Question on buy and hold

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Question on buy and hold

Glenn Mayo
Fort Worth, TX · Member since 2015 · 80 posts · 16 votes

In my area, I'm finding a lot of homes that have been previously purchased by investors and rehabbed, and are often FSBO, owned free and clear. I also have the great fortune to be located smack dab in the middle of an area that is in the early, but identifiable, stages of gentrification. I have heard it said that, if you're planning on buy and hold, it's ok to pay a little more for your rental properties. So, my question is, is that true? And if so, how does that apply to the kind of situation I described above? What percentage of retail do you think would be fair for a home that is newly rehabbed and move-in ready?

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Jeremiah B.
Investor · Portland, OR · Member since 2012 · 266 posts · 128 votes
10y

Each market is different.  Generally speaking, when I'm buying, I'm looking at something like this:

  • If you want recently remodeled/flipped house, or buy from a turnkey provider, you'll pay something like 105%-110% of market.  
  • I've always been shocked to see this, but if you want new construction on the lower end of the spectrum, you can actually get that for around 102% of market.  I haven't gone this route yet, but it's awfully tempting.
  • If you want a well maintained, move-in ready house, on the open market, you are, by definition, paying 100% of market.  I haven't gone this route, but would be open to doing so.
  • If you want a generally well maintained, in a strong area, house that needs paint and carpet only, you can get that for around 90% of market.  Probably built in the 90's or 2000's.  This is my preferred buying method, but you need to know that there is not a lot of money made when you buy (~ 5%).  This is my sweet spot, and what I'd consider a solid double.
  • If you want a house needing major rehab (15K+) in a B area, I can get that for around 70%-80% of market.  Probably built in the 80's.  I've done this a few times with good success, but it requires a lot of capital, I've missed my rehab estimates by a lot, and it takes more time and energy than the above strategies.  Cash is king here, and non-cash offers will struggle to be considered.  The biggest downside to this for me has been that I haven't been able to get as much cash out at refi (delayed financing) as I had hoped (it sounds easy on paper, but I've struggled with this).  Still, I will typically make 10%-20% in equity when I'm done, and end with a good rental.  This is a higher risk, higher reward strategy for me.
  • If you are open to major projects in C-class areas, you should be able to get these for <50% of market.  You will need cash, and you should work with wholesalers if you want to go this route.  Rehabs will be well over 25K, and you run the risk of lower rents not justifying the work or maintenance.  Appreciation is also a big question mark here.  With that said, I've never gone this route as I prefer newer, stronger neighborhoods, and am willing to pay for that.

Hope that helps.

Happy Hunting!

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  • Jonna WeberPro Member
    Moderator
    Investor · Boise, ID · Member since 2011 · 1k+ posts · 736 votes
    10y

    Hi @Glenn Mayo - Buying a flip almost certainly means you are paying retail and then some, if the rehabber is worth his/her weight.  I would personally concentrate on homes that need a little cosmetic love.  Many of ours have needed paint/carpet/light fixtures, but are otherwise sound.  Many retail buyers look past these, and you can purchase for 10-15% off retail without too much digging.  If you haven't read The Millionaire Real Estate Investor by Gary Keller, I highly recommend it. He talks about acquisition costs for the buy and hold investor.   Have a great day!  

    208-608-4884Podcast Guest on Show #80
    1Reply
  • Account Closed
    Real Estate Agent · Las Vegas, NV · Member since 2015 · 2k+ posts · 1k+ votes
    10y

    There is nothing wrong with the price you pay for a property as long as the numbers can cash flow and fit into your investment goals . Ft Worth has had strong growth and appreciation in values. I like your strategy in identifying up and coming areas and in the buy and hold arena has proved to be a winner Good luck 

    2Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Glenn Mayo, the trick is to not pay for FUTURE appreciation in advance. No need to remind Sellers that their area is on the up and up. 

    (Besides, what if it DOESN'T happen)?...

    1Reply
  • Glenn Mayo
    OP
    Fort Worth, TX · Member since 2015 · 80 posts · 16 votes
    10y

    Interesting points, all. I definitely don't want to buy at retail, but I can't afford a major rehab. The "paint and carpet" variety is about as extreme as I can get at the moment, and that's because that's work I can do myself.

    @JoannaWeber, I am EXACTLY in the middle of "The Millionaire Real Estate Investor" now. I hope to finish it this weekend. Excellent book!

    1Reply
  • Kelly Smith
    Lender · Across US · Member since 2015 · 66 posts · 18 votes
    10y

    Here is a thought Glenn - have you considered trying wholesaling since you live in the area?  This could be a good means to gain some experience, earn some 'quick' cash to build up for flipping or rentals.  

    0Reply
  • Glenn Mayo
    OP
    Fort Worth, TX · Member since 2015 · 80 posts · 16 votes
    10y

    Hi, Kelly! Yes, I've considered wholesaling, but the thing is, I need to first do two things 1) learn EXACTLY how to do it, and 2) learn how to REALLY identify good deals. There are enough bad wholesalers out there already making things difficult for good wholesalers. I don't want to be another one. And I want my name to be one buyers are glad to hear, not one they roll their eyes at. So...I'm taking Ben Leybovich's advice and studying.

