midwest investing - Posted by HB

Posted by infinitig35 (PA) on June 21, 2007 at 04:12:24:

Great post Rich-CA.

midwest investing - Posted by HB

Posted by HB on June 20, 2007 at 17:44:59:

I live in Can’t-afford-nia wanting to become a full-time investor. I am currently researching homes to rehab and rent out in the Mid-West (Texas, Kansas, Oklahoma, Missouri, etc.). Can anyone tell me of how they may do this? What to look for and what to stay away from? How to deal with contractors, real estate agents, etc.?

Thanks,
HB

Re: midwest investing - Posted by John Corey

Posted by John Corey on June 21, 2007 at 10:56:51:

HB,

You talk about wanting to be a full time investor. Are you consider a
move or will you continue to be in CA?

John Corey

Re: midwest investing - Posted by James Harris

Posted by James Harris on June 20, 2007 at 21:20:53:

HB, Drop me a line , I have some properties that you might be interested in.

Re: midwest investing - Posted by Rich-CA

Posted by Rich-CA on June 20, 2007 at 21:07:32:

I posted this before, but the archives have a small problem, so here it is again - it combines 3 posts so its long:

The first thing I do is get a list of Realtors. I usually start with HomeGain.com, where I can select the area where I want to invest and enter what I’m looking for (for example, I insist that an agent I work with have their own investment properties and some experience managing properties so I know they have an idea of what makes a good rental property). The agents who are interested post a response. I have a list of interview questions related to managing properties, landlord-tenant law and things that are my personal hot button items. I look for these in the responses. if it looks like I have found an agent she or he goes on my phone interview list. These are the people I e-mail my list of questions to and then call and talk to later. I try to narrow the list to 3 - 4 agents. I ask each agent for property manager references. I have separate interview questions for them, look at their lease (or see if they’ll use mine), look at their record keeping, look at their management agreement, and so on.

Once I have 3 - 4 agents and PMs that look good from their materials, web site, phone conversations and e-mail, I schedule a trip to the city, where I meet each face to face. From the PMs, I look at their tenant files to see if I think they collect enough info to protect my interests (including move in/out procedures and pictures). I select a primary and backup as the PM I will be using. They will be providing feedback on properties I am interested in (how quickly they can fill a vacancy, what rents they can get and so on). I check the data against what the others have said to make sure they are in the normal range and not just irrationally optimistic.

For the agents, I have each show me some properties. I pay close attention to what they select (remember, these are investors themselves), what they say about the property, the area, the rents the property will yield (I check the rents against what the PMs say - the PMs tend to be a little more cautious on pushing the rent numbers and if you weigh an additional month of vacancy against that extra $75 of rent, you will find a 1 year lease may break even for the vacancy holding costs - so I tend to price a little low for an area).

The properties an agent thinks are good investments will help (1) determine if you are on the same page and (2) see what the things they describe actually look like. The latter is important of you buy properties based on the pictures the agent sends you so you aren’t thinking “small fix up” is $1,000 and the agent is thinking $5,000.

You will also need a home inspector. I ask my insurance agent (again, I use Farmers because their Truck division offers a really first rate commercial landlord’s policy for a good price) and RE agent for referrals. If possible I look at a copy of their report. I look for pictures (my San Antonio inspector actually runs a fiber optic camera down the vents to look for breaks that may cause trouble by dumping heat or moisture between walls or in other places that I don’t want) and descriptions. I ask the person making the referral for a sample report from one of their properties because I don’t want an inspector’s “model” or “marketing” report, I want a real one. BTW: you can compare some parts of an Appraisal with a Home Inspection report.

Once I know the people I will be working with, I set up the LLC, open the bank accounts and start looking for properties. Some I see on Realtor.com, others from the lists e-mailed me by the agents. I compile a list of properties to look at. I then have the agent go out and get me pictures based on what I need to know for a rental.

One example I had was my agent in San Antonio. She was very good. She referred me to some very solid people (she was good at picking people), and her pictures showed me things like: rooms that were sized as to be hard to fit normal furniture in (very bad in a rental). Things that would need repair (she spotted things the inspector missed - nobody sees everything).

The rest is just paperwork.

I always start with Real Estate agents who themselves are invested in the market I am buying in. I then follow their recommendations as a starting point for PMs, repair people and so on. In AZ, the maintenance is done in-house by my PM. In TX, I got connected with a very inexpensive, good quality, honest contractor for a couple of cosmetic fixers. Bottom line, I list out what I want and see not only how they respond, but also what else they recommend. I am not a contractor myself, but as a former developer of software systems the systems of a house are quite simple by comparison. Besides, when developing a good software system, you have to be able to learn other people’s jobs quickly. So I meet with people face to face and then ask a lot of questions, offer ideas that are sometimes not well informed and listen to their answers. Sometimes I offer ideas that I know are not legal to see if they also know this. But the big key in seeing what you have is in:

  1. Learning enough about what the person you are interviewing does to be able to ask questions. You can use home repair projects to do this or follow the people around who do work on your home asking questions about your job. I have followed electricians, furnace people, carpenters, painters, plumbers, installers and so on as they worked on my own home. I have found the good ones have no problem impressing you with what they know.
  2. Know what you want done in detail and how much you’d like to spend. You can get guesses from your own workers or at Home Depot.
  3. Ask good questions.
  4. Listen carefully to the answers and ask follow up questions.

