Trouble choosing a niche

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Trouble choosing a niche

Chad Adams
Investor · Joplin, MO · Member since 2014 · 21 posts · 4 votes

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

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Most Popular Reply

Eric FernwoodBusiness Member
Realtor · Las Vegas, NV · Member since 2014 · 995 posts · 1k+ votes
12y

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

[email protected]702-358-8884
FERNWOOD Team, KW VIP Realty520 Reviews
WebsiteView Page
16Reply
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13 Replies

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  • Larry Turowski
    Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
    12y

    @Chad Adams Congrats on getting started.  You've got some great resources to start you out--handy skills and access to cash, so it is just about finding some deals.

    The first thing you need to do is find other investors in your area. I am sure there are some that are investing in SFH as well as MFH's. Take them out to coffee or lunch. Ask them what type of deals they like and how they find them.

    Look at lots and lots of houses before you pull the trigger unless you stumble across a no-brainer.  Dozens if not a hundred.  You don't have to go in each one but I'd probably shoot for going into dozens.

    Start with one house and see how it goes.  See how you like the whole business.  From there you should be able to pick up two or three more, assuming you are putting down 20%.

    1Reply
  • Eric FernwoodBusiness Member
    Realtor · Las Vegas, NV · Member since 2014 · 995 posts · 1k+ votes
    12y

    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

    [email protected]702-358-8884
    FERNWOOD Team, KW VIP Realty520 Reviews
    WebsiteView Page
    16Reply
  • Will Porter
    Investor · Houston, TX · Member since 2014 · 116 posts · 41 votes
    12y

    @Eric Fernwood your post couldn't have come at a better time. I'm actually having a short meeting with a property manager today as a sort of general networking/advice session. But now I have some solid questions to ask, thanks for the great post.

    0Reply
  • Marcia Maynard
    Investor · Vancouver, WA · Member since 2013 · 3k+ posts · 4k+ votes
    12y

    @Larry Turowski and @Eric Fernwood You are both spot on. Great answers! 

    @Chad Adams We are looking for our 16th+ rental unit in our preferred location. We have figured out what rents well, but we also consider what type of property needs the least management. Consider the "drama factor" and your tolerance for working with different types of populations. As, this is a people business too. You have the opportunity to add to or detract from the quality of the community and neighborhoods. All the best to you!

    0Reply
  • Tiger M.
    property manager · Las Vegas, NV · Member since 2012 · 502 posts · 171 votes
    12y

    @Eric Fernwood that post rocked! You need to post more often because you have the goods to share. You said what I was thinking but with color graphics.

    0Reply
  • Bill R.
    Henderson, NV · Member since 2014 · 111 posts · 163 votes
    12y

    @Eric Fernwood - Excellent post.  I think these principles are valuable to remember for any type of business.  

    0Reply
  • Chad Adams
    OP
    Investor · Joplin, MO · Member since 2014 · 21 posts · 4 votes
    12y

    @Eric Fernwood Thank you.  Very good advice.

    @Larry Turowski Thanks!

    @Marcia Maynard Thanks!

    Thank you for the great advice. I'm pretty new to this community, but it blows me away how knowledgeable and giving the people are here.

    @Marcia Maynard I REALLY enjoyed the podcast you just did, thank you.

    0Reply
  • Eric FernwoodBusiness Member
    Realtor · Las Vegas, NV · Member since 2014 · 995 posts · 1k+ votes
    12y

    Thanks for the positive feedback. 

    Hello @Will Porter ,

    Having an informational interview with (multiple) property managers is essential. What I would seeking to discover is not only the type, configuration, location and rent range, I would also be looking for a future investment team member. I will share my opinion on how to select a good property manager. However, before I continue, know that I am a Realtor in Las Vegas and my practice is almost exclusively remote investors. So, I am biased towards utilizing a property manager based on my working almost 7 days a week with investors and the large number of people who have come to me for help after having disasters attempting to manage their own properties. Also, know that I am not a property manager; I do not manage properties. But, I know a few (very few) good property managers and if I refer a client to them, the client gets a discount on the property manager fees due to the volume of properties I have placed with them. Also, I have nothing to gain from referring clients to a particular property manager; I do not accept a referral fee from the property manager because I want the property manager to know that the only way they get another client from me is to take exceptional care of all my clients. Since property managers are accustomed to paying referral fees to Realtors and I will not accept a fee, they are very aware that I will move my clients to someone else without any hesitation if all my clients are not well cared for.

    Before I get into how I interview prospective property managers I want to explain what I expect from a property manager, which is illustrated in the chart below. Expectations drive interview questions. (Note that I will talk about the process not specific questions. I have a list of over 40 property manager interview questions and if you would like a copy, drop me an email.)


