Choosing a Long-Distance Rental Property: Where to Invest?

Question

Hi,I am fairly new to real estate investment. I currently live in the Midwest and am interested in purchasing a property in Huntsville or Chattanooga. I lived in the South for a while so I am comfortable investing in either of the cities. I have been researching the Huntsville market for some time now, and one day I realized that there were a lot of rental listings on Zillow that had been sitting for more than 100 days, which is a red flag to me. Then I looked up rentals in Chattanooga, and all the listings were relatively new, within 30 days. I'm not sure if this could be a major factor for someone like me in choosing an area to invest, but the statistics suggest that Huntsville has a lower overall vacancy rate. Any thoughts on this?

Korey Pell · Answer

Hello Sehyun Lim!

Depends on what type of Rental property you're looking for. Short-term? Mid-term? Long-term?

Chattanooga is great for Short term and Mid term rentals(typically used by people who travel for work)!

Nicholas L. · Answer

@Sehyun Lim

invest wherever you are located

Michael S. · Answer

@Sehyun Lim - here are some answers to why rental properties in the Huntsville market were on zillow for over 100 days:

1.  The holidays and winter season is always tougher to rent than spring/summer/fall, which is when the 100 days you referenced would have occurred

2.  The rental is priced over $1500/month and is either in a C/D neighborhood or the property is a dump

3.  The rental is priced over $2000/month, which move much slower in general here

FYI - you should definitely speak with folks in the market you choose who have knowledge and experience firsthand for that rental market.  Using zillow as your only data source for analyzing a rental market is analogous to buying a stock because you like its ticker symbol.

Tom Blue · Answer

Hi

We lived and owned in Huntsville. The market is always strong because of the growth there as well as diverse people who travel in and around there with the Military, space and rocket industry, as well as many other tech jobs.

Most people prefer to buy and the past year rents are priced much higher then people want to pay.

We worked with Carolyn Dietrich with Dietrich rentals in Huntsville, AL.

We also have rentals in TN not Chattanooga but Pigeon Forge.

good luck.

Michael Smythe · Answer

@Sehyun Lim

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+, zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680, some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620, many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with zero or negative relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

Lindsay Davis · Answer

@Sehyun Lim,

I’m active in both Chattanooga and Huntsville and would be happy to provide some perspective. To cut to the chase, the number of days a rental property on the market may not necessarily signal a market-wide demand problem. (From a demographic perspective, Huntsville is one of the fastest growing cities in the Sunbelt, and this helps buoy rental demand.)

Instead, days on market could signal that there are idiosyncratic issues with the rental itself. For example, it could be in an undesirable or unsafe location, overpriced relative to the market, managed by a property manager or landlord of poor repute, or be substandard in quality.

Nonetheless, if you’re more confident about investing in Chattanooga, there’s no problem with that either—it’s a solid market. However, do note that Chattanooga is growing at a slower pace than Huntsville is—a trend that’s unlikely to change anytime soon.

Lane Kawaoka · Answer

@Tom Blue don't know if you have any 10 acre land for sale. We build 100+ unit apartments in HSV. We have a few sites now and are looking to expand.

Dena Puliatti · Answer

@Sehyun Lim  I'll send you a DM. I work specifically with out-of-state investors to buy, sell, and manage their rentals homes.

Choosing a Long-Distance Rental Property: Where to Invest?

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