This is a very 2021-esque question. We have seen numerous markets in the United States (and the world) massive appreciation in the past year and a half. Now real estate investors are wondering if it’s balanced it is worth keeping track of business in the market. Although prices can be higher than before, you still have numerous options when buying a profitable rental property.
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This is Real Estate Rookie, episode 112. My name is Ashley Kehr, and I’m here with my co-host Tony Robinson, and we’re back with another rookie [inaudible 00:00:14] Today we don’t pick a topic, we don’t pull one from Facebook, we actually have someone who slipped into Tony’s Dms. And Tony, what is this DM saying?
So this message was from Scott Morris, and his Instagram handle is HotDads1. So HotDads, number one. And he said, “Hey Tony, I’m a huge fan of what you and Sarah, my wife, and what you and Sarah do in the short term rental. I’m struggling to grapple with prices in the Smoky Mountains, and how can these properties even be profitable at current market value? Am i seeing things wrong? And doesn’t price matter that much in strong markets like Tennessee? I’m just trying to find out if this is just a change of mindset or if I should look in other markets? “
So Scott, a great question, and I think it’s really part of a bigger question of whether you should keep buying in a market where things are increasing in value quickly and where prices are rising relatively quickly. It’s hot in the Smoky Mountains. We bought our first cabin there for 590 a year ago. That same cabin will likely sell between $ eight, maybe even $ 900,000 today. So crazy, crazy appreciation last year. But for us the purchase price is not as important as the total cash flow that is generated, e.g.
And for us, as long as we are still able to get the numbers we want in these booths in terms of revenue and cash payouts, then even if they hit up to a million dollars then maybe it still makes for make sense to buy. And people keep saying, hey, maybe you don’t want to buy at the top of the market because what if prices fluctuate again or home values drop? And my thought process about this is, even if my home value goes down a little, let’s say it’s worth $ 800,000 today. I buy it and it’s worth $ 800,000. If the value drops to $ 700,000 from 12 months, as long as that price drop is not linked to greater financial hardship and the economy where people stop traveling, if people are still traveling and I still make my money every month As the real value of the home in the short term is not that important to me. Because I can confidently say that if I hold this property for 30 years, I will probably make money from it from an equity perspective.
But for me, as long as there are people traveling to this market, as long as people are still booking this on Airbnb, as long as we are still generating income, then for me even for buying at the top of the market, it doesn’t matter much. So I don’t know, these are my thoughts, Ash. What do you think about buying and appreciating expensive markets?
Well Tony, do you see any connection in the Smoky Mountains when you buy it? As prices go up, do you see that your daily rate goes up too?
We are, but it’s a strange situation we are in because we first launched this cabin in 2020 during the COVID period, so generally fewer people are traveling. Summer 2021 is considered to be one of the busiest summer vacations of all time. I think this plays a big part, but probably if this were like a normal market I would assume that even if prices go up on a buy price, you probably don’t have a direct correlation in your average daily rates so you need this offset a little.
Ok yeah I just read an article the other day about how much rents are going up in the US and property prices are going up, so rents are going up and then so is the eviction moratorium. Landlords therefore try to be extra careful by charging more in advance in case they don’t have to evacuate. I was just wondering if you see this in the short term rental market too? But as for investing in a hot market, I invest in really small rural towns, don’t see much appreciation, but I think one way to get into a hot market is to find creative ways to buy real estate . And like Tony said, make sure the numbers still make sense and you can get the deal working.
Last week we had Nick Cooley on board in Denver, Colorado, which is a super hot market, but he makes it work and make it profitable. So there are definitely ways to do this. So I’ll give you an example. I bought a property in South Buffalo in 2017, just as the area was getting hot. I am having a really good time. I bought it at a 20% discount, conventional 30 year loan. Now, two years later, I am still looking at properties in these areas and only the prices have risen so much and become outrageous that I can make a cash offer or a 20% offer as an investor. it just didn’t make sense. So I teamed up with my sister who didn’t have a home and was eligible for an FHA loan. So she only had to put 5% on the property and we could buy a property with only 5% less instead of me doing 20% less.
And how we did that, she went and got the mortgage, I’m not on the mortgage at all, I’m just on the deed. And I wrote her a gift letter that I would give her the deposit fund. So the benefit for me has been that I own 50% of this property for only 5% of the value at the time of purchase. And then my sister, she can hack it, she pays, I think, $ 45 a month for her mortgage payment, and then the tenants pay the rest of the mortgage, insurance, and property tax. I don’t see any cash flow right now, but it’s a long-term game for me. This property is building tons of equity. When my sister moves out, I’ll get some of the cash flow. If we decide to sell it I’ll get 50% of the equity.
So you have to get creative, I think if you want to get into these hot markets, go creative ways to buy these properties to make the numbers work instead of throwing a ton of cash in them or just relying on equity too . You don’t want that either.
I love the idea of getting creative. This is the best way to be successful as a real estate investor. I think the only thing I would add, Ashley, is you say you are looking at an expensive market and look at this property, you do your numbers and you say okay, I am happy with this. But then you see, man, this property sold for $ 300,000 less two years ago. The fact that it sold for $ 300,000 less two years ago doesn’t change the fact that it’s still good deal today, it just means that it was really, really good deal three years ago. But it could still be a good deal today so I guess that’s the other thing people see for who they are, man, this household for a lot less 12 months, 24 months ago, it can’t be a good deal be. But the thing is, if you calculate the numbers today based on today’s purchase price, and it still meets your criteria, then no matter what the price was in the past, it’s good business.
That’s such a great point. I think a lot of people will also look at houses that are upside down and, oh my god, six months ago they bought this for 100,000 and now they are trying to sell it for 250,000. Wow, we should have got it back then. Okay, we’ll try to do a refresher. But you’re right. Just because it used to be cheaper doesn’t mean it’s bad business now. It is probably actually bad business if it sells for less than it was two years ago that something is really wrong. People try to dump it and don’t even get their money back, they want it so badly.
Well, HotDads1, hope we answered your question. I hope this gives you some added value. Real estate newbies, I hope you guys get it too. I know it’s super crazy here in 2021, and it can feel like it’s impossible to find a good deal at times, but like Ashley said, a little creativity, a little patience, this is going to get you a lot.
Yeah, you didn’t tell me that was his Instagram handle before we started. I mean, it’s going to be blown up now, I’ll see who the hot dad is.
Thanks for listening. I’m Ashley @Wealthfromrentals and he’s Tony @TonyJRobinson on Instagram, and we’ll be back with an investor for another episode on Wednesday to hear her story. Thank you guys for participating. And if you love the podcast please leave us a five star rating on iTunes or whatever platform you listen to. We would be very happy about that. Have a nice weekend.