Business model ideas

[Charles Terrizzi]

I am torn in how to start (not to be confused with analysis paralysis, well maybe a little) 

Input is welcome on these lines of thought:

1. Should I seek the nicer areas of town to buy single family rentals and keep them above average nice/bordering on really nice....this idea is that I could get better tenants and lowering my pain is of course the goal here. These types of homes around here would cost $150k and have the best schools and possibly could get tenants from the several military bases, increasing tenant accountability. .....Is this line of thinking good, and will it likely provide better tenants and a better overall success? Possibly?

or

2. Buy very cheap homes in my area, avoiding the worst areas, which I am fairly sure I don't want to venture into....still fix them up nice, not super nice ....and get pretty decent ROI (I would think) but then I would also think I would have to deal with more turnover or tenant instability....I am really thinking in this direction, as I could buy with cash and avoid financing.

Seems like the lower end would actually be better, as rents are not low anywhere around here, and they don't seem to go up proportionally for the nicer homes. The only question is, is the value of having nicer properties worth it? There are many ways to look at it, I reckon. 

My wife will go insane if I talk like this to her, so you are my sounding board.....she's not the business type. 

[Bill Gulley]

Charles, so far you have good opinions based on what others experience in their locations, perhaps averages, that's really not where you start to develop a model. 

We can make assumptions about price levels, quality of tenants, from there vacancy turnover, maintenance, repairs and expected rent increases. Each category will be different and unique. 

Any business model begins with an evaluation of the market, economic factors of a community, stabilization, gentrification and the movement of the population. You are forecasting rental demand, don't look so much as to what it is today but where it will be ten years out. This doesn't have to be a statistical analysis, simply knowing your city, what areas are desirable, the socio-economic aspects of neighborhoods. Drive through them, the folks there will be much like your tenant population. 

IMO, there is no need to consider A or A+ properties unless you have a high turn over of professionals. Those homes here are north of $250K, the rents required are more than the cost of ownership and people will buy if they can before they rent. 

Low end rentals yield more because they take less of a cash investment to get into. You better think about the economic investment at the same time. Time in management, repairs, damages, collections, evictions, police calls, complaints......IMO you're not really ahead as you are earning every dime you can collect!

Somewhere in the middle there are better properties than the lower end, look for owner occupied areas, it's best when you have the only tenant in the neighborhood. People who own generally take pride in their properties, your tenants should be socialized enough to keep their place in like manner with the neighbors. 

Look at the market demand for an area, a high market demand for buyers will mean a higher rental demand for single family homes. 

Identify neighborhoods of middle income homes reaching maturity, market demand is flat and rentals begin to creep in. Elderly owners mean they can't care for properties and moderate income folks have difficulty in maintaining properties. This is a formula for a neighborhood moving into distress appreciation slows are stops and values decline.

A good target market is in an area that is still in its growth period, demand is stable or growing. Appreciation will remain constant. Properties are in fair or better condition reducing time and money in management and maintenance. A 7 year old roof is better than a 15 year old roof and much better than a 20 or 25 year old roof!

As a landlord, part of your benefits of holding will be through depreciation. There is the concept (a very successful one) of inventory turn over, depreciation begins to wear out around 7 to 10 years, your assets have aged, hopefully appreciated and you sell and move on to homes that meet your requirements. You may be moving up in quality and price but generally you still serve the same tenant base as rents increase along with economic conditions. Eventually, you'll near your investment goals and can change your model to longer term holds if you like. 

The economic value of most homes runs about 50 years, during you last "step up" if that was a 15, 20 year old home and you retire to the hold idea, you'll have 30 to 35 years of income, perhaps longer depending on the "class act" property you selected. Then you have a residual value as your net worth or with several exits available to you. 

Also keep in mind that you want marketable homes, to be marketable they must be finance-able as a single family unit. Look to banks minimum loan amounts, if you go below $67,000 a buyer begins needing to pay more in cash and that limits your market, it's less marketable the lower you go. 

What will be an estimated market value of a property over the term yo hold it? If you do turn over inventory, can you market it and have it financed? 

Need to define your investment goals, then build a portfolio that meets those goals. :)