Scott Snyder, Raleigh Investment Real Estate
Snyder began building his real estate portfolio in the mid-'90s as an exit strategy from Hewlett Packard, finding, filling and managing his units, and, when necessary, correcting tenant or other related issues as they came up. For the last five years, Snyder has applied his knowledge and experience to assist his clients at Raleigh Investment Real Estate. Due almost entirely to referrals, Raleigh Investment Real Estate has grown at an average of 40 percent each year for the last five years.
NuWire: What is it about the Raleigh market in particular that might make it exciting for investors to invest in?
Snyder: I grew up in southern California. I spent 31 years there, and I went to engineering and law school there and had a very successful career....I was very attuned to a rapidly appreciating market in the '80s there in Los Angeles specifically.
When...my wife and I moved out to the Raleigh area, we noticed a much more sedate market....What was intriguing or interesting about this particular market in Raleigh was the fact that you could find properties that, while they weren't appreciating at rates of 10, 15, 20, 25 percent—but then again, virtually no market today is doing that—you were finding a market that was very, very steady. And you were seeing real estate appreciation that was tracking a few points or a few clicks above rates of inflation.
And here in Raleigh we've been seeing a fairly stable 4 to 7 percent appreciation rate in areas where you can actually gain true positive cash flow. I mean, this is true positive cash flow, over and above your principal, interest, taxes and insurance, and so you're not playing any games with negative amortization notes or trying to finance 100 percent, etc. And there are areas or pockets within the Raleigh market that in fact are appreciating at a much faster clip.
In Raleigh, particularly downtown, there's a lot of activity, and I believe [Money magazine] quoted some $2 billion of external investment that was actually taking place. This means you are seeing a lot of renovation [and] tear downs that are taking place.
So we are seeing pockets of higher appreciation, but for the most part what's unique about this particular market is that we're seeing just rock steady appreciation, 4 to 7 percent, and we're able to gain that with true positive cash flow...certainly 10, 15 percent down is possible. I believe that makes Raleigh stand out; it's just one of those cash flow workhorses, if you will.
NuWire: Can you talk a bit about the job growth and commerce in Raleigh?
Snyder: Raleigh has gone through a substantial change in the last three years, four years maybe. Back in the late 1990s, when the NASDAQ was screaming forward, high tech was all the rage, dot-coms were everywhere. Raleigh certainly had its fair share....There were other very established companies. IBM had a huge presence. Cisco had a huge presence. Nortel had a big one. And even GlaxoSmithKline had a very large big pharma presence here in Research Triangle Park.
But we were very heavily laden with high tech type jobs, and so when the NASDAQ went south and a lot of high tech folks found themselves in a very precarious position, that really hurt our economy. And so we did see our unemployment rate, which is currently in the mid 3s go up towards the upper 5s, 6 percent, which definitely hurt the area. We saw vacancy rates go up significantly. People were playing all sorts of games and gimmicks to try and keep the places occupied.
But as a result of that, there were companies who saw that as an opportunity and so in exchange we found ourselves diversifying our economic base into a higher degree of big pharma, bio tech type jobs. Being midway between New York and Miami, we also saw some large companies needing huge distribution requirements such as Wal-Mart, Lowes Home Improvement, Home Depot, etc., who have moved into the areas while taking advantage of some of that dislocated workforce and creating light manufacturing and large distribution networks here locally....You've got Wachovia and B of A, which have a huge presence within this area.
And so with the pharmaceutical, high tech and financial segments plus the distribution jobs that have come into the area, you've seen our unemployment rate race downwards and our vacancy rate race downwards, and subsequently we've seen our rents rise.
NuWire: How has the Raleigh market changed over the last few years, and how do you see it changing over the next five years and beyond?
Snyder: What has changed is that of course the job base is very well diversified at this point. It's a very, very stable job base. And so we have seen the vacancy rates shore up. We have seen the jobs diversify so no longer are we just...the high tech.
Over the next five years, I think that what we're going to end up seeing is just a lot more of the same. The last two to three years have just been beautiful here because we've seen a very steady influx of people.