    The Critical Characteristic

    Integrity** is THE critical characteristic for all investment team members. The reason integrity is so important is that there is no way to write a management agreement which will ensure the property manager will do what is actually needed for you to be successful. Saying this another way, there is the "letter" of an agreement and there is the "spitit and intent" of an agreement. A person with integrity will consistently carry out the spirit and intent of the agreement. A person with out a deep sense of personal integrity can usually be relied upon to carry out the letter of the contract most of the time which simply is not enough. Never associate with or deal with anyone who is not a person of high integrity.

    Process Questions

    These are the questions designed to determine IF they have processes in place that will meet your needs and how well they work. For example, my current process is that if I find a qualified property I send the property manager a walk through video of the property. The property manager gets back to me within 48 hours with her opinons on the property, the location, and the probable rent and probable time to rent. When I was intervewing property managers several said that they do not get involved with the properties until they are ready to rent. This is totally unacceptable to me. 

    Fees and Cost Management

    Obviously the fee charged by the property manager is important. However, I am more concerned about the value they provide in exchange for the fee they charge. I moved my clients from a property manager who charged 7% to a property manager who charges my clients 8% (My clients get a discount off their normal 10% fee due to the number of properties I have placed with them.) I did this because while the previous property manager was good for several years, they started not doing the job I require. So, worry about the value you get in exchange for the fee, not just the total fee.

    Cost management is another critical area. You need a property manager with the processes of handling tenant requests 24 hours a day, 7 days a week. Water heaters (etc.) do not start leaking on any pre-determined schedule. You also want to receive the original invoice from the contractor who did the work; with no markup. Too many property managers view maintenance as another profit opportunity.

    You need a well defined approval process. For example the property manager I primarily work with will automatically handle any repair under $200. Over $200 they will contact me or my client for approval prior to authorizing the work.

    One final consideration on cost management. There are a small percentage of tenants who are always calling in for repairs. These are usually minor but the costs add up. The property manager must have a process for detecting such complainers and dealing with them.

    Area of Expertise
    Some of the property managers I know have the majority of the properties they manage in a relatively small geographic area. If you place a property with them and it is not in this area, repairs and everything else will require a special effort by the property manager and their staff. You want to be in the middle of their business channel.


    Risk Management
    Tenant screening procedure, rent collection and preventative maintainence are parts of risk management. I will talk about tenant screening some other time so I will not mention it here. On rent collection, the property manager must have a process in palce for collecting the rent. This sounds fundamental but I have talked with a few property managers who seem to be very flexable on when and how much is paid. My standard (which conforms to Nevada laws) is that rent is due on the 1st. Period. No exceptions unless the tenant notifies the property manager in advance and the delay in payment is approved. If the rent had not been received on the first, a Pay or Quit notice follows very quickly. And, there is no let up until either the tenant pays the back rent plus late fees and such or they are evicted.

    The property manager (or their delegate) must see the property on a regular basis. For example, if there are tree branches touching the roof, you are going to have roof damage over time. Also, if there are drainage issues, you need to get these taken care of before they become a problem.

    One last point on this is that every time maintainance people are in a property, they need to be taking note of the condition of the property. If the property is not being cared for, the property manager must have a clear and well defined process for addressing the problem.

    There are more topics I could cover but I hope this gives you a start on interview topics. Email me if you want the questions I use.

    [email protected]702-358-8884
    FERNWOOD Team, KW VIP Realty520 Reviews
    WebsiteView Page
    4Reply
  • Elizabeth M.
    Investor · Bay Area, CA · Member since 2016 · 25 posts · 4 votes
    9y

    @Eric Fernwood  This is an old thread, but really good info.  Would you mind if I contacted you with some specific Q's?  Thx!

    0Reply
  • Allyssa McCleery
    Rental Property Investor · West Palm Beach, FL · Member since 2017 · 262 posts · 136 votes
    9y

    @Eric Fernwood

    Hi! I seem to not have been the only one to find this post years after! I appreciate all the information here. I am struggling to decide on where specifically  I want to invest in south florida. 

    Do you have any advice on contacting property managers to be able to interview them in this way? Do you recommend trying to contact the bigger companies through a google search or smaller companies who may have more time to answer questions? 

    Really appreciate your thorough posts!

    0Reply
  • Diana Duncan
    Real Estate Investor · Miami / Fort Lauderdale, FL · Member since 2013 · 63 posts · 12 votes
    8y
    Originally posted by @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

     Spot on! Thanks for your detailed post.

    0Reply
  • Diana Duncan
    Real Estate Investor · Miami / Fort Lauderdale, FL · Member since 2013 · 63 posts · 12 votes
    8y
    Originally posted by @Eric Fernwood:

    Thanks for the positive feedback. 