    On that score, since you're a hard money lender, could you explain to me how exactly that works? All the intricacies and ins and outs? If I want to do anything in real estate, sooner or later (probably sooner), I'm going to have to use hard money, so it'd be a good idea to have more than a vague idea of how hard money lending works. :)

    1Reply
  • Account Closed
    Real Estate Professional · Dayton, OH · Member since 2015 · 423 posts · 187 votes
    10y

    There is no reason to overpay or pay over market for any property right now.

    The market is coming back strong, but it's not that strong.

    That being said, the property needs to make business sense for you and the return has to be acceptable.  Otherwise, pass.  Irrational exuberance will get you in trouble.

    1Reply
  • Jeremiah B.
    Investor · Portland, OR · Member since 2012 · 266 posts · 128 votes
    10y

    Each market is different.  Generally speaking, when I'm buying, I'm looking at something like this:

    • If you want recently remodeled/flipped house, or buy from a turnkey provider, you'll pay something like 105%-110% of market.  
    • I've always been shocked to see this, but if you want new construction on the lower end of the spectrum, you can actually get that for around 102% of market.  I haven't gone this route yet, but it's awfully tempting.
    • If you want a well maintained, move-in ready house, on the open market, you are, by definition, paying 100% of market.  I haven't gone this route, but would be open to doing so.
    • If you want a generally well maintained, in a strong area, house that needs paint and carpet only, you can get that for around 90% of market.  Probably built in the 90's or 2000's.  This is my preferred buying method, but you need to know that there is not a lot of money made when you buy (~ 5%).  This is my sweet spot, and what I'd consider a solid double.
    • If you want a house needing major rehab (15K+) in a B area, I can get that for around 70%-80% of market.  Probably built in the 80's.  I've done this a few times with good success, but it requires a lot of capital, I've missed my rehab estimates by a lot, and it takes more time and energy than the above strategies.  Cash is king here, and non-cash offers will struggle to be considered.  The biggest downside to this for me has been that I haven't been able to get as much cash out at refi (delayed financing) as I had hoped (it sounds easy on paper, but I've struggled with this).  Still, I will typically make 10%-20% in equity when I'm done, and end with a good rental.  This is a higher risk, higher reward strategy for me.
    • If you are open to major projects in C-class areas, you should be able to get these for <50% of market.  You will need cash, and you should work with wholesalers if you want to go this route.  Rehabs will be well over 25K, and you run the risk of lower rents not justifying the work or maintenance.  Appreciation is also a big question mark here.  With that said, I've never gone this route as I prefer newer, stronger neighborhoods, and am willing to pay for that.

    Hope that helps.

    Happy Hunting!

    2Reply
  • Glenn Mayo
    OP
    Fort Worth, TX · Member since 2015 · 80 posts · 16 votes
    10y
    Originally posted by @Jeremiah B.:

    Each market is different.  Generally speaking, when I'm buying, I'm looking at something like this:

    • If you want recently remodeled/flipped house, or buy from a turnkey provider, you'll pay something like 105%-110% of market.  
    • I've always been shocked to see this, but if you want new construction on the lower end of the spectrum, you can actually get that for around 102% of market.  I haven't gone this route yet, but it's awfully tempting.
    • If you want a well maintained, move-in ready house, on the open market, you are, by definition, paying 100% of market.  I haven't gone this route, but would be open to doing so.
    • If you want a generally well maintained, in a strong area, house that needs paint and carpet only, you can get that for around 90% of market.  Probably built in the 90's or 2000's.  This is my preferred buying method, but you need to know that there is not a lot of money made when you buy (~ 5%).  This is my sweet spot, and what I'd consider a solid double.
    • If you want a house needing major rehab (15K+) in a B area, I can get that for around 70%-80% of market.  Probably built in the 80's.  I've done this a few times with good success, but it requires a lot of capital, I've missed my rehab estimates by a lot, and it takes more time and energy than the above strategies.  Cash is king here, and non-cash offers will struggle to be considered.  The biggest downside to this for me has been that I haven't been able to get as much cash out at refi (delayed financing) as I had hoped (it sounds easy on paper, but I've struggled with this).  Still, I will typically make 10%-20% in equity when I'm done, and end with a good rental.  This is a higher risk, higher reward strategy for me.
    • If you are open to major projects in C-class areas, you should be able to get these for <50% of market.  You will need cash, and you should work with wholesalers if you want to go this route.  Rehabs will be well over 25K, and you run the risk of lower rents not justifying the work or maintenance.  Appreciation is also a big question mark here.  With that said, I've never gone this route as I prefer newer, stronger neighborhoods, and am willing to pay for that.

    Hope that helps.

    Happy Hunting!

     This is solid, excellent advice. I will be filing this away for further consideration and using it to guide my buying choices. Thank you very much!

    0Reply
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