Rental cash flow in a sideways market

11 Replies

Hi all,

First off, I'm a new member. Looking forward to learning more and sharing some of my insights.

I currently have one investment property, condo, generating $1,700/month with a mortgage/HOA around $1,000. It's been great, but I want to pick up a multifam next and keep growing my portfolio. I'm currently looking in several areas and one of the areas that has caught my eye is Auburn, Maine. I haven't visited yet but plan to do so. They have lots of multis for under $200K and I even spotted a few for under $100K that are close to turn key. One of them was a 6 unit for $180K... so I'm thinking, OK, even with low rents, that could generate some solid monthly profit. That one was delisted though.

What I'm perplexed with is why no one is capitalizing off this? Or maybe they are?

According to Neighborhood Scout, vacancy in Auburn is 8.9%. The average rent for a 2 bedroom is around $700, conservatively. Population is pretty stagnant at around 23,000 and it's been that way for around 20 years. Bates College is nearby, but it's very small and most people live on campus. I don't live in the area, but there are several property management companies that seem reputable. With 25% down, mortgage on $180K would be less than $1,000. Fully rented this thing would bring in at least $4K in rents. Even with one or two vacant, $2.8K should be easily doable and the monthly cash flow would still be there. Should I go for it? Or would you avoid Auburn, Maine.

TLDR: Auburn, ME looks legit for cash flowing rentals, but is it too good to be true?

Pat

I'm no expert, but so far it sounds good. However, you have to include taxes, insurance, CapEx, repairs, etc. Also, just because the cash flow is good doesn't mean it's necessarily the best thing you can do with your money. What's the cash on cash ROI? I use the BP Rental calculator to decide if something is good or not, though as a free member, you can only use it 5x. :-)

Thanks, Jody. I need to look into CoC ROI.

@Pat Clancy

As @Jody Schnurrenberger said, there are other expenses other than just the mortgage and taxes.  When you factor everything else in, it could be a deal that's not as good as you had originally thought.  

In addition, there's other factors investors look at...  Maybe it's a town that has a lot of crime?  Maybe there's not as many renters in the area?  Maybe there's really a decline of population and no room for appreciation?  My only advice would be since you don't know the area, make sure you do your due diligence.  

Best of luck!

Thanks, Christopher. You're right about due diligence. I plan to visit soon. As far as population, it has been basically the same at 23,000 for over 20 years. Still working on figuring out what the crime rate is like. Definitely more crime than other parts of Maine, but crime in the state of Maine is on a much lighter level than other states it appears.

Pat,

Lewiston / Auburn (LA locally) can be a tough market. It varies quite a bit from house to house, and employment can be a challenge.  The population has been declining, and like the rest of New England the drug epidemic is present. It has been a refugee resettlement area in the past, but I don't know about that currently. 

Maine, in general, outside of Portland can be a challenge Real Estate wise, mostly due to employment,  or lack of it. With the major paper mills shutting down across the state, is added to the economic slump.

There are some great properties in LA, but they are all cashflow and little to no appreciation. That cashflow is really dependent on the economics with limited employers. Watch your numbers like a hawk. I would increase vacancy and Capex to 12 to 15% and plan on losing 20% to 30% of asset value. I'd also stress test with a similar (or more) drop in cashflow.

Pundits have said for years that LA is done, finished, down and out. It's pretty resilient, and hangs on, but it's up and down.

I know it looks great from Boston,  (it's only 2.5 to 3 hours north) but it might as well be on another planet in every way. 

For the record I'm not anti LA. I My first NPN deal was in LA, so I'm familiar with the area. I actually like the cities and find them super interesting, enjoyable and fun. They are their own, unique and fascinating place. That alone demands investor attention to the details.

Good luck!

Jim 

When I'm looking for quick and easy information on a place, I go to www.BestPlaces.net (Sperling's Best Places to Live).  I looked up Auburn, ME and the only thing I saw concerning to me was that other places I've been researching all had home appreciation.  But Auburn had depreciation over the last 10 years.  That seems bad when most other places are going up, but that's me.  (You can find the housing info like that under Housing Stats on the left side.)

One suggestion is to call two or three management companies in the area. I did this with a property I purchased in Augusta. You’ll get a lot of good info through them.

They can tell you right down to the street which areas to avoid, vs what parts of town are better.

You’ll also get a good feel for the management company through this call. Don’t buy the property if you can’t find a PM enthusiastic about managing it.

Perfectly stated @James C.  I have several SFRs in the L/A area.  They are all performing well, but you have to choose wisely in this area.  There are many multis “on sale”, but most of them are not worth the headache.  That said, the rental market in the area has been in the rise the last 12-18 months in large part because Portland and the immediate surrounding areas have priced most renters out of the market so they are pushing north and west of Portland.

Pat - I am happy to provide additional info if I can be helpful.

I purchased and sold a SF in the past year in Auburn.  @James C. is pretty much spot on in his analysis. There are definitely some decent spots and good people there, but the quality of tenants is lower and you should not bank on appreciation. Right now, the economy at large is enjoying a time of low unemployment and increased housing values, which may make places like Auburn look better than it is, but I would guess when/if there is a downturn, the types of tenants you would get would be some of the first on the chopping block when companies look to 'cut costs'. The other challenge, in my experience, is that a lot of the properties are ~80-100 years old and are suffering from deferred maintenance. While this could also represent an opportunity - be realistic in how much more in rent the market can stomach (after fixing up, if you go that route), and review the school district boundaries to identify the best schools in Auburn. 

Also, note that Lewiston and Auburn (known locally as L-A) are about to vote (on Nov 7) on whether or not to combine their cities, in which case things may change for better or worse. 

Bottom line, be sure when you analyze the properties in Auburn you are not just considering cash flow, but also the resale value (assuming depreciation) after your holding period, and expect high maintenance/ CapEx expenses to include covering the costs of heat for the tenants (as many can't afford $100+ swings in monthly expenses, so you are better off paying for it yourself and keeping the rent coming in).

Thank you all for the feedback! What I'm picking up is yes, it is possible to invest successfully in Auburn/Lewiston, just need to do you due diligence. Anyone I ask in person simply says it can't be done. You all have some great insight.

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