Making money in real estate in 2022 – back down the RE rabbit hole

[sammybiker]

I’ve been fighting the itch to get back into the active real estate game after a hiatus.  What a different world we’re in from just 3-4 years ago when I was very active.  Values are sky-high, rates are rising quickly, rents continue to rise and even the next 6-12mo seem uncertain as to what will happen with values and the housing market overall.

Goals

1)  Deploy cash to purchase 2-3 properties throughout 2022, rehab and rent (short-term rental only) or flip.  If renting, refinance the majority of my cash back-out after rehab.

2)  Purchase under-market and achieve a minimum of 20% equity after rehab (for rental properties) or 20% net profits on funds deployed (of flips).

      2a)  Cash flow for rental properties should exceed $800/mo after all debt service and expenses.  Cash-on-cash returns if not refinanced should exceed 12%.

Funding

1)  My own cash.

2)  Existing lines of credit.

Background

I work in project management and recently relocated to the greater Knoxville, TN area.  The area I’ll be focused on purchasing in is either the greater Knoxville area and/or Southeast Texas.  I’m new to TN and don’t have established investor or contractor relationships but I’m here on the ground.  I have those relationships and excellent contractor pricing in SE TX but am only there once every 6-8 weeks.

Previous Real Estate Threads

Making 200k in equity in 6mo - Back down the rabbit hole, long distance RE 
 https://forum.mrmoneymustache.com/real-estate-and-landlording/back-down-the-rabbit-hole-more-long-distance-real-estate-investing-adventures/

Anatomy of a mostly DYI renovation on a budget    https://forum.mrmoneymustache.com/real-estate-and-landlording/anatomy-of-a-mostly-dyi-renovation-on-a-budget/msg1514890/#msg1514890

My Long Distance Lease-Option-Flip Project   https://forum.mrmoneymustache.com/real-estate-and-landlording/my-long-distance-lease-option-flip-project/

Closing Notes

Given how competitive the markets are, this may be a very slow thread that only documents making offers for some time…I’ve made some offers and done a few inspections over the last couple of months and while I’ve been close, no deals have gone under contract.

With that said, let’s get started.

 

[Archipelago]

At least in my area (MCOL northeast), I'm already starting to see the effects of rising interest rates from the 3% range to the 5% range. This will start pricing middle class folks out of the market. Although it's still a hot market I expect to see things really slow down once the stream of cash buyers and high-income folks starts to dry up. And it will, eventually.

The best RE deals shouldn't be too dependent on any of these factors, however. If you can find underperforming RE and turn it into a valuable asset, there's lots of money to be made.

[sammybiker]

@Archipelago Yep!  How's the 4plx coming along btw?  Hope all is well.

At least in my area (MCOL northeast), I'm already starting to see the effects of rising interest rates from the 3% range to the 5% range. This will start pricing middle class folks out of the market. Although it's still a hot market I expect to see things really slow down once the stream of cash buyers and high-income folks starts to dry up. And it will, eventually.

The best RE deals shouldn't be too dependent on any of these factors, however. If you can find underperforming RE and turn it into a valuable asset, there's lots of money to be made.

[Archipelago]

@Archipelago Yep!  How's the 4plx coming along btw?  Hope all is well.

At least in my area (MCOL northeast), I'm already starting to see the effects of rising interest rates from the 3% range to the 5% range. This will start pricing middle class folks out of the market. Although it's still a hot market I expect to see things really slow down once the stream of cash buyers and high-income folks starts to dry up. And it will, eventually.

The best RE deals shouldn't be too dependent on any of these factors, however. If you can find underperforming RE and turn it into a valuable asset, there's lots of money to be made.

It's going well. It's appreciated of course since 2020, but I have no intention on selling it, so it will go down in price due to rising interest rates. I already feel like I missed the boat on selling, but I'm okay with missing that boat because it's a buy/hold property.

I've filed an eviction on an inherited tenant recently after giving 30-day notice and getting no response. Market rent in the area is $1200/month, they're paying $775/month and refused to pay a $50/month increase. So I figured it's time to part ways and rent to someone else. Tenant has been a PIA since day one. Other than that, everything is going well at the property. Getting the last of the deferred maintenance repairs completed this month (roof and chimney).

[sammybiker]

Awesome @Archipelago I still think that deal was a home run.

Hopefully you'll update your thread one day ;)

@Archipelago Yep!  How's the 4plx coming along btw?  Hope all is well.

At least in my area (MCOL northeast), I'm already starting to see the effects of rising interest rates from the 3% range to the 5% range. This will start pricing middle class folks out of the market. Although it's still a hot market I expect to see things really slow down once the stream of cash buyers and high-income folks starts to dry up. And it will, eventually.

