5 Learnings From First 5 Rentals

[Michael S.]

About 2 years ago I determined that I wanted to get into the real estate game. Just this past month, my wife and I hit our first major milestone -- 5 homes! Because BiggerPockets has been instrumental in helping us reach this stepping stone, I wanted to give back through knowledge share. While I was originally going to tell our whole story, it turned out to be too long. Instead, I'm going to share 5 learnings I've had over the past 2 years from buying in San Antonio, Dallas, Jacksonville and Atlanta areas while living in the NYC area.

#1: What You Want Isn't Necessarily What Your Tenant Wants

The first house I purchased was amazing. My wife and I loved it and wanted to move in ourselves. We negotiated the brand new upscale washer and dryers to stay with the home and also wanted a play set to stay in the backyard. The pink and orange coloration of the paint in the home brought a great character and jived well with the furniture used for staging. A converted garage seemed to be a great idea because, being a NYC resident at the time, I didn't see the point in having a covered garage. After closing and working with the property manager, reality struck and my perceptions were wrong. The washer and dryer may eliminate tenants who already have their own. The play set (fortunately was not included at closing) would have been a liability and I would have had to pay for the removal. The orange and pink paint had to be painted over with a neutral color. The converted garage would eliminate tenants who enjoyed garage space and wanted to protect their car / cars, but it was helpful for someone who needed a first-floor room for a guest. This was my worst purchase, but is still one I am comfortable owning since it is cash flow positive and got me in the game.

#2: I'm Glad I Avoided Turnkey Companies At First (But I May Consider Turnkey Later)

Prior to purchasing my first home, I spoke with a variety of turnkey companies and read more than a few pro/con threads (including one I started). 

Here is why I opted to not use turnkey companies to purchase any of my first 5 homes and instead used a RE agent or wholesaler:

• the MLS provides a much deeper population of potential homes. Turnkey companies generally focus on a handful of homes that may or may not work well for you. Also, the locations generally favor those that are in cooler sub-markets, limiting appreciation.
• the MLS (or working through a wholesaler) allows you to buy under appraised value whereas turnkey properties don't. I've have the opportunity to buy properties off the MLS in appreciating areas at under appraised value through negotiating lower prices with sellers who were becoming motivated. Turnkey properties tend to sell at what I perceive to be higher than market values.
• MLS properties allow you to pick and choose based on more difficult to quantify characteristics. Land, and especially a functional backyard, is important to me. The turnkey homes I've checked out may be close to post-ARV prices for MLS properties, but I've noticed that MLS properties tend to have more usable land. Some of the turnkey homes I've checked out have land at a horrible incline or land that just isn't usable.
• Turnkey rent rates tend to be higher than what seem to be normal market rates. This isn't the case for everyone, but I believe that some turnkey companies inflate their rent rates. A simple way of checking is by doing a quick search on Zillow for rentals around the area of the turnkey property. Shop as a potential customer and really ask yourself if the rental numbers from the turnkey company make sense. I also noticed one of the top turnkey companies using a 1 month free promotion to get tenants into a lease prior to selling the home to a turnkey purchaser. I'm not sure how prevalent this is across other providers. Of course, you can also contact other property managers for opinions as well.

Here is why I might consider a turnkey company in the future:

• You can buy more homes. Repairs are built into the loan, so repair costs can be done by 80% financing within one loan.
• Turnkey companies save time. If you find a company you trust, there's value in removing the time-intensive searching process.
• I'm still holding out hope that I can find a turnkey company that truly provides strong prices in a hot market with fair rental rates.

#3: Buying "With Equity" At A Distance In Hot Markets Is Easier Said Than Done

I've heard numerous times that you should buy a house with built in equity. Unfortunately, this is hard to do at a distance. Wholesalers in markets may indicate that you are buying a home at a discount, but this isn't actually the case. Many of the wholesalers I've received numbers from inflate equity significantly (except for one wholesaler who has my trust entirely). Don't take someone's word for what equity is in the house -- instead, compare against recent comps on your own. Then use your own judgement on if the home is actually a strong deal.

#4: There Is Value In Being In Multiple Markets

Now that I am in 4 markets around the USA, it provides me with perspective that I didn't have before. I've been able to compare property management and agent service levels so I understand good and bad service. I now have four teams I trust, so this allows me more freedom to shop in any market for my next property based on what I'm seeing with my own properties. At the same time, having worked deals with teams with multiple agents broadens my network of agents  and property managers who trust my ability to close without trouble to provide them with incremental business.

Of course, there is also value in diversification in case of an economic downturn that doesn't hit all areas equally...

#5: Understand What Your Strategy Is

One of the downsides of a site like BiggerPockets is that it is so easy to jump from strategy to strategy. While shopping for homes, I think I inherently understood my strategy, but it took a while to really write out what that strategy is. 

Here is what was important to me for my homes:

• home must be cash flow neutral or positive after expenses.
• home must be B or A level property. I would need to feel comfortable living in the home and neighborhood and don't want to deal with problem tenants. This needs to be a hands-off home.
• The home must be a home desirable for property managers to manage. I don't want to be stuck with a home that property managers reject when I'm doing this at a distance. Again, this must be a hands-off home.
• home must be in growing markets (population growth and job growth) to allow for some appreciation over the next 20 years.
• home should be in school districts at least a 4/10 on great schools (the higher, the better).
• home should be built after 1980 so I don't deal with old home surprises.

Here is my long-term strategy:

• Build a portfolio of 20 homes between my wife and I.
• Pay 25% down on each home rather than 20% down to help with cash flow numbers during an eventual downturn.
• Sit on homes for 20 years while collecting growing amounts of rental cashflow. 
• Use portfolio to gain financial independence with cashflow.
• Keep process as hands-off as possible with property managers managing homes and a CPA and bookkeeper managing taxes.
• Consider apartment investing and fix & flips in the future.

Here is what I am looking for with homes 5-10:

• Grow in my current markets with my current teams.
• Explore a couple of more markets (I'd like to get into Orlando). If I find a wholesaler in another southern or western market who has strong deals, I may be tempted as well.
• Expand my network of wholesalers who are honest in their communication and estimates. Even better if they offer to manage the renovations and property management.
• Buy a personal residence in Northern NJ (less for financial reasons and more personal reasons). I'm looking into First Look HomePath properties now to find something that won't stray too far from my investment requirements. I'd like to use as a live-in flip.

Please connect with me if:

• You are an honest wholesaler in a strong cash-flowing market in the south who secures your own deals and is looking for a buyer (or are willing to connect me with one you know).
• You are in any of the markets I am in and am willing to share your thoughts of sub-markets I should focus on.
• You are an active investor who follows a similar strategy and want to swap ideas and thoughts on markets (even more valuable if you are in Northern New Jersey or NYC).

Thanks for reading! I hope this helps someone take the first few steps to home ownership. I'll look to update further once I reach #10. Also, I'm happy to answer any questions on this thread.