Who do I turn to when initially searching for my investment prop?

[Alis B.]

I'm brand new to this so kindly use single syllable words in your responses (I'll most likely Google your lingo). 

That opener should let you know how green I am to this. I live in central TX and I would like to invest in a local rental property (single or possible duplex).  There is a large hospital in the area & I hope to rent to medical residents. 

What are my first steps in locating my potential properties?

1) Do I look to purchase a property that is already listed?

> should I look online (zillow for example) & then go through just the listing agent (in hopes of shaving off the full 6% commish) when I find a property that I am interested in?

2) Drive around and find neighborhoods that are well groomed and have a history of low crime THEN look for listings in that area?

Thank you! 

[Eric Fernwood]

Hello @Alis B. 

Before I answer your question (as best I can), know that I believe you should only buy properties that generate a sustained positive cash flow and are located in an area likely to appreciate over time. Meeting these two goals (sustained positive cash flow and appreciation potential) is not easy. Let me explain:

Sustained positive cash flow

Sustained positive cash flow means that rent consistently exceeds the total recurring costs. What criteria must the property and the area meet in order to achieve sustained positive cash:

• A good tenant. I define a good tenant as one who: pays all of the rent on schedule, takes care of the property, does not cause problems with neighbors, does not engage in illegal activities on the property, and stays for multiple years.

• Low maintenance cost. This is a combination of the climate, condition of the property, and the quality of the property manager. 

• Stable or growing job market - Rental property profitability is dependent on a stable job market. You want a job market that is growing and not dependent on industries like manufacturing. Also, it is better to have a lot of smaller employers than a few large employers.

• Property price vs. rent. There are areas where it is virtually impossible to rent a property at a profit due to the cost of the properties vs. the rent.

• Landlord friendly laws and taxes. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict a tenant. Also, state, local and property taxes are very important. It is very difficult to have a profitable property in a high tax area.

• A property that will rent quickly at a price which will exceed recurring costs thus generating a profit.

• There are other considerations as well but I think I covered some of the more important ones.

Potential Appreciation

• Low crime. High crime and appreciation do not go together.

• Sustained population growth of people who can and will rent your type of property.

• A stable area in which people desire to live and have good schools.

• Overall state population growth.

If you limit your search to any single geographical area you are unlikely to find such properties. Focus on your goals and not geography. I am a Realtor in Las Vegas, and my business is almost exclusively remote investors; at this time I have zero local investor clients. People invest here because some properties here meet their profitability and appreciation goals. However, Las Vegas is not the only place where you can meet the profitability and appreciation objective and I will now tell you the process I would use to find others.

The process

Note that the following is more of an outline rather than a description so please ask if you want more information on any point.

• Start by understanding the overall population movement trends. See population changes by state here. In general, I think the population is moving towards the southwestern states. This should narrow your search to only a few states.

• Each state has a limited number of viable cities since you need cities that are sufficiently large so that there is a stable (and growing) population. I am guessing a population over 1 million people would be a good start. This should get you to 5 to 10 cities.

• A rental property is no more valuable than the jobs around it so you need to look at job stability in each of the cities. Googling each city and the local chamber of commerce web site is usually a good source. This should eliminate one or two more cities.

• For each of the remaining cities check the taxes/landlord/eviction/rental/rent control laws. For example, in Las Vegas a typical eviction takes less than 30 days and costs less than $500.

• Seminars and blog answers (like the one I am writing) are general in nature and may not apply to a specific local because each local is unique when it comes to investing. The best source of such local information is a mid sized property manager. They will have enough properties under management to know the market but small enough to be interested in a new client (you). You will learn more about local investing by talking to 3 or 4 property managers than you will get from seminars and books. You are essentially looking for the intersection of four factors:

1. Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.

2. Type: Condo, high rise, single family, duplex, single story, two story, etc.

3. Configuration: Two bedroom, three car garage, mud room, etc.

4. Rent Range: If the majority of the population to which you want to rent are willing to pay $1,000/Mo to $1,300/Mo. you should be looking at properties that can profitably rent in the same rent range.

• Once you have a property profile (that matches the above factors) you can use Zillow or any other source to determine the typical price these properties recently sold for. Once you know the typical price and the typical rent you can use a tool I created to determine if you can make money in that market. Break-Even Calculator. Using this tool and data from Zillow, I looked at properties in three cities: Austin, TX; Cupertino, CA and Las Vegas, NV. If the Break-Even Price is lower than the Actual Sold Price it is unlikely that properties in that city will generate a positive cash flow. As you will see in the table below the prices of properties in Cupertino (and possible Austin) are too high relative to the rent to generate a positive cash flow. You should be able to generate similar data for all the cities you are considering in an evening. (Note: the following are "typical" prices. You can usually do better than typical once you are actually looking at properties.)

• Next, I would select one realtor and one property manager from each finalist city and go. There is no substitute for personally meeting the people who will be the core of your investment team. Note: tell both the Realtor and the property managers up front that you are in the investigation phase and are not “buying” anything on this trip. If any are “too busy” to spend time with you, then you know to eliminate them from further consideration.

• At this point I believe you will likely have enough information to make an informed decision on where and what to buy.

Alis, I hope the above helps. Feel free to contact me if you have questions.