Whats your criteria ??

Question

Hey guys and gals,

Just wanted to create this post to talk about what everyone's criteria is for their rental property investments ? After sitting down with my wife we found out that our freedom number is about 6500 a month. So we are working together to put together a plan this year to start acquiring properties to get us closer to our goal. We want to purchase homes between 40-80k (affordable living) that will generate us at least a 10-12 % cash on cash return with a minimum cap rate of at least 10 percent. Ideally we need 13 properties that net cash flow about 500 a month. After running the numbers on several homes in our area I can get net cash flow about 200 -250 a month. Using the calculators on bp with 5% percent vacancy, 7% repairs, 7% cap ex and 8% management. My question is should I just keep making offers in tell I get a property that fit my criteria to a T or should I maybe start looking elsewhere to fit what I am looking for? Or  am I focusing to much on the calculators numbers and not taking enough action. I say that because if you were to add back some of the vacancy and management I am getting closer to the 500 a month goal I am trying to achieve . Side note I plan on managing the properties myself. Looking forward to reading your comments !

Jason Bergan · Answer

Don't use cap rate as a factor in my opinion. We use cap rate to evaluate a property and to get a 10% cap you usually have to buy extremely distressed properties or buy in undesirable areas. For my investors, I show them the average list to sold price in the areas they're looking. You can write offers all day but sellers know what those numbers are as well and are unlikely to accept if they don't see it as close to fair. Don't factor in a management fee unless you're planning to pay yourself for it on your books. These forms and blogs are great, but you still have to take everything with a grain of salt. The Iowa market is still hot right now and in most price points is a seller's market, so not everything works in the marketplace as well as it does on paper. Also keep time value of money in mind, if you go another year without getting into a rental due to your criteria, you're losing all that potential income and experience.

Daniel Fane · Answer

@AJ Leman Headed to 10x growth con this week cant wait to get to Miami to escape this weather for a few days!! I think for my short term goal I am going to focus more on cash flow to try to get to that freedom number as fast as I can. Ottumwa, Fairfield, Albia are areas that I have been looking. I don't see much in this terms of appreciation in this  area but I can almost make since of the cash flow. There are enough manufacturing jobs that will keep people  employed in order to survive, but based on the demographic and being lower income I think prevents folks from actually purchasing their own home. Which is why I am looking at rental properties here and I also live near by. Appreciate your input.

AJ Leman · Answer

Hi Daniel,

Hope you are staying warm tonight!

I think your planning sounds pretty good.  I agree with @Jason Bergan that the forms and books are great but things can be different as well.

I should probably be a bit more goal oriented, but I tend to take what comes my way.  Some of our properties are more cash flow plays, while others are more appreciation.  For example, in the Iowa City area, things are pricey, but usually appreciate nicely.  In some smaller surrounding towns you can get better cash flow deals, but the appreciation is not as great.  I manage some properties and hire out some others.  I still work a full time job, so there is that as well.

My two cents: be patient for a good deal, but also flexible considering location, appreciation and cash flow potential. Not sure all that helps, but its been a decent strategy for us.

Jake Riordan · Answer

I could be wrong here, but looks like you're looking at just single family houses.  I don't personally buy them for rentals since the returns aren't usually there.  I much prefer duplexes up to about 8 units or so.  Plus, in a SF if it's not leased then you lose $ for that month, where as a duplex & up can still cover expenses even if 1 or 2 units are vacant.

Jason Bergan · Answer

@Daniel Fane I wouldn't suggest breaking into other markets if you're not comfortable with it yet. Investing out of your area takes a lot more trust in your local agents, contractors, etc so unless you have those connections in place, you could end up paying more for small mistakes. My advice was going to be to edit your criteria to better match your market while still making sure you could make a profit. Also, when manufacturing is your main employment industry, make sure that there are multiple manufactures in different sectors, otherwise one company shutting down or moving locations could take away years of hard work. I notice you're a licensed realtor, so you should have access to RPR. The reports you can run will give you a no-nonsense area overview that breaks down what industry people are employed in, as well as what percentage own vs rent. Observations are good, but make sure you're always checking the facts as well.

Joseph A. · Answer

@Daniel Fane if you have a specific criteria and it doesn't work in your local market, maybe you should consider investing in a different market where the numbers make sense. But as always make sure you do your due diligence.

Daniel Fane · Answer

@Jason Bergan Thank you for your input. Do you think it might be worth looking in other markets right now in Illinois or possible Kansas City Mo ?  I wanted to get my first 2 or 3 properties closer to where I live so I can gain experience with the entire process before I hire out or even attempted long distance rentals.

Whats your criteria ??

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