First property, competitive market, any ideas?

Question

I am located out of Minnesota and am interested in beginning my career or future as a landlord. main points

1. houses are for like 350,000 - 425,000 in Minnesota with rent from 1,800 - 3,300 so if I get a property for 415,000 with about 5,000 in rehab and rent for about 3,000 is this a good deal and how do I know what a good deal is?

2. I always have family and friends giving me negatives like " what is it doesn't rent" or who is going to "pay that much for rent" or "what if the tenant burns the house down" are these realistic situations and how do I prepare and understand to to come back if anything like this happens how do I plan ahead.

3. should I go for a newer house with little to no rehab for 415,000 or something like 350,000 with like 10-20 in rehab?

if you can answer these that would be great thank you..

Jeff Schemmel · Answer

@Mohammad Al-hadad 1.) the median home price in the MSP area is ~$395k for what you're describing.  This is the single-family home market, and it's hyper competitive.  Forget about cash flow with this type of asset, the cheaper you go, the worse it is.  You can't buy the cash flow, even with a larger down payment.2.) some of these things are inherent risks.  Trust data, focus on the upside but plan to take calculated risks.  Some things will always be true no matter what asset type you buy.  In general, higher rents and nicer properties generate better (well-qualified) and paying tenants.3.) There are a few routes you can take.  I like the option of living in your first, maybe your 2nd property.  You can buy it for less cash, and you have lots of flexibility from there.  If you want to do some work, you can. Ideally there is some value-add to increase value and marketability to help you get a bit more in rent.  I prefer multi-family assets for this.  Duplex, Triplex, Quad.  They give you multiple-income streams that help protect you against the threat of vacancy and non-payment, and you can often substantially reduce your cost of living by purchasing as an owner-occupant and living in one of the units while you learn to become a landlord and property manager.

Michael Smythe · Answer

@Mohammad Al-hadad investor expectations have been skewed by the last 5 years of low interest rates and artificially low prices.

10+ years ago, most investors focused on Class B and C properties, not Class A.

Reason: hard to get Class A properties to cashflow!

Class B typically cashflows from purchase or within a year or so.

Class C typically cashflow well from purchase, but has tenant performance challenges.

Read copy & paste info below:

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

Charles Carillo · Answer

@Mohammad Al-hadad

I would not worry about what others say, but I would worry if the property does not cash flow. Will a property you purchase for $415k cash flow with a tenant paying $3,000? Even if you put down 20%, it will most likely not have cash flow when considering repairs, maintenance, vacancy, etc. I would also hire a contractor to estimate repairs; I don't think I have ever purchased a home that just needs $5,000 in rehab. Walk around Home Depot; it is not inexpensive to rehab properties.

Tim Swierczek · Answer

Great Post, thank you for spending the time writing it.

Tim Swierczek · Answer

1. houses are for like 350,000 - 425,000 in Minnesota with rent from 1,800 - 3,300 so if I get a property for 415,000 with about 5,000 in rehab and rent for about 3,000 is this a good deal and how do I know what a good deal is?

- I would not do this deal. I would look for small multi-unit properties with high bedroom counts. A 5-bedroom duplex in a solid area will generate $4500/mo in rent or more. Then you need to look for the one that has low expected CapEx for the next 10 years. These would be properties with good roofs, windows, siding, and mechanicals.

2. I always have family and friends giving me negatives like " what is it doesn't rent" or who is going to "pay that much for rent" or "what if the tenant burns the house down" are these realistic situations and how do I prepare and understand to to come back if anything like this happens how do I plan ahead.

- My parents used to say the same things, I ignored them and now I'm a millionaire. There are plenty of people who will pay these rents, infact there are over 100's of thousands in the Twin Cities alone.  Of course, you need to use your common sense when comparing properties. One common mistake is that investors look at the high market rent and assume they can get it, or they use an average rent but their unit is below average. Shop your own unit like you were a prospective tenant and you will figure out exactly what is should rent for. Getting rent right is the easiest part of being a landlord. If you know how to shop for a rental you know how to get rent projections correct.

3. should I go for a newer house with little to no rehab for 415,000 or something like 350,000 with like 10-20 in rehab?

-I wouldn't look for single-family rentals in the Twin Cities in this market unless you find a steal or an owner-financed deal. Rates are too high to make those numbers work. You will be working your day job just to afford to subsidize the rent. See my answer above for more details.

Adam Bartomeo · Answer

1. This is not a good deal as I define it. If you use cap rate to try and get an apples to apples metric you are about 4%. I would suggest trying to find something that is 10% or better UNLESS you have another reason to buy it, like high equity or high reward in the future (transitioning area that will see high returns in the near future).

2. This is a statement of ignorance. When you need surgery you go to a doctor that specializes in that particular surgery, you don't ask your friends and family to operate... Reach out to other investors to get the right information.

3. I would tell you to invest where the numbers make sense. Often newer investors need to start with properties that are in better condition because they are uneducated and don't know how to handle the different scenarios that may come up.

Sheldon Alex · Answer

Hi Mohammad,There are people who may express their concerns with what you're planning to do. There is risk when doing real estate investing, but there's a lot to gain if done right. Block out any negativity or any recommendations to dissuade you from pursuing this business. Maintain focus on finding the right cash-flow producing properties. Based on your numbers, there would be little to no cash-flow (if held as a long-term rental), especially if you factor in the high interest rates. It's usually a good idea to look for rental properties that require little to no rehab because of the timeframe needed to get a property rent ready before marketing it to find suitable tenants.Hope this helps. Sheldon Alex

Kyle Hoffman · Answer

Hey @Mohammad Al-hadad,

The first thing I would say is that the cool thing about real estate investing is that there are many options and styles about how to invest and what strategies you want to pursue. You also have a variety of price ranges, lending options, and markets that allow for a low cost to entry.

If you don't already own a home yourself, I always suggest house hacking as this gets some skin in the game, but also allows you to learn hands-on and offset your mortgage payments. If the Minnesota market has duplexes or 2-4 multi-family units, this could be a great way to get started.

If you already own a home, then I would say to do some research on the top places around the country to invest in and build a team and a network of experts in that area. This will help give you the guidance, trust, and efficiency that out-of-state investing requires. Start off with a SFH that you can get at least cash flow neutral on a long-term rental and let your education begin that way. The first deal is always a great learning experience and you will learn how to navigate the issues that may arise!

In response to your concerns, first thing to know is that investing in real estate never comes without risk and it is not as simple as some online "gurus" make it out to be. This doesn't mean that you won't be successful and there are several things that can be done to mitigate risk. Finding the right property manager, purchasing the right property in areas where tenants are attracted to live, and having the right strategy is what will determine your success. Newer home, older home, rehab, flip, turn-key, etc...all of these can work if you find the right deal. Hope this helps!

Jonathan Greene · Answer

The numbers you put out there are not good. You don't buy a $350k property for 1,800 rent unless you want to capsize your portfolio or unless it is a holdover tenant and the property has a ton of appreciation potential. From what you wrote, I don't think you have much guidance because you should be able to do better than that in your area. Do you have an investor-friendly agent who also invests or works with other investors to help?

Don't worry about what people say, but with the numbers you put out, they would be right. Tenants will not burn the house down on purpose if you are a good landlord, and hopefully even if you are not, but tenant-landlord relationships are important and landlord is not passive.

First property, competitive market, any ideas?

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