Our client profile has shifted from about a 70/30 ratio, four years ago being 70 percent North Carolinians who were investing, and that absolute amount has still continued to increase. So it's not like the North Carolinians are not investing here; it's just that the number of external investors from California, New York and Florida have greatly outpaced the rise in internal investment if you will. So that foreign investment is now a 70 percent piece of our pie....That is because people have seen this rock steady nature of growth. Where everybody else, whether it be California or New York or Florida, they've actually seen a pull back in pricing, we haven't seen anything of the sort and we're continuing to beat last year's levels in terms of both transaction numbers and price appreciation.
NuWire: Which areas and neighborhoods within the city are currently experiencing the greatest amount of growth and why?
Snyder: In terms of price appreciation growth and areas that are impacted, the area immediately next to downtown Raleigh, particularly in the northwest quadrant of downtown Raleigh is seeing substantial price appreciation growth, and we have been for the last...couple years. That will likely continue for the foreseeable future, certainly over the next three years.
Money magazine had a quote that there is about $2 billion worth of investment down in the downtown area....We're seeing mostly tear downs where some of the older homes...are being significantly retrofitted or just downright demolished and replaced with much larger structures where we have multi-families that [are] being replaced with single families, and so you've got a rental population that is getting slightly displaced but...there's price growth there for those who are seeking that.
Just east of downtown and even south of downtown, that's an area that has been largely forgotten by investors looking for appreciation. It is definitely a cash flow area. Typically, it has been a higher crime rate area, but we're seeing a significant change in people seeing opportunity relative to the location in downtown. And that has even been displaced. And so we're seeing a very significant change. Even the mayor has made some fairly decent sized purchases down in the east and the southeast area in anticipation of this future price growth.
But in terms of overall just where the mass is going, you've got Western Wake, and that is just south of Research Triangle Park. You've got north Raleigh, which is where the major water and sewer infrastructure was put in over the last five to 10 years, and so now the developers are taking advantage of that.
And now we're seeing, because of the change in the job base out in eastern North Carolina where you once had significant populations of tobacco workers, those have been displaced through the outsource of tobacco offshore, and now you've had RBC Centura and BB&T moving operation centers there, financial operation centers, and now you've got a displaced workforce that is working and it's actually drawing in jobs in its own right, and now we're seeing significant growth out there.
In fact, as one example, in an area called Rocky Mount, which is right on the I-95 corridor, about 50, 55 minutes east of downtown Raleigh, it's not quite a bedroom community...it has its own economy, but it's right on the I-95 corridor between New York and Miami. There's a new construction duplex community that has literally zero percent vacancy and we were sold out six months in advance down there. We have recently sold out several more communities and have one more managed community available. These communities, in particular, are excellent for the remote investor. We are doing these in both single family and duplex versions, with prices for the single family homes starting at $115,200 and duplexes at $162,500.
NuWire: Which areas within Raleigh and the surrounding cities would represent the best opportunity if an investor is interested exclusively in maximizing their cash flow?
Snyder: If they're maximizing cash flow, I would look at the areas south and east of Raleigh, that's downtown, but there are certain risks associated with that. Typically it's going to be a higher demand on management skills.
If you're looking for other areas, I personally have been moving dollars to the eastern North Carolina area, specifically into Rocky Mount, Nashville—that's Nashville, North Carolina—and also Wilson and Greenville—and that's Greenville, North Carolina. Those are the areas that I've been moving dollars because...I can get cash flow as well as purchase new construction.
Much of what my portfolio is today happens to be existing homes that range anywhere from 20 years old to 90, 95 years old, and a lot of those are at various stages of capital improvements. And, you know, your typical 20-year-old or 15- or 20-year-old is...probably nearing the life cycle or the expected life of its air conditioners, probably nearing the end of its roof. So a lot of those things can be overcome; you're going to end up having to make price adjustments.