People are more open when you show an interest in what they do. Sometimes the conversation will wander. This lets you discover what the person values and in turn can help you decide to trust or not trust someone.

For getting a unit ready between tenants, I have a list of professionals. Coordinating them long distance and getting a lockbox on the property can be a challenge. Also making sure the work actually gets done is a problem. A lot of people don’t want to pay a PM, but I found that having eyes and ears on the ground where the property is located is invaluable. If they charge less than 10% of the gross, however, they won’t last and will either raise their rates as the business grows or take on too many properties. It takes this much to keep the business going. It also simplifies keeping an eye on the workers.

I know how the long re-renting cycle goes. When I bought in Phoenix it was 3 months to find a tenant. Its down to 6 weeks, but is no joy when a tenant moves out. I used Craigslist and Backpage for advertising as well a listing in the paper, which produced a lot of calls. But it was the yard sign the PM put in the front yard that generated the best calls. The yard sign requires someone in the area willing to do the work, but you will need to compensate them for their time.

I have had a few offline requests for further info, so I decided to see if I can post my last response to you here.

I thank you for providing the details on how you choose your agents.

But, how did you choose the neighborhoods? I get the advice of the Real Estate agents I interview. After the first 4 or 5 of them, a picture of which areas produce what and what the areas are like begins to make itself clear. One of my rules is that I do not want to invest in an area where my Property Manager would need to gun to be able to go into the neighborhood at night alone. When I do my location visit, I use a “gates and graffiti” rule. This is not foolproof as a lot of areas where everyone has dogs tend to have gates because dogs can tear through a screen door (when left open). So I look for painted out graffiti (the paint overs never match) and gates over windows (people only pay for these if they need them, and if everyone needs them, that’s a good indicator of the crime rate. I drive through with my “finalist” agents. I have a local map book (Thomas Brothers/Rand McNally have ones for most major metro areas that often print subdivision names on the map) and I mark it up with “good, bad, ok” and other notations. A “good” neighborhood next to a “bad” one is risky because the bad tends to spread. Sometimes I’ll call the Police in the area and see what their stats are - some publish them, others do not. But mostly, the agents usually know what areas are best avoided and you can cut down your search area this way.

For example, I’m in Chicago area and, while the cashflow is possible, it’s practically impossible without a large (i.e. 20%+) downpayment.

There are areas where I could cashflow with zero down, however, those are pretty rough areas that I don’t feel comfortable in. And the cashflow would come only from Sec. 8 tenants and I’d have a hard time filling the place with anyone other than a Sec. 8.

Section 8 programs are locally administered, federally funded programs and the implementation is different from place to place. In San Antonio I have one Section 8 tenant who, on their 6 month inspection, demonstrated they don’t keep their house any worse than I keep mine. Always on time with rent, never any problems other than the ones I want to hear about. Some Sec 8 areas try to disperse clients into SFR areas because if you group low income together, you get more problems. Anyway, I try to avoid low income, which reduces cash flow, but maintains my stomach lining. You will be doing constant rehab between tenants in a low income area.

I look for cities that have a number of characteristics:

  1. Growing middle class job base. This tends to push resale and rent prices up.
  2. Using a mythical 1400 sq ft, 3BR/2BA SFR in a middle class neighborhood as a starting point, I look for houses in solid middle class neighborhoods around $100K. Usually lower average prices results for some problems (like poor job growth or even job shrinkage). For pure cash flow (and no expected price growth), the prices will be lower and the rents higher.
  3. Good schools, safe streets.

Basically, I look for the opposite of Detroit (where people are having trouble giving away houses for half what they paid for them 20 years ago - only minor exaggeration on this).

So, my questions for you are as follows:

  1. What kind of properties do you look for? It appears that you have some SFH’s and Townhomes on your site. Did you find these to be more profitable than say, a six unit or a multi-unit?

I prefer SFR/SFH just because these tend to attract a better sort of client. That means less damage to the property, less headaches with problem tenants, fewer evictions, and so on. Not no problems, just fewer. The more expensive the rent, the “better” the tenant. A lot of horror stories come from “low income” mentality.

