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First Rate Property Management Blog

Finding Value Despite Shrinking Margins

Originally posted 3/5/2018

Swope Investment Properties regularly sends out a newsletter that includes good articles and listing information.  In the most recent article, realtor Eric Uhlenhoff shared his perspective to rising prices.  

Finding Value Despite Shrinking Margins

In Shane's article in the Nov 17 newsletter, he described the buyer challenges in

the current market. Not much has changed since then, but we are seeing a bit more

inventory in the residential income space. Yes, margins and cap rates continue to

decline, and we've seen some rising interest rates too, which isn't helping our

Buyers! So, is this another bubble or what?

Back in 2007, when evaluating income properties in the Treasure Valley, using a

sensible downpayment, finding a property with a positive cashflow was like

searching for unicorns. Rents didn't support the values and yet many

buyers willingly accepted negative cashflow in hopes of feasting upon rising prices in

the future. However, in today's market, we're still seeing discerning buyers insist on

cash-on-cash returns. And of course financing with nothing down is not a thing

the way it was back in 2007, so fundamentally, this market is way different


So, where's the value for a buyer? Well, several things haven't changed. Financing

a residential income property (4 units or less) can still be done on a 30-year fixed

loan (thumbs up!) and the tax laws governing depreciation and other tax benefits

are all still in place and may have gotten better depending on individual

circumstances (two thumbs up!).

No question, the sale prices have come up, but so too have the rents. Consider

also that overall vacancy rates are historically low and with rising interest rates this

is likely to keep that vacancy low. All these changing conditions should force

change in our analysis and in this market, we should always take a solid look at

the achievable rents when doing your evaluation as many sellers are not keeping up

with the market.

Continuing to look at cash-on-cash returns and/or cap rate is still okay (and

important!). However, in this market, add in the principle pay-down and the tax

benefits, and compare these combined returns against the risks associated with a

very high stock market and rising inflation. This is both smart and necessary.

My crystal ball is far from clear when looking out beyond what I am having for

lunch. Real estate investing should be for the long term and when time permits,

allow the Swope Team to help analyze and advise a strategy... cuz there's value out


Eric Uhlenhoff

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Tony Drost, Chairman
First Rate Property Management, Inc.
Boise, Idaho
Contact me for more information about the Investment Real Estate and Property Rental markets in Boise and Idaho.


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