The best RE deals shouldn't be too dependent on any of these factors, however. If you can find underperforming RE and turn it into a valuable asset, there's lots of money to be made.

It's going well. It's appreciated of course since 2020, but I have no intention on selling it, so it will go down in price due to rising interest rates. I already feel like I missed the boat on selling, but I'm okay with missing that boat because it's a buy/hold property.

I've filed an eviction on an inherited tenant recently after giving 30-day notice and getting no response. Market rent in the area is $1200/month, they're paying $775/month and refused to pay a $50/month increase. So I figured it's time to part ways and rent to someone else. Tenant has been a PIA since day one. Other than that, everything is going well at the property. Getting the last of the deferred maintenance repairs completed this month (roof and chimney).

[PMJL34]

I love it! I've really enjoyed your past projects and hope this one goes well!

[Another Reader]

Posting to follow.  Love your stories.

Values on my AZ rentals are up huge, I'm being pursued daily by small to medium investor buyers.  Resale market still going gangbusters, some rental markets oversupplied and rents have topped out.  Piling up cash for the downturn coming.  Cuz you know it is coming.

[clifp]

Memphis, I've been eying that place. as a potential market.  One of the largest turnkey rental companies REI Nation is based out of there.

You'll be happy to know not only is Memphis one of the most affordable markets in the country, it is the most affordable market in the world, according to this list.
https://www.numbeo.com/property-investment/rankings.jsp

[theoverlook]

I'm looking forward to following along again! Do you still own all the properties from the "Making 200k in equity in 6mo" thread?

[Dicey]

Oh, boy!

[waltworks]

I feel as the resident housing perma-bear I should chime in to say I'm excited to re-enter the market with cash in a couple of years after everyone has capitulated to 7 or 8% mortgage rates.

Kidding... sort of.

-W

[Another Reader]

I feel as the resident housing perma-bear I should chime in to say I'm excited to re-enter the market with cash in a couple of years after everyone has capitulated to 7 or 8% mortgage rates.

Kidding... sort of.

-W

This wipe out could look more like the RTC days.  Cash on hand will make a lot of people very wealthy if that happens...

[clarkfan1979]

Saving up cash to buy more real estate is typically a good thing. However, sitting on the sidelines with cash and waiting for the market to crash requires a crystal ball. Many on this thread have been predicting a housing crash since 2015. Some continue to buy and some continue to sit on the sidelines.

Every real estate market is different. As interest rates continue to rise, potential buyers that were on the edge of affordability will then be pushed into the rental market. Rent prices will continue to go up.

How can they afford the rent? Well, they have good jobs and 100K in their checking account because they were previously trying to make 20% down offers on 450K houses.

If interest rates get to 7% for primary houses, investors will be more likely to hit the 1% rule again with rentals. Cash flow will come back. However, principle paydown and appreciation will start to fade away.

[sammybiker]

@PMJL34  Thanks.
 
@Another Reader Thanks AR, hope all is well on your end.  I still wish I had bought in PHX, the fundamentals just look awesome, from snowbirds to folks getting priced out of Cali and coming to PHX to new business moving in.

@clifp Sounds good!

@theoverlook Thank you and yes I still hold all of those.  Trying to sell a couple later this year that are equity heavy and are maybe breaking even after increases property taxes + new windstorm+flood insurance requirements by the banks.  I also refinanced (4) of them Fall 2021 and took out some more equity + reduced my rate.

@Dicey  Hope you've been well Dicey!

@waltworks Ha, we shall see.  With the number of real estate seminars/courses/spam out there, it feels a little like ~15 years ago.  That's my leading indicator of a crash.  That and everyone trading forex again w/1000% daily returns with 0 risk. 

@clarkfan1979  Hope you've been well.

[waltworks]

Yeah, my housing perma-bear status hasn't made me richer in the last 5 years, I was spectacularly wrong about what would happen with housing, especially post-covid.

But I'm FI so I'm not too bummed. An extra million bucks if I'd held onto my properties would be nice, I guess, but it really wouldn't affect my lifestyle and I sleep better at night not thinking about cracked sewer lines or whether I should get earthquake insurance.

For what it's worth, I'm kidding about hoping for a crash. What I'd like to see is a housing market that actually serves the housing needs of everyone, even if that means my own house is worth a lot less. But a massive crash is probably not the best way to get there.

-W

[sammybiker]

I'm concluding this thread.

I did submit several unsuccessful offers but no dice.  We all knew rates would climb but how quickly they popped up made things less attractive and obviously reduced cashflow potential. 

It's been fun watching overpriced dumps start their rapid price drops the last couple of weeks.  We'll see what happens later this year, specifically with rates.  6-7% interest rate for an investor loan isn't necessarily a deal killer if I can capture significant equity and still cashflow...but I can afford to be patient.

