What cities in Arizona would you say are hot for Rentals?

[Claudia Almaraz]

I am a real estate agent in CA looking to buy rentals in Arizona. What would you say is a hot city for rentals? I am doing my research but will love to hear from real people and investors. 

Thank you all in advance for your answers. 

[Shiloh Lundahl]

@Claudia Almaraz I like to invest in real estate the same way I win at Monopoly, I buy the light blue properties in C class neighborhoods that give me the greatest cash on cash return. Then I use that cash to then purchase properties in B- neighborhoods for more long term sustained cash flow to win the game. See example below:

Considering the fact that everyone starts out with only $1500 at the start of the game, the best option with the greatest returns would be to buy in the C class areas until you gain enough cash flow to then buy in the B- areas.  Anything above that gets a lower rate of return except for Boardwalk, however, to build on Boardwalk takes a lot of capital (almost twice as much as you start out the game with).  When I play the game it usually only takes me about 30 - 45 minutes to win if people don't dilly dally and are quick on their turn.

In other words, I buy low end properties in C class areas, when the cash flow is at the highest return. "But don't low end properties come with more tenant drama" you may ask. Not necessarily.  In order to cut down on the drama, we sell the properties on 5-year lease options to where the tenant takes care of the property maintenance and is working towards home ownership.  This also makes it so we don't need to budget for Cap-Ex since we rehab the properties before they move in and everything is in new condition or working order when the tenants move in (and if we find out something isn't working right at the beginning then we have it fixed and include it in the original cost of the rehab). We also don't need to budget for vacancy or turn over since we are selling the property to the end buyer that we are putting into the property as a renter.  And if they decide not to purchase the property then we will put in a couple of thousand to fix the property back up and then we will get reimbursed by the option fee from the new lease option buyer that comes in next (our tenants show a lot of interest in purchasing the properties and we put tenants in the properties that have a high likelihood of being able to purchase the property in the next 2-5 years).

This model allows us to sell a property for about 5-10% above current market value and cut out realtor fees and closing costs (which are minimal and are paid for by the buyer at closing).  We are able to collect a premium rent, usually about $50 above market rent and since the tenant takes care of all the maintenance, we don't need to budget for property management since the tenants take care of most maintenance issues anyway. Otherwise I have my assistants that help with my other businesses take care of the property management part.

We also try to find properties that, after we have rehabbed them, our all in is about 75% of the market value. That way we can get all of our money back out of the property when we refinance with a bank (following the BRRRR model). This then gives us on average about $200 a door in monthly cash flow because they are commercial loans at 20 year amortized 5-year fixed rates.

To follow along with what @Cara Lonsdale pointed out, the price point is important to create cash flow. The price points to where this model works best for us is when our all in is less then 150k.  This model works best in cities where you can get B- or C class properties for 150K or less after the rehab.  

I agree with what @Doug McVinua pointed out about picking the right city.  We like to find these types of properties in:

Mesa, Arizona

Apache Junction, Arizona

San Tan Valley, Arizona

Coolidge, Arizona

Florence, Arizona

Casa Grande, Arizona

and Phoenix, Arizona (although we historically have stuck more to the East Valley).

We find that the rent to cost works best with these numbers.  When people are mentioning purchasing properties in Scottsdale or Gilbert, or even in many areas of Chandler, those numbers wouldn't work as well for our model and a lot of the time the investor has to keep a significant amount of capital in the property to make it cash flow, thus lowering considerably the cash on cash return.  We try to have between 0 and 6k total in our properties and get 100% or more cash on cash returns on average each year, over a 5 year period of time when you include the profit from the sale.

@Mike Malfitani and @Jordan Duvall since you are both newer (or appear to be newer, I hope not to offend) I wanted to bring you into this post so that you could see a model that works in Arizona.  This is the actual model that we use and these are actual numbers we shoot for.  Last year we followed this model with over a dozen properties and we hope to add 10 more to this model this year.