Auston is Hot, Dayton is Not is that an opportunity?

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Auston is Hot, Dayton is Not is that an opportunity?

Michael Lauther
Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes

I have always been a contrarian (not a speller)but the danger is to take a position too early.

While my Texas friends are raking in the money in their market they are taking that market out of my reach

Just as investors here in the Hampton's have bid up the properties to a point where investing for income is not viable investors in Texan are seeking rapid appreciation I am seeking income now. Would not mind some appreciation.

Currently I am buying properties in Dayton OH , a specific example is example is a 3 bedroom one bath with central air ;408 Sheridan ave Dayton oh 45403. I am all in for under 20k and getting 588 sec 8 rental from a tenant who loves the property.

How would my Texas friends evaluate this market that has been shrinking in population that has had above average unemployment and crime has Lost its manufacturing base.

I am betting it has hit bottom and will slowly appreciate over the next 5 to 10 years as the city finds its way.

How would you compare it to the latest Hot market in Auston. Do you see opportunity here or would investment in Auston give me more bang for my buck?

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Brian LevredgePro Member
Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
14y

I would look more at the long term trends to see what kind of a picture it paints about Dayton. What is the long term job outlook? What direction are taxes heading? Etc., etc. I invest for both cash flow and appreciation and without long term job growth to push up demand for housing then you are only investing for cash flow. Furthermore, you are relying on the govt to pay your rent. I'm not knocking that as I have some Section 8's myself, but what if housing in the future gets cut? Then you are looking at further reduced returns.

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  • Brian LevredgePro Member
    Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
    14y

    I would look more at the long term trends to see what kind of a picture it paints about Dayton. What is the long term job outlook? What direction are taxes heading? Etc., etc. I invest for both cash flow and appreciation and without long term job growth to push up demand for housing then you are only investing for cash flow. Furthermore, you are relying on the govt to pay your rent. I'm not knocking that as I have some Section 8's myself, but what if housing in the future gets cut? Then you are looking at further reduced returns.

    1Reply
  • Michael Lauther
    OP
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    14y

    You make some interesting observations Brian. How would you go about determining the growth outlook for an area. The trends have been down and have started to improve. Are there places to track employment , crime, population increases by metropolitan area. I have seen the numbers posted for Auston because it appears that Auston is at the top of the scale and I would assume Datyon is near the bottom.

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  • Michael Lauther
    OP
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    14y

    The March Unemployment rate in Montgomery county OH is 8.5% and is going down a decrease from Feb rate of 8.9% The trend is going in the right direction but so is the rest of the country. how would this compare to Auston which is hot now has a much lower unemployment rate but. what would a similar property in Auston cost and what would the income look like compared to the Dayton property? Is The Dayton property selling at a sufficient discount to warrant giving up the potential for better appreciation in value of the hot market? I guess i am trying to get an idea of how the two markets compare if reasonable expectations are met over the next 5 to 10 years.

    Dayton In My opinion would tend to be a more stable market with a larger current income and moderate growth of 2 or 3 % while Auston would generate less current income with expectation of much more appreciation in value. What would a Property similar to the one I listed on this post look like?

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  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    14y

    I'm not from Texas either so I couldn't answer for that area.
    But I guess I would question the risk/reward to those types of deals you're getting in Dayton. Here is how I view my product choices.....

    I'm guessing you're paying cash as I don't think it would be easy to find a lender willing to do a loan for 20k. That said, its allowing you to get about $400 a month (guessing that taxes and insurance are running you about 200/mo) on your 20k investment.

    But, if that is the case, then the two things you'd be missing out in that equation are:
    1) Appreciation - I'm not saying to invest for appreciation but what are you really going to get if a 20k house goes up 3% versus a 100k house going up 3%?
    2) Mortgage Paydown. Since you're paying cash, you're not taking advantage of leverage. Even if you are getting loans, you're still not paying much off each month given how little a loan it would be.

    Meanwhile you're taking the same amount of risk that the tenant may do some significant damage. And in 20 years, when the house is paid off, what do you have? A house making $400 a month worth about 40k.

    I'd much rather be in a better product - one that will still cash flow $400 a month but will include a better paydown and, more importantly, can have some meaningful value when you get 3% appreciation. Give me a house that I can get all in between 60-85k but is worth between 100k to 150k and is making me $300 to $400 a month.

