Property Types to Target

[Tom Suvansri]

As a new investor looking to buy and hold, I'm still trying to determine which property types to target initially.  I'm sure it could differ by market, but in general which property type would be best to start to get rolling and why?

Many thanks,

Tom

[Eric Fernwood]

Hello @Tom Suvansri ,

A good question. There is no standard answer because each locale is unique and your personal situation is unique. Based on market demand and the potential tenant population it could be single family homes in one location and condos in another. The basic approach is to determine where (example: south of the river, west of I35 and north of 11th street) and what (2 bedroom condo, three bedroom single family home, etc.) Once you know this where and what you can then determine whether the property will generate a positive cash flow. If not, look for another location and start again. This process is illustrated below. I will explain each block later.

The moral is that just because you would like to buy investment properties in a specific location does not mean that the property will generate a positive cash flow. Where can you find the location specific information you need quickly and at essentially no cost? Talk to local property managers.They deal with rental properties every day and know what rents well and what doesn't. Contact three to five and tell them you are just starting and you are looking for a property manager to work with. (I have a set of property manager interview questions you (or anyone else) can have. Just drop me an email.) What is the key information you need to know (what and where)?
• Type: Condo, high rise, single family, duplex, single story, two story, etc.
• Configuration: Two bedroom, three car garage, mud room, etc.
• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.
• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.
• Property laws, taxes and regulations: This is a catch-all category of local/state issues that affect landlords. An example is evictions. In Las Vegas an eviction typically takes less than 30 days and costs less than $500. Clients tell me that in California, if a tenant knows what they are doing, an eviction can take up to a year and can cost thousands. Another example is state income taxes. Nevada and Texas have no personal income taxes so a 5% return is actually a 5% return. If you buy a property in a state with a high personal income tax rate, you need to factor this into your actual return.

After only a couple of interviews you will begin to have a very good understanding of the local market and what type of properties rent best and how long they typically take to rent if the properties are market ready. Remember that the property manager only makes money when they collect rent so they want rentable properties too. The last thing they want is another unrentable property. This approach will work in your city or across the country.

Once you know specifically what type of properties you are looking for, use Zillow (or any other such site) and find rental properties that match the property managers recommendations (type, configuration, location, rent range). Next, find recent sales of similar properties (same source).

After you complete the above you will have a very good idea of what good rental properties cost, and how much they will rent for. Knowing these two pieces of information you can determine whether the properties in that area can generate a positive cash flow using a tool I developed for making what I call a quick investigate/forget decision. You ( and anyone else) are welcome to use the tool. Here is the link and below is a screen shot.

The tool generates what I call the break-even price based on the rent and other known factors. The break-even price is the purchase price where income (rent) equals recurring expenses (debt service, taxes, insurance, etc.). Watch the getting started video for details but simplistically enter the estimated rent and some other known factors and click Estimate. In the example shown (which you can automatically generate by clicking Sample Data in Getting Started), the maximum you can pay for a property which will rent for $1,200/Mo. (assuming all the other factors match your situation) is $185,960. Will you make money at this price? NO!!!! There are other costs to be considered as well. Making a purchase decision is not the purpose of the tool. The purpose of the tool is only to determine whether it is worth the time and effort to investigate further. For example, suppose you find a property where rehab and closing costs are minimal and you can get the property for $160,000. With a break-even price of $185,000 , you should make money on a property selling for $160,000 so it is worth further investigation. However, if you would have to pay $190,000 to get the property, forget it and look for another. Remember that it is only for a quick investigate/forget decision, not a purchase decision. 

At this point you will know: what type of property and where to buy the property as well as whether you can make a profit. If you can make a profit, time to see some properties. Contact a Realtor and provide them specific data (what and where) and tell them you want to see data on properties that match your criteria.

A final point. Never buy a property without first having the property manager see it. I deal with investment properties. I am a Realtor in Las Vegas and my practice is almost exclusively remote investors. Plus, I’ve owned 20+ rental properties. Despite my own experience I never buy anything without all members of the team agreeing that it will be a good property. My team consists of:
• Two Realtors with investment experience.
• A property manager with years of experience and who is managing over 1,000 properties.
• A licensed property inspector who is also a licensed plumber.
• Other as the situation dictates.

Tom, I hope the above process helps. Feel free to ask questions if what I said was not clear.

Best Wishes,

Eric Fernwood