When it comes to acquiring single-family properties, whether you are a traditional fix-and-flipper or you intend to buy-and-hold for rent, an effective acquisition strategy is necessary for investors to succeed.
Which markets are the right ones for investing? What factors should determine which houses to buy?
“We look at markets, in order to satisfy both criteria, that we think show the greatest promise for upside potential in the near and long term,” said Leonard Blangiardo, Principal, Domaine Realty Advisors Inc., which does both fix-and-flip and buy-and hold, “as well as those that have the best relationship between unit cost and current achievable rent.”
In order to find out which markets are right for investing, Blangiardo said his company scours the top 54 markets in the country by population, which basically comes down to markets with a population of higher than one million.
“We look at things like embedded upside—what is today's value down to the address level for a specific property relative to what the highest historic peak value was for that unit, and if there is a significant difference in those two,” Blangiardo said, “whereby we can buy it a significant discount to historic peak. That's criteria number one to satisfy the upside potential.”
The next step is to determine a reasonable range of rents for a particularly unit and what the cost is going to be after examining achievable rents at the market-wide level, country-wide level, and city-wide level, down to the address level, according to Blangiardo.
“We look at markets that have the best combination of gross yield and embedded upside or discount to historic peak value,” Blangiardo said. “Then, we get more granular once we enter that market and look at specific examples of properties that we're considering buying. We'll look at what our reasonable expenses would be down to the address level before we actually pursue a specific acquisition or number of acquisitions.”
The most important figure at the end of the day when determining where to acquire properties is net yield, Blangiardo said.
“We try to stay within a certain price point range that doesn't dip below a level where you start to see spikes in risk in terms of default risk and the risk of appreciation really stagnating moving forward, and there's sort of sweet spot for it all, and we kind of try to find that sweet spot,” Blangiardo said.
That sweet spot is usually between 78 and 85 percent of HUD’s published fair market rents per bedroom in a given county—and a property that falls below that 78 percent threshold is typically in a higher category of risk, Blangiardo said. For example, risk of default might be higher in that particular neighborhood, there may be higher crime in that neighborhood, or lower pride of ownership. Those neighborhoods have a lower prospect of appreciation, Blangiardo said.
“Obviously, the lowest price point will tend to more likely yield the best cash flow yield,” Blangiardo said. “There's a level of risk associated with that, so as opposed to just diving into that category and enduring that risk, we try to find that sweet spot where you have the best combination of economic factors with the lowest risk.”