    Hello @Will Porter ,

    Having an informational interview with (multiple) property managers is essential. What I would seeking to discover is not only the type, configuration, location and rent range, I would also be looking for a future investment team member. I will share my opinion on how to select a good property manager. However, before I continue, know that I am a Realtor in Las Vegas and my practice is almost exclusively remote investors. So, I am biased towards utilizing a property manager based on my working almost 7 days a week with investors and the large number of people who have come to me for help after having disasters attempting to manage their own properties. Also, know that I am not a property manager; I do not manage properties. But, I know a few (very few) good property managers and if I refer a client to them, the client gets a discount on the property manager fees due to the volume of properties I have placed with them. Also, I have nothing to gain from referring clients to a particular property manager; I do not accept a referral fee from the property manager because I want the property manager to know that the only way they get another client from me is to take exceptional care of all my clients. Since property managers are accustomed to paying referral fees to Realtors and I will not accept a fee, they are very aware that I will move my clients to someone else without any hesitation if all my clients are not well cared for.

    Before I get into how I interview prospective property managers I want to explain what I expect from a property manager, which is illustrated in the chart below. Expectations drive interview questions. (Note that I will talk about the process not specific questions. I have a list of over 40 property manager interview questions and if you would like a copy, drop me an email.)


    The Critical Characteristic

    Integrity** is THE critical characteristic for all investment team members. The reason integrity is so important is that there is no way to write a management agreement which will ensure the property manager will do what is actually needed for you to be successful. Saying this another way, there is the "letter" of an agreement and there is the "spitit and intent" of an agreement. A person with integrity will consistently carry out the spirit and intent of the agreement. A person with out a deep sense of personal integrity can usually be relied upon to carry out the letter of the contract most of the time which simply is not enough. Never associate with or deal with anyone who is not a person of high integrity.

    Process Questions

    These are the questions designed to determine IF they have processes in place that will meet your needs and how well they work. For example, my current process is that if I find a qualified property I send the property manager a walk through video of the property. The property manager gets back to me within 48 hours with her opinons on the property, the location, and the probable rent and probable time to rent. When I was intervewing property managers several said that they do not get involved with the properties until they are ready to rent. This is totally unacceptable to me. 

    Fees and Cost Management

    Obviously the fee charged by the property manager is important. However, I am more concerned about the value they provide in exchange for the fee they charge. I moved my clients from a property manager who charged 7% to a property manager who charges my clients 8% (My clients get a discount off their normal 10% fee due to the number of properties I have placed with them.) I did this because while the previous property manager was good for several years, they started not doing the job I require. So, worry about the value you get in exchange for the fee, not just the total fee.

    Cost management is another critical area. You need a property manager with the processes of handling tenant requests 24 hours a day, 7 days a week. Water heaters (etc.) do not start leaking on any pre-determined schedule. You also want to receive the original invoice from the contractor who did the work; with no markup. Too many property managers view maintenance as another profit opportunity.

    You need a well defined approval process. For example the property manager I primarily work with will automatically handle any repair under $200. Over $200 they will contact me or my client for approval prior to authorizing the work.

    One final consideration on cost management. There are a small percentage of tenants who are always calling in for repairs. These are usually minor but the costs add up. The property manager must have a process for detecting such complainers and dealing with them.

    Area of Expertise
    Some of the property managers I know have the majority of the properties they manage in a relatively small geographic area. If you place a property with them and it is not in this area, repairs and everything else will require a special effort by the property manager and their staff. You want to be in the middle of their business channel.


    Risk Management
    Tenant screening procedure, rent collection and preventative maintainence are parts of risk management. I will talk about tenant screening some other time so I will not mention it here. On rent collection, the property manager must have a process in palce for collecting the rent. This sounds fundamental but I have talked with a few property managers who seem to be very flexable on when and how much is paid. My standard (which conforms to Nevada laws) is that rent is due on the 1st. Period. No exceptions unless the tenant notifies the property manager in advance and the delay in payment is approved. If the rent had not been received on the first, a Pay or Quit notice follows very quickly. And, there is no let up until either the tenant pays the back rent plus late fees and such or they are evicted.

    The property manager (or their delegate) must see the property on a regular basis. For example, if there are tree branches touching the roof, you are going to have roof damage over time. Also, if there are drainage issues, you need to get these taken care of before they become a problem.

    One last point on this is that every time maintainance people are in a property, they need to be taking note of the condition of the property. If the property is not being cared for, the property manager must have a clear and well defined process for addressing the problem.

    There are more topics I could cover but I hope this gives you a start on interview topics. Email me if you want the questions I use.

     Thanks for sharing this important part of the PM screening process. Great post! I've spoken to a few landlords who cannot wait to get out of their PM contracts because of poor due diligence.

    0Reply
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