Trouble choosing a niche

[Chad Adams]

Hello everyone,

I've been reading and listening to everything I can for the last several months. Thank you to all of you for making BP such an amazing place full of awesome info.

I am beginning my search for my first investment property and I'm having trouble deciding which direction to go. I don't really have a mentor, so I'm hoping BP can be a "sounding board" of sorts for me.

So, what are my goals:

I'm interested in passive income with a focus toward building up a portfolio of rental properties to provide income during my retirement (still 20ish years away)

At some point in the future (retirement years), I know I'd like to have 10-15 (or more) units that are mostly paid for and require fairly low maintenance (quality construction, nicer neighborhoods).

I don't live in an area that appreciates well, so I'm mostly focused on cashflow.

Other info:

I'm pretty handy. My dad was a handymand while I was growing up. I built my own house (I didn't GC it, I actually built it).

So, I'm trying to develop a plan of action. Right now the plans available seem to fall into these areas:

• Single Family Houses - focus on houses that need work. Buy, rehab, rent. I don't see many of these that seem like they would provide decent cash flow.
• Multi-Family - focus on duplexes, triplexes and quads.
  
  • This seems to cash-flow a lot better that SFH.
  • Because of my goals I would rather end up with MFH designed to be MFH, but it seems the SFH converted to MFH cash-flow a lot better, so I wonder about focusing on cash flow in order to build experience as well as bank some extra money to reinvest down the road.
• Multi-Family - the best cash flowing properties where I live seem to be small apartment complexes (less than 20 units). I have found several that are 5 to 15 units and the numbers seem to look best on these, almost to the point of it seems too good to be true so I feel like I'm missing something.

More Info:

Average rents in my area:

1br = $350-$425

2br = $500-575

3br = $650-800

I don't have a lot of Cash in savings. I'll be using a $60,000 HELOC to help finance any deals I find (at least to get started). I work full time as a software developer (home office), but have a fairly flexible schedule.

Looking for guidance.

Thanks,

Chad

[Eric Fernwood]

Hello @Chad Adams ,

Good question. I've faced the same question several times and have found an approach that worked for me as an individual investor and now as a Realtor in Las Vegas whose business is almost exclusively investors.

By education I am an engineer and I've learned that you have to reverse the process in order to find the solution you are seeking. So, instead of looking for a niche, I suggest you look for what niche is profitable. Once you know what is profitable you can then decide if other aspects of that niche work for you. Here is what I would do (and have done multiple times in the past):

I have found property manangers the best source for information on what rents well. Most people think of property managers as someone who collects rent after you already have the property. To me, this is completely backwards. I would start by finding two or three mid-sized property managers. Make an appointment and go see them. Tell them that you are getting into the rental property business and would like their advice on:

* What type of property rents best: By this I mean condo, single family, duplex, etc.

* What configuration rents best: two bedroom, three bedroom, etc.

* What is the best location for such properties: North of the river, east of 35th St, within two blocks of mass transit routes, etc.

* Best rental price range: If the median income for the people who rent properties is $4,000/Mo., trying to rent a property for $2,000/Mo. is not going to work. The rental price must be consistant with the median income of the renters you desire to attract.

The intersection of these four factors are what I call the "Sweet spot". Below is a graphical representation of what I am intending to communicate.

Note that the approach I recommend does not depend on the city or property type. It applies equally well to commercial or residential. And, it is easy to do since you are getting your information from property managers, the people who know the most about what rents and what does not rent.

A few more points:

* Just becase you determine the rental sweet spot for your area does not mean that such properties are profitable. NEVER buy a property for long term capital gains. If it does not make money today you can not afford to buy it. This is what drives so many investors to do remote investing. In fact, almost none of my clients live in Nevada. They do remote investing because they can make money and the laws are pro-business here. What does this mean to you? I have clients that formerly bought properties in California and they learned that it can take up to one year and thousands of dollars to evect a knowledgable tenant. In Las Vegas, typical evection time is under 30 days and it costs about $500.

* I consistently read people who want to buy damaged properties and rehab them. This is only valid if there is a significant price difference between a damaged property vs. a property in good condition. In Las Vegas the gap is very small, which is why flipping does not work in Las Vegas in the current market.

* Do not let your personal bias affect you judgement. You might "believe" a 2-bedroom condo is the right investment property. But if multiple property managers tell you that single story duplexes are the best renters, listen to them. Property managers want properties that will rent quickly. They only make money if the property is rented.

* When it comes to rehab, ONLY do what the property manager recommends and do EVERYTHING that the property manager recommends.

In summary, start by talking to multiple property managers and find out what type, configuration, location and rent range is the best for your area. Determine whether you can generate a positive cash flow. If you can't, don't buy in that area.

My best wishes to you.

Eric Fernwood