matter the turn of the economy or not, you wouldn't HAVE to sell for bleeding reasons. A good takeaway for me is that as long as you have a realistic cash flow to cover expenses, it's better to buy than wait it out.

@Ian Walsh - That is the general principle right now, I agree. Unless the market keeps going up...

@Manolo D. - I really appreciate this idea - to focus more on weaknesses in my skillset. I would imagine there is a steep learning curve with your first rental and all the maintenance, upkeep, and updates required. What an idea - to find your rehab niche, become the expert in it, and pursue those properties to get value out of them.

@Joe Splitrock - Good to know on the basement permit thing - I don't have enough experience to know that no permits is typical. I appreciate you allowing me to borrow from your experience on that. And the 1% rule thing - I thoguht the general rule of thumb is that you probably wouldn't be able to cash flow under 1%?

Good point on just jumping it. I need to jump in, I just don't want to jump in for jumping in's sake. Maybe after this convo I will be able to loosen up a little, enjoy the process a little more, and actually pull the trigger.

I can't believe you've never had a property fall out of contract?! Maybe my approach is a little off then? In a tight market my understanding is that you find properties that basically meet your criteria, tie it up under contract, then verify during due diligence that your assumptions were correct and that there are no other lingering issues with teh property. Is that what you do? What do you attribute your success to in being able to close on the deals you offer on?

0 Reply

Joe SplitrockPro Member

Moderator

Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes

10y

@Chris Watkins cash flow is determined by purchase price, cash into deal, income on property and expenses on property. Those are the only four variables that matter for cash flow.

- Purchase price means you need to buy right and it is usually the thing people fixate on the most, but there are three other variables equally important.

- Cash into deal is typically 20-25% for investment property but could be as low as 3% if the property has an owner occupied status when purchased. This can make a huge different on cash flow and ROI, because the less money you have into the property the better.

- Income on property is generally just rents but could also include something extra such as laundry. Rents are market based. Over time rents will increase but expenses like purchase price and cash into the deal stay fixed. That means a property will usually cash flow better over time.

- Expenses is the bucket that covers operating expenses, repairs, vacancy, insurance, taxes, mortgage and utilities. This is the main reason I think the 1% rule can fall short because different properties have different expenses. For example a new property has very little repair expense. A property in a great neighborhood could have very little vacancy. A single family home may have all utilities paid by tenant versus multifamily where you may pay most or all the utilities. Interest rate affects payment so as some mentioned buying with lower rates is better.

In my portfolio I purchase single family homes in A-/B+ neighborhoods and use .8% as my rule. If you are buying in C neighborhoods you probably need 1%. If you are buying in D neighborhoods it may be 2%.

As far as properties never falling out of contract, I think the reason is that I am selective on which properties I place offers on and my offers take into account the property condition. Once I commit, I close. I really don't want to waste my time or the sellers time.

It sounds like you have analysis paralysis and you are afraid of making a mistake. Realistically no matter how much you try, you will make mistakes on your first property. My best advice is buy in a good location, because location is only thing you cannot change. Better location is better and longer term tenants. Your number one expense is vacancy, so keeping people in the property is crucial. If you overpay a little, hold on and it will work itself out over time. Any loss on paper comes off your taxable income on your W2 job, so it is not a total loss. I am not saying to purchase a loser property, but not everything will be perfect.

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Do your best w/ current market conditions or wait for better?

Do your best w/ current market conditions or wait for better?

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