Multi units produce more cash flow and if you don’t mind the additional “hands on” the tenants require, it can be a better investments. BUT when you go sell them, multi family of 5 or more is considered commercial and not residential from a lending point of view. That means more expensive loans and resale prices that only go up if rents do (or if you have a buyer who will accept a lower return) and a longer sales cycle (think - exit strategy). With SFR you resell to two markets - owner occupied and investor - increasing the chances of a sale. For pure cashflow, however, multi is better.

  1. What kind of things do you look for when buying a rental property? I find it hard to understand why someone would rent for say $1200/mo, when their PITI would be the same or LOWER if they bought outright.

I sometimes wonder why people rent at those levels and have come up with a number of reasons:

  1. The credit report is very bad. Just because a person with good credit has a 6% loan does not mean someone with worse credit will get the same rate. Had one buyer recently who had to do 100% financing and the first was at 8 2/4% with an 11 1.2% second. Their payments per month would be more than double what mine were. With the death of sub prime lending, a lot of marginal buyers will now actually have to show a 10% down payment or more.

  2. The job is temporary.

  3. They bought a house but its not built yet.

  4. They are getting medicare or some other assistance that limits their assets.

  5. They don’t want to be responsible (new roof, water heater, etc.) for the maintenance costs that can dwarf the PITI payments when the occur.

2a What kind of appreciation are you looking for? Depends on the area. Each area has an historical appreciation rate. Everything outside this range should be considered a “high” that will have a matching “low” that yields the average. For example, Phoenix appreciates at 5 - 7%, up until 2004. From 2004 to 2006, it was about 45% and then dropped 17% from 2006 to date. In San Antonio, its 4 - 6 %, but they have very few out of the ordinary highs or lows. If there is an economic “boom”, meaning a lot of jobs are moving into the area, the prices tend to move faster than normal. For example, Phoenix started booming as SF Bay Area (where I live) started having large numbers of jobs move from here to there. Investor money pushed this further, but the core movement was a jobs and people migration. I would LOVE to get in like I did with Phoenix, just ahead or a market adjustment, but hat’s more luck than skill.

2b.Also, how do you evaluate a rental market? In other words, how can you make sure that your rents are accurate and that there is adequate supply of renters?

You can use Realtor.com to pull MLS listings of rents anywhere in the country. The data tends to lag the local MLS by as much as a week, but it is good for determining if an area is worth more research. I also have the same agents who e-mail property listings send me rental listings using the same criteria. That way I can match up the houses and the rents. Since my agents are also active investors, I have them help me map this on to a “rental map” of the area. In interviewing PMs, I ask things like: average time to find a tenant in each of the areas I am seeing from my agent’s listings and what rents they can get. This cross checks the things the agents tell me (agents, being in sales, tend to be optimistic while PMs, who are in a different line of work tend to be more pessimist so for rents and vacancy data I tent to trust what the PMs say more).

For example, I evaluated Albuquerque. Nice city. Newer houses. 3 - 4 months to fill a vacancy and rent on a $300K house was around $950 per month. I would be an idiot to buy there.

  1. Personally, do you buy at market value or do you ALWAYS buy a property that is distressed or where the owner is motivated, like facing foreclosure, etc…

I normally buy near market value (meaning I rarely pay asking price). I purchased two “cosmetic” rehab properties, and these have worked well for me. It was elderly sellers who did not have the cash or energy to keep up with the maintenance. I haven’t dealt with moderate to severe rehabs, foreclosures or tax liens. I prefer my properties vacant so that I can make them attractive to prospective tenants quickly. Normal turn around for a tenant turnover is 5 days. The two cosmetic fixers took 3 weeks.

My personal game plan is to start buying pre-foreclosure properties and then flipping them to build cash reserve. I figure I can always keep those that I like and I can always sell them.

I will be the first to admit that what I know about pre-foreclosures (and other distressed property purchases) is book knowledge. There are risks that don’t occur with a retail purchase, mainly in access for determining the true condition of the property (and therefore setting your make ready budget). You also have to figure holding costs and if you want a quick sale, you have to price noticeably below market (meaning it sticks out in an MLS listing). I use MLS exclusively because of the number of properties it gives me to look at. Some on CRE Online don’t. I am not sure how they get their buyers, but having a network of investor/buyers will help move properties faster than trying to sell individually. If I were to approach this, I’d use a Help U Sell or other service to get the listing on MLS.

  1. If you (and I hope this never happens) get into a situation where you NEED to sell your properties, would you be able to sell and at least break even or would you take a loss?

You can always sell a property if there is no limit to how low you are willing to drop the price. In those cases you may very well take a loss. I sold our house in Phoenix in 90 days - which is less than the 160 day average but would never set speed records - and I had the house priced at the bottom of the range and it was staged (looks like a model home inside, with furniture and so on). Didn’t lose any equity but if I needed a fast exit, I would have dropped a lot more in price and do it right off. The big problem with RE is the time it takes to liquidate.