So in order to maximize cash flow, I would probably look at those two areas, east and southeast of downtown Raleigh. That's difficult for a remote investor. And then for those who are remote, going to a managed community where you have individual ownership with very low vacancy and new construction, so you have virtually no maintenance at least for the foreseeable future, I would then look at the eastern North Carolina area: Greenville, North Carolina; Rocky Mount; Wilson; and Nashville, North Carolina.
NuWire: What about areas that are best for long-term appreciation?
Snyder: Long-term appreciation, I would probably come back to the area...northwest of downtown Raleigh (referred to as “inside-the-beltline”), and I would also consider locations like Chapel Hill and Cary, North Carolina.
NuWire: Have you seen people participating in doing a lot of rehabs and flips? And if so, what areas are best for those?
Snyder: The rehabs and flips are certainly interesting....They are a great way to get some very quick bang for your buck and turn those over for reinvestment.
I've done that myself, but the opportunities are certainly difficult to find—the good ones, that is. Where you do find them? You know, sometimes it's like a box of chocolates...you never quite know what you're going to find. So a flipping opportunity is not necessarily for the novice. It's really something that as a learned investor, you've got to walk in with all eyes open and with a substantial reserve available.
NuWire: What common mistakes have you seen investors make in the Raleigh market?
Snyder: Looking to flip pre-sales opportunities. Well, this might have been a great strategy if you were an early investor in a subdivision in Phoenix, Arizona, but it's not necessarily a strategy that's going to pay out today. To expect a 25 percent rise in appreciation between now, where there is nothing but dirt, and six months from now where you've actually got a livable house...and...flip it before you actually close, is not something you can do here.
We have had investors...who have walked in here and despite the warnings against doing that, still expected through extremely rose colored glasses that what they experienced in L.A. over the last three or four years is something they're going to continue to experience here. And what was experienced in these various markets...including the northeast and the southeast in Florida, etc., is an anomaly and it's not something that's likely to recur for a long time out in the future. And I don't know when we're going to see rates of appreciation approach 20, 25, 30 percent again....It could be 10 years, it could be 20, it could be never. But I'm not going to start rearranging the tea leaves to try and predict it.
And so I think that the mistake that people make is by coming into the market and expecting to be able to turn a substantial profit within the next year or two. And that's why...we have highly recommended making sure that either you have substantial reserves to cover a negative cash flow or to purchase properties where you're going to have a very reasonable chance of having at least neutral cash flow, if not something better, because if you're at neutral cash flow or above...assuming disaster doesn't strike elsewhere in your life, you can hang on to this property indefinitely.
NuWire: Can you talk a bit more about the different...projects that you've been a part of and your favorite type of investments?
Snyder: My favorite type of investment has changed with my stage of life. But with regards to what we have done in the past, we started off buying just some very staid, boring multi-families...that I had a very strong chance of not going into the red on....I really was tepid when I first started. But it's proven out very, very well, and we have purchased... somewhere between 15 and 20 properties along that line.
Then we have purchased some properties that have required a tremendous amount of TLC. I didn't get into that until I felt like I had some calluses on my hands, so to speak, from the prior projects where I felt like I could readily change out tenants where I needed to....We weren't intending to flip, though we have turned some of those properties within about a three-year time frame....It was a lot of fun, but I'll tell you, I learned an awful lot and I didn't make nearly as much as I had hoped.
As we have gotten busier and busier, I have had to drive myself towards not having as much direct involvement with screening, finding tenants, etc. And as a result of that decision, I have opted for newer construction opportunities that required less input, less labor, less time on my part. While the immediate return may not be as high as fixing and flipping, it is something that I can sustain for a longer period of time.
As long as I've got money to invest, then I'll be able to continue to do this because we've developed very strong relationships with very solid property management companies, and I feel that at this point, now I can move up the management chain (or “food chain” if you will) to just a more pure ownership position as opposed to having to play a more direct hands on role in the actual management. So it has changed and shifted over the last 12, 13 years as we've gotten more sophisticated, gotten a little bit larger, and have gained a lot more confidence in our ability to delegate to people that we can trust.