    With 20 houses, texas investing will be sitting pretty in 20 years once they're all paid off and they've doubled in value. Not sure you'll be seeing the upside on the houses in Dayton.

    Not only that but houses in that price range seem to have a limited renter pool - i.e. Section 8 or people with extremely challenging credit history. The city may come up but it might also just stagnate there.

    Seems to me that the hardest hit areas tend to take the longest to recover and some never do.

    I'm sure people in Michigan thought it would be a great idea to buy rental properties 10 or 15 years ago because "the city would have to recover". I don't think that turned out so well for them.....

    1Reply
  • David Beard
    Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    14y

    @michael lauther -- I invest in Cincinnati, better economic base than Dayton (9 Fortune 500 companies make their home in Cincy), and unemployment trending in the right direction, but still in the same ballpark as far as lots of distressed inventory. The quoted section down below was contained in a Morgan Stanley review that someone posted on BP recently (can't find the link), featuring the thinking of some large institutional investors that are considering the Buy-to-Rent model in places like we invest in the midwest/south.

    Cities such as those in Ohio are high on the list of expecting to see large capital appreciation just from the simple convergence of distressed prices back to non-distressed levels (Cleveland +73%, Columbus +54%, Atlanta is at the top of the list at +85% appreciation from convergence; interestingly San Fran is 4th at +60%.).

    So given that these SFR properties have cap rates of 15+%, and have this opportunity for appreciation, I think places such as southern Ohio cities present great opportunities. And I still want to invest within easy driving reach of where I live, which I can do in Cincinnati. I'm not quite ready to range as far afield as you apparently do.

    "Capital Appreciation without Home Price Appreciation?: Usually, we would attach the concept of capital appreciation to that of home price appreciation, and model capital returns based on our home price projections. However, in the current market environment, we believe there are actually two separate sources for capital appreciation. First is the fundamental underlying HPA, which we believe will remain close to 0% over the next five years. Second is the capital appreciation that we believe exists from the convergence of distressed to non-distressed prices as the backlog of inventory is cleared. Historically, there has been about a 5% discount for distressed properties due to quality issues. Currently, this discount ranges from 30-45% depending on the MSA. We believe this greater discount is due to the excessive inventory of distressed properties. If this is the case, then eventually when the distressed inventory returns to a more normal level, distressed prices should also converge toward their non-distressed counterparts. While not all of this convergence will be from the bottom up (indeed, we believe non-distressed prices have more to fall), a good amount of capital appreciation should still occur simply due to the magnitude of the current discount. Furthermore, as the distressed inventory is removed from the market, the overall housing environment should improve and eventually lead to fundamental home price appreciation as well."

    1Reply
  • Brian LevredgePro Member
    Investor · Chattanooga, TN · Member since 2009 · 1k+ posts · 903 votes
    14y

    [http://ecodevdirectory.com/]

    I like the above link because it will take you to just about any chamber of commerce/economic development team in the country based on area.

    1Reply
  • Raymond B.
    FL · Member since 2009 · 2k+ posts · 357 votes
    14y

    Brian Levredge,
    Linked for you:

    http://ecodevdirectory.com/

    Raymond

    0Reply
  • Jeff Thompson
    San Diego, CA · Member since 2011 · 86 posts · 9 votes
    14y

    One problem I see is when you're buying properties with market values way under replacement cost: what happens when you have to fix something? Is it worth a 10k repair on a 20k property? Long term you will have to make some expensive repairs.

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  • Joe Delia
    Involved In Real Estate · Rochester Hills, MI · Member since 2010 · 812 posts · 178 votes
    14y
    Originally posted by Mike Hasemann:

    Seems to me that the hardest hit areas tend to take the longest to recover and some never do.

    I'm sure people in Michigan thought it would be a great idea to buy rental properties 10 or 15 years ago because "the city would have to recover". I don't think that turned out so well for them.....

    Which city are you talking about? Detroit? I don't think your michigan example is a very good one. Michigan actually is doing pretty well right now.

    0Reply
  • Michael Lauther
    OP
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    14y

    Thanks for the replies, helps me solidify my thinking about my objectives and how my strategy fits.