Should be interesting to watch :D  @waltworks

[waltworks]

I'm seeing actual price declines here in the intermountain west. Seller concessions like crazy, price cuts, houses sitting for months. It's like someone flipped a switch.

Gravity has to win sooner or later:
https://calculatedrisk.substack.com/p/real-house-prices-and-price-to-rent?

I think there will be some smoking deals if you have cash in the next few years.

-W

[Another Reader]

I'm seeing actual price declines here in the intermountain west. Seller concessions like crazy, price cuts, houses sitting for months. It's like someone flipped a switch.

Gravity has to win sooner or later:
https://calculatedrisk.substack.com/p/real-house-prices-and-price-to-rent?

I think there will be some smoking deals if you have cash in the next few years.

-W

It will be a long time before buying rentals makes sense in the west coast or intermountain west cities...  We will see if we get back to 2009-2012 discount levels. 

[sammybiker]

And I don't think the fundamentals support getting back to that level...but a 20-35% dip from peak, certainly.

Thoughts? @Another Reader

It will be a long time before buying rentals makes sense in the west coast or intermountain west cities...  We will see if we get back to 2009-2012 discount levels.

[Another Reader]

And I don't think the fundamentals support getting back to that level...but a 20-35% dip from peak, certainly.

Thoughts? @Another Reader

It will be a long time before buying rentals makes sense in the west coast or intermountain west cities...  We will see if we get back to 2009-2012 discount levels.

Well, with not much in asset markets that makes sense, I'm accumulating cash.  What are you doing?

[sammybiker]

@Another Reader  Sounds good.

I'm paying off higher interest debt and holding onto cash.  I don't know what else to do right now.

And I don't think the fundamentals support getting back to that level...but a 20-35% dip from peak, certainly.

Thoughts? @Another Reader

It will be a long time before buying rentals makes sense in the west coast or intermountain west cities...  We will see if we get back to 2009-2012 discount levels.

Well, with not much in asset markets that makes sense, I'm accumulating cash.  What are you doing?

[waltworks]

Yep, max I-bonds (which for us is a lot, having kids is finally paying off...) and hold cash.

-W

[Another Reader]

The only debt I have is the mortgage on the primary residence.  At 3.125 percent, I can equal that in relatively short term treasuries and now CD's. Plus I would lose the tax deduction.  I maxed I-bonds earlier this year.  I expect prices to come down on cars and trucks eventually as supply increases and demand slows. Don't need a vehicle now anyway. So savings it is. 

[Midwest_Handlebar]

I'm seeing asking prices decline from "bat shit crazy levels" to "merely crazy". I'm not seeing significant reductions YoY in my market. I think the nominal price for real estate will stay relatively flat, but real prices with (9%+ inflation) will decline. I've been piling up I-bonds, but will switch over to cash shortly. I'm going all in 2023 in equities and real estate.

[waltworks]

Oh, people are still *asking* crazy prices. They just aren't selling their houses unless they drop them, though.

-W

[NonprofitER]

I'm so excited that you are back to doing this! Your first thread really helped motivate me to get into rentals (now we have 7 long term doors).

I *may* know someone in my real estate world who has an established team in Knoxville. He actually lives here in Austin, but used to live in TN and has a business partner there where they still buy and rent. Let me see if I can confirm... if I do, I'll PM you his contact info.

[PMJL34]

Is it the norm for posters not to read responses on a thread? Like not just this forum, but all forums.

I don't know why I feel it's so disrespectful lol. Like joining a conversation without even knowing what's going on. I mean I get it if there is 300 responses. But at least put a disclaimer that you havent read the replies maybe?

Fyi I like you nonprofiter. So not targeted at all.

[sammybiker]

@NonprofitER Congrats on the 7 doors!

Would def appreciate the PM, if nothing else for another local contact.

That would be funny...NonprofitER skipping over the part where I've called this experiment quits, I meet up with their reference and go do another 7 deals in Knox :D

Going to be an interesting couple years ahead regardless.

I'm so excited that you are back to doing this! Your first thread really helped motivate me to get into rentals (now we have 7 long term doors).

I *may* know someone in my real estate world who has an established team in Knoxville. He actually lives here in Austin, but used to live in TN and has a business partner there where they still buy and rent. Let me see if I can confirm... if I do, I'll PM you his contact info.

[clifp]

I'm seeing actual price declines here in the intermountain west. Seller concessions like crazy, price cuts, houses sitting for months. It's like someone flipped a switch.

Gravity has to win sooner or later:
https://calculatedrisk.substack.com/p/real-house-prices-and-price-to-rent?

I think there will be some smoking deals if you have cash in the next few years.

