Rent rates on A, B, or C type properties?

Question

Hi BP, I'm a newbie looking to get into buy and hold investing. I downloaded J Scott's SFH analysis spreadsheets from the FilePlace so that I can practice analyzing properties to see if they're potential deals. I'm picking SFH properties from Redfin at this point, and I'm focusing on the suburbs of Los Angeles, mainly the neighborhoods I'm at least somewhat familiar with. I checked craiglist for rentals within a mile of the zip code of the Redfin properties, and filtered the craiglist search to match the number of bedrooms and bathrooms on the Redfin property I was analyzing. I found big differences in the rental rates between what I thought were all B neighborhoods, with access to good schools as well as freeways. The question I have is, what sort of % increases or decreases in rent should I factor in when comparing A, B, or C properties in other cities? How much impact do the local schools have on rent rates? What are some of the other big drivers that impact rents? Thanks in advance!

Aaron Norris · Answer

@Hector Sapinoso you've never heard of PropertyRadar?! It's honestly hard to believe that data is so inexpensive to get these days. I think they have a free trail and I'm a big fan of Sean O'Toole (owner). I do invest in Riverside and the Inland Empire at large. If you look up a video podcast I do, last week I posted a rant because Fortune magazine listed Riverside as one of the top five potentially overinflated market. I explain in the video how well Riverside is positioned. Right before the bust, they did Riverside Renaissance. It was $2 billion in infrastructure projects in 5 years but about 30 years worth of projects. They renovates the Fox theater, the downtown core, did lots of underpasses, we are almost finished with a ton of freeway work, we have four universities that are all growing, we own our own utility...  I grew up here but left for New York City and Los Angeles for about a decade. I never thought I'd return but I did, and I love it. I'm very proud of my home town and how far it's come.

As far as renting to students, just be careful as they've locked down ordinances because people were converting houses into mini-dorms. Check with the city to check what the code is. It has something to do with the amount of non-related individuals in the property and I believe there is a limit not just with that but people and bedrooms. I don't rent to students.  BUT, be aware that UCR is expanding a great deal. Lots of foreign students but they are also hiring something like 300 teachers in the next few years. The med school too at UCR is having their first graduating class.

If you're in Riverside, stop by!  I'll give you some pointers.

Derek Newton · Answer

Aaron makes an excellent point. There are multiple factors to consider, especially in Los Angeles where not only are there sub markets and pocket neighborhoods, but also hubs that drive variation in rent (consider hipster stretches in Silverlake, Highland Park, Echo Park, etc.). As all markets have their differences, it is difficult to quote increases in other places. Make sure you are comparing apples to apples with both the market and the property itself. True comps are the most difficult to find and may require some ingenuity on your part. While schools are a driver for rent, they are only one piece and may not even apply to your target market. This will depend on the property type itself also. When I analyze properties for clients, I look at geography, demographics, walkability, and property features including size, condition and amenities. It helps to physically drive those areas when possible and call any for rent signs to inquire about price and amenities, You might also consider calling local property management companies. Hope this was helpful.

Aaron Norris · Answer

@Hector SapinosoYes, AOA is more focused on apartments. Don't know why I had in my head you were talking about multi-unit buildings. Craiglist is another good resource and PropertyRadar has some rental data I like to reference.

Aaron Norris · Answer

City of Riverside for us has been pretty great. We did some presentations with them when the foreclosure stuff was happening. But, there's been some big change over and all new leadership is in place.  From the looks of it, it appears they are trying to make building more friendly. Would love to hear others weigh in.

Cash flow in Riverside is difficult. You might have to go out a little further into the county to find strong cash flow. Or, perhaps, you're going for a long-term investment and locking in really great rates with more upside long term in equity gains. I think Riverside is well poised in that direction. However, I'm not advocating you get rentals that are going to be a black hole.

Check I Survived Real Estate on Google. Because of our conversation, I think you'd really like that video. Lots of input from multiple facets of the industry.

Hector Sapinoso · Answer

Wow, thanks for all the info and the advice @Aaron Norris.

That's pretty cool that the city worked directly with you. Most of the stories I've heard are about getting the runaround and difficulties with ordinances. In all fairness though, those have been more related to mansionization than initial development. Generally speaking, is the city of Riverside pretty investor friendly?

I've done a few analyses using J Scott's SFH tool on some Riverside houses on the MLS, and I haven't seen anything that would have positive cash flow, and in fact would have pretty large losses. I'm assuming that's because (1) I'm just using the listed price as my starting point, (2) I'm just using a formula for rehab/improvement costs, and (3) I have high accrual rates for PM and vacancy just to be conservative. I'll definitely look into properties in those other areas you mentioned as well. I used to audit the RCCD when I first got into public accounting and I remember that the area near by was pretty nice to walk around.

As far as the event, that sounds really interesting but unfortunately that's too short of notice. I downloaded the slide decks from last year's and 2014's event though, and will take a look through those. Hopefully CB puts up the presentations from this year's event quickly and I can at least read through those.