    Mike , I have worried abut the low income demographic of the community. This Does present a challenge and being a landlord in this part of Dayton is anything but passive, it is the biggest concern I have. On the other hand I am netting close to 20% on my investment before considering appreciation. While I hope for increasing value that will be there 20 years from now I need current income more than I need future appreciation.

    David: Thanks for your input as well. It would validate my premiss that these undervalued properties that have sold for 40k to70k in the recent past could recover to near those levels in future.

    Brian and Raymond thanks for the link, it is a resource I have been looking for.

    Jeff, I agree that it hurts to invest a substantial sum in a property that is low cost but that is precisely what makes the strategy effective. If I buy a property for 10k and put in 10k to update systems that my maintenance cost should be lower and I am still in a nicely renovated structure at less than I could build a new one for. At 20k I am still slightly below the market for a comparable property which have sold for 25 to 30k.

    Joe : I was reluctant to go Detroit although if I had the courage of my convictions I think that this strategy would work there as well.
    A key element to consider in these neighborhoods is that they differ widely from block to block. It takes constant effort to remain current on how the area is changing. I am attempting to invest in a part of town that is improving and I am happy to do my part in keeping that trend going in the right direction.

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  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    14y

    My sense is that buying the properties that require so much personal involvement is basically like buying a job. As a business that is primarily intended to generate income, it makes it less of an investment and more of a business.

    My area is the opposite. With an area like mine you are investing in an area that has high expectations for growth and demand. If the goal is to invest and be less involved then Portland is a better place to "set it and forget it."

    Personally, having high cash flow sounds good but so risky, not sure how to approach. OTOH if rates increase dramatically then the apreciating areas are likely to flop, and cash flow would seem to be the safe bet.

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  • Michael Lauther
    OP
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    14y

    Good point Jeff: Dayton is definitely a hands on situation for now and while a property manager is supposed to make it passive the reality is that they often need as much management as tenants in some cases. What could I expect from $100, 000 cash investment in your area in income without using leverage? I am sure your market is more likely to grow have better appreciation and I hear that rentals go fast so vacancy would not be an issue.

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  • Joe Delia
    Involved In Real Estate · Rochester Hills, MI · Member since 2010 · 812 posts · 178 votes
    14y
    Originally posted by Michael Lauther:

    Joe : I was reluctant to go Detroit although if I had the courage of my convictions I think that this strategy would work there as well.
    A key element to consider in these neighborhoods is that they differ widely from block to block. It takes constant effort to remain current on how the area is changing. I am attempting to invest in a part of town that is improving and I am happy to do my part in keeping that trend going in the right direction.

    I know this is a hard concept for people outside of michigan to understand, but detroit is like an island. There really is no reason to go there unless you want to for casino, tigers, lions, redwings. Growing up an hour from detroit and living there till i was 22 i probably went into detroit less than 10 times, most of which were to tigers games. There are plenty of investments in the surrounding neighborhoods of detroit. Don't judge "michigan" based off what you hear about detroit.

    Not talking to you directly, but it's just something people outside of SE MI can't really grasp unless you grow up there or spend a lot of time in that region of the country. I've lived all over the country and there really isn't a dynamic like it that i've come across.

    0Reply
  • Michael Lauther
    OP
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    14y

    Joe: Detroit doesn't sound much different from New York City in some respects. I know many people who live less than an hour from Manhattan and have never been there. I see you are from Cincinnati. Do you ever come to Dayton?

    0Reply
  • Jeff Thompson
    San Diego, CA · Member since 2011 · 86 posts · 9 votes
    14y

    Ohio certainly looks intriguing, the prices are astounding! Have you considered moving up to multi's that would have a $72k+ ARV and doing the cash-out refi routine? Now that would be cashflow!

    Although as someone soon to be loan limited straight cash has it's appeals. Tempting...

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  • Michael Lauther
    OP
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    14y

    I have considered duplexes but have do not us debt inside my self directed IRA to avoid UBIT but I am considering going outside of my pension but have limited cash. I am talking with several prospective equity partners but am reluctant to use leverage.

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  • Joe Delia
    Involved In Real Estate · Rochester Hills, MI · Member since 2010 · 812 posts · 178 votes
    14y

    I haven't worked in dayton but our brokerage has an office there.