-W

I'm a fan of calculated rnewslettertter, and their data for V as  doesn't look great.  On the o,ther hand all the antedata is looking fairly good. 
Vegas: I continue to get almost daily, text, phone calls, snail mail, or email offers for my properties. I had all 3 appraised in Mrch, and enup ded taking a loan out on one. I an got unsolicited offer for $5K over the appraised value last week.  I'm ha ng  difficult times raising rents fast enough. I didn't raise in 2020 due to Covid, so that put me behind.  Still the comps on one of my properties came back at $1675 and Zillow said $1,900. The house is renting for $1295 after a $125 raise last year. So increased by $150 and had zero pushbackback.  The flip team that I provide hard money lending to is still doing great finding flipping luxury houses in Vegas (1.5 million+).  They are no longer selling in 3 days at over asking, but 30-45 days and modest discounts to their (aggressive) prices.

Kansas City.  I ended with about ~10% rent increases in my co-owned units.  The same flip team is primarily focused on 200,000-300,housesouse in the area, and while they aren't being sold in a week above asking. They are selling in a normal tof ime 30-45 days

Honolulu: housesouse on my sisters street just sold for 10% over asking, again they didn't sellwithin days, but a normal time.

Higher rents equal higher cap rates, which I think will help maintain prices despite higher mortgage rates.

[NonprofitER]

Ha!
No offense taken.

I actually do usually read the whole thread but somehow missed several responses this time. Shrug. I blame multitasking.

Either way, you never know. I'll reach out to the guy and send you his info. Maybe he has a great pipeline for undervalued deals.

[Midwest_Handlebar]

clifp- Where in Kansas City do you invest? I'm in the urban core, River Market to Plaza. I'm also struggling to raise rents to where they need to be. I have several that went from $1,100/ month to $1,400/ month in the past year. Trying to get my game plan together on what I'm going to do next year as leases come due. Likely going to offer to split the difference with the tenant and still see a $150/month increase on average.

[clifp]

I have three in Independence and three in Blue Spring, 3 duplex and 3 SFH. I have a partner who is local to the area and a property manager, and so they handle 95% of the issues , including rents increases.  Double-digit rent don't seem sustainable on long-term basis.  I haven't checked recently with higher housing prices and higher mortgage rates, but it is always been the case that it mortgage payments, plus taxes and insurance were less than rents.

I'm quite nervous about housing prices in Hawaii, less in Vegas but in the KC area, but with cap rates still in the 9-10% range and rents rising so quickly, I don't worry about them.

[Swish]

The only debt I have is the mortgage on the primary residence.  At 3.125 percent, I can equal that in relatively short term treasuries and now CD's. Plus I would lose the tax deduction.  I maxed I-bonds earlier this year.  I expect prices to come down on cars and trucks eventually as supply increases and demand slows. Don't need a vehicle now anyway. So savings it is.

How long did it take you @Another Reader to get debt free on all your rentals? We finally just broke past a wall we hit at 3 rentals about 2-3 years ago and now have quite a few units.

[Another Reader]

The only debt I have is the mortgage on the primary residence.  At 3.125 percent, I can equal that in relatively short term treasuries and now CD's. Plus I would lose the tax deduction.  I maxed I-bonds earlier this year.  I expect prices to come down on cars and trucks eventually as supply increases and demand slows. Don't need a vehicle now anyway. So savings it is.

How long did it take you @Another Reader to get debt free on all your rentals? We finally just broke past a wall we hit at 3 rentals about 2-3 years ago and now have quite a few units.

I sold a couple that had appreciated and a couple that lost value, i.e. my mistakes.  The last one I sold was in a HCOL area and there was substantial equity.  Paid off the last of the rentals.  If I were to do it over, I would have held several of the ones I sold and kept the debt. 

[Swish]

The only debt I have is the mortgage on the primary residence.  At 3.125 percent, I can equal that in relatively short term treasuries and now CD's. Plus I would lose the tax deduction.  I maxed I-bonds earlier this year.  I expect prices to come down on cars and trucks eventually as supply increases and demand slows. Don't need a vehicle now anyway. So savings it is.

How long did it take you @Another Reader to get debt free on all your rentals? We finally just broke past a wall we hit at 3 rentals about 2-3 years ago and now have quite a few units.

I sold a couple that had appreciated and a couple that lost value, i.e. my mistakes.  The last one I sold was in a HCOL area and there was substantial equity.  Paid off the last of the rentals.  If I were to do it over, I would have held several of the ones I sold and kept the debt.

That is super interesting that you would have kept more of the properties and debt. I have toyed with the idea of selling the highest equity to cashflow properties over the next ten years and be completely debt free. If I keep them all I will have much better net worth and cashflow but it will take closer to 17-18 years to get there. Currently we have been growing by refinancing every 5-10 years but with interest rates now at +5% or more I am having second thoughts about the growth strategy we have been using.