Aaron Norris · Answer

@Hector Sapinoso This PDF is very old. The vast majority of this is now complete. PS, the City of Riverside also blew my mind this week.  We had a two-lot piece of land that was entitled to be turned into 5 lots but triggered a ton improvements that didn't make sense for the project ROI. Long story short, the city put together a panel from someone in planning, housing, fire and the public works department. In 30 minutes, they bat around our ideas and we figured something out. I've not been through that process before but I hear in most cities, it's not that easy! I was very excited and impressed.

I worked in downtown LA at an architectural lighting design firm and got to bit on a ton of those residential projects in downtown LA and Orange County (Central Park West) in 2005. Residential foot traffic is so key to a vibrant downtown so I'm so happy to see so many residential density projects on the boards. Someone told me the city manager would like to see some 5,000 new residential units in downtown Riverside. Then again, I could be spreading vicious rumors.

As far as where I invest in Riverside, I'd like to get more but haven't seen anything in a while that makes sense for cash flow. Some areas that might aren't the best neighborhoods and I'm really wanting to go long as I mentioned before. If I can lock in those permanent low-interest rates, I'd like them to be newer and in better areas.

As far as commuting, I can't say exactly. I know this is short notice but Coldwell banker Town and Country have a forecast event coming this week on the 9th in Ontario. It features Bruce Norris, Christopher Thornberg and John Husing. Bruce (Dad) is best known for California real estate trends; Thornberg has a great local, state and global perspective; and Husing is best known for his demographics. There is a fee to attend (has nothing to do with us), but if you're serious about investing out here, it's very rare all three are on the same stage sharing their forecasts, perspectives and expectations for Riverside and San Bernardino Counties and the Inland Empire at large.

I think there are several opportunities in Riverside around Cal Baptist University and La Sierra University. Both faith-based schools that continue to grow. CBU, for instance, is building a stadium in the next few years. I already mentioned UCR and their med school and plan to hire close to 300 new professors as they appear to inch more towards a research school. I have no data if they plan to live in town or if they are commuting from other cities. And RCC, the local community college, is finishing another round of building including the very cool culinary arts school in downtown and a new admin building on the main campus. It's known for several of its programs like nursing and cosmetology. With all the growth and infrastructure improvements that have taken place over the last 7 years, I just feel very positive Riverside is in a really good place for growth.

Definitely try to check out that forecasting event. Then, some weekend night, get tickets to something playing at the Fox Theater and do drinks at Mission Inn early and then do dinner at Mario's Place across the street. Whenever I bring people into town, they always say "Wow, who knew."

Then again, maybe I should just keep my mouth shut! Investors, stay away!!! Have a good weekend.

Hector Sapinoso · Answer

Thanks @Aaron Norris for the info. That's a really huge undertaking going on right now. I like the idea of building up an urban core. When you first mentioned it, I imagined the impact LA Live had on downtown Los Angeles, but the map on the pdf looks like there are improvements going on city-wide. Are the planned new residential builds in downtown going to be condos or mixed-use facilities, again similar to downtown Los Angeles? Are there certain pockets or suburbs of Riverside that you focus on for your investments? What other areas of the Inland Empire do you focus on? I found some interesting economic reports at the link below. Would you say that Riverside is more of a commuter city, with most people driving in to the downtown core, or are businesses dispersed throughout?

http://riversideoed.com/resources/city-data/beacon...

Aaron Norris · Answer

You're a fellow Excel nerd @Hector Sapinoso . Glad I'm not the only one. It's actually one of the only reasons I ended up working with my Father. Who else is going to create his market timing reports with over 400 charts!!!?

Yes, the Riverside Renaissance was funded by the bond issuance. They used to have a website dedicated to the entire endeavor but it looks like it's now down. However, I did find this PDF that talks about all the different projects that they worked on within the project. not sure how old it is:

https://www.riversideca.gov/pdf2/rivren.pdf

I wish they would have kept the old site up because this is pretty old and doesn't show the status of the projects. There are several private projects getting started in downtown to add density and there is a specific goal of turning downtown into an urban hub. more restaurants are popping up and the addition of more residential will be awesome. We have two new hotels going in and three new large residential projects going in (one going into the old Imperial Hardware spot on Main street which will be mixed use, one on Market Street which is a block and probably apartments, and a new project directly in front of the Fox Theater by Mark Rubin.) Can you tell I'm a Riverside nerd yet?

Let me know when you're in town. We're actually very close to UCR and I can show you around.

Hector Sapinoso · Answer

@Aaron NorrisI haven't seen PropertyRadar but I checked it out and it looks like a pretty good tool to use. In the FAQs it lists out the various export functions and the Excel nerd in me smiled. btw, is that your quote on the home page? Are you or your company related to them at all?

As far as Riverside, I wasn't aware of all of those improvements, and that makes it sound all the more intriguing. Were a lot of those improvements funded by public bonds or private money? I'm curious, as I'm not sure how the use of public money versus private would impact the tax base in general and the local economy as a whole. I have a feeling that might be a whole other discussion though.

Also, thanks for the note on renting to students, I wasn't aware of that. UCR was one of the main reasons I wanted to look in Riverside, and you reminded me that looking up government regulations is another step in the process I need to get under my belt.

Lastly, I'd definitely love to meet up some time for coffee.

Rent rates on A, B, or C type properties?

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