    Here's a deal I personally just did in Cincinnati. Bought for 32000, put 45K in, appraised for 80K ARV. 2/1, 4 units, each unit rents for $550, we pay no utilities.

    I just brought on 8 properties from an investor looking to owner finance this properties after my crew rehabs them, and then I rent them. 20% down, 2-5 year balloon.

    0Reply
  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    14y

    Michael, if you are looking for immediate return then Portland, (as far as I can tell) is not good. Apartments are in such high demand that they mostly yield 5 to 6%. People who invest here are betting on rental appreciation, and a longer time horizon, and have money.

    If you are 40 and have an extra 20 yrs to wait then Portland overall is probably excellent. Neither you or I want to wait (assumption).

    Having just retired, I am more in your frame of mind and looking.

    Maybe a mixture of Dayton and Austin? Cincinnatti?

    Rich Weese has new construction in Texas, fairly low cost, but not big cash flow as would be expected w/ brand new.

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  • Michael Lauther
    OP
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    14y

    Jeff, you are correct while I am concerned about my young daughters, all three in grade school, they need to eat now. I did not plan my retirement to include young children. I planned to chase beautiful women around Europe. As with most plans I failed to see what would happen if I actually "Caught " any of these women. I am happier than I have ever been in my life. Now I need to make sure my family is taken care of now and in the future.

    1Reply
  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    14y

    Michael, that is very funny. Just took a $3700 mo pay cut so understand the "eating now" concept. Haven't looked at it that way for over 20 yrs.

    Have seen some good deals around here but they are all short sales and have sales pending. Multiple offers is normal in some areas.

    Talking to a RE guy in Vegas yesterday and he said inventory is drying up and multiple offers there too.

    Supposed to be an REO backlog that the lenders are supposed to unload maybe by this summer. Guess the banks are looking for big buyers (500 houses).

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  • Michael Lauther
    OP
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    14y

    Jeff, I have found most of my properties by going to the neighborhood having coffee with the neighbors and spending some time with my tenants. They have turned me on to whats good, bad, and ugly in the area. One property was a short sale that fell through and my tenant called me to tell me. Was completely renovated and the bank jumped at the offer. Closed and had it rented through Catholic Charities within 1 week. There are lots of these in the Dayton area but cash is king.

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  • Joe Delia
    Involved In Real Estate · Rochester Hills, MI · Member since 2010 · 812 posts · 178 votes
    14y
    Originally posted by Michael Lauther:
    Jeff, you are correct while I am concerned about my young daughters, all three in grade school, they need to eat now. I did not plan my retirement to include young children. I planned to chase beautiful women around Europe. As with most plans I failed to see what would happen if I actually "Caught " any of these women. I am happier than I have ever been in my life. Now I need to make sure my family is taken care of now and in the future.

    This post cracked me up.

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  • Joe Delia
    Involved In Real Estate · Rochester Hills, MI · Member since 2010 · 812 posts · 178 votes
    14y
    Originally posted by Jeff Sielicky:
    Michael, that is very funny. Just took a $3700 mo pay cut so understand the "eating now" concept. Haven't looked at it that way for over 20 yrs.

    Have seen some good deals around here but they are all short sales and have sales pending. Multiple offers is normal in some areas.

    Talking to a RE guy in Vegas yesterday and he said inventory is drying up and multiple offers there too.

    Supposed to be an REO backlog that the lenders are supposed to unload maybe by this summer. Guess the banks are looking for big buyers (500 houses).

    The inventory isn't "drying up" in vegas. They changed the law to have actual ink signings on the foreclosures so it's slowed the banks way down. Thats put a slowdown on the process, as a result they have a large backlog. I just listed our place in vegas hoping to cash in and invest locally.

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  • Michael Lauther
    OP
    Investor · Hampton Bays, NY · Member since 2009 · 907 posts · 258 votes
    14y

    Joe : Glad to see you liked my post. I have to get to
    Dayton soon. Maybe we can meet when I'm there.

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  • Jeff Thompson
    San Diego, CA · Member since 2011 · 86 posts · 9 votes
    14y

    I don't know nearly enough about Ohio... How hard is it filling units? You finding you need to go under market to keep filled or do lenient checks?

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