Headache-resistant cash flow markets: how do you mitigate?

Question

I’m a new investor deciding on markets to invest in.

2% rule usually is great but the concern from guys like David Greene and others is that the better cash flow and the lower the entry price, the more “headaches” you will get. For example, just looking at a bunch of mutifamily properties on Zillow for Detroit, average year built is the 1930s.

But I’m wondering if anyone has found a creative way around this potential risk. How could you measure the “headache-iness” of a property in the first place?

For those investing in 2% cash flow markets, how do you mitigate headaches?

Bryan Blankenship · Answer

Invest in more affordable markets.  You can work around both of those issues by choosing a market that's not well, say, Detroit LOL.

Ohio is right next door and they are much friendlier to landlords/business, more affordable, and they operate at the 1% rule in most markets.

Sometimes it's better to get rid of the problem than to try to solve it.  Like what @Andrew Bang said... you're risking being a slum lord and low appreciation, which also gives you liquidity issue. (going to require a TON of advil)

Eliott Elias · Answer

If you wouldn't live there it is a headache market

James Wise · Answer

You hit the 2% rule, you're dealing with low income properties. If you got low income properties, you got headaches. It's that simple. That's the business.

Andrew Bang · Answer

Advil, and hire a property manager that doesn't mind being a slum lord.   The other side of these lower entry prices is less appreciation and long days on market when you need to exit.

Sam McCormack · Answer

@Jason Carrillo

I would say Ohio could be a good place to start. I am in Cincinnati, it's landlord friendly, lower prices, good rent ratios (1%+), etc.

Also, you can buy a not great property and don't have to be a slumlord. Being a slumlord depends on how it is managed, not the property itself. That's my advice

Bob Stevens · Answer

Well I would never live in parts of Cleveland, (actually anywhere) especially East Cleveland, HOWEVER if you know what you are doing the " headaches" can be very financially rewarding. Its ALL about your team and knowledge

All the best

Nicholas L. · Answer

@Jason Carrillo

don't try to pick the "best" market in the US.

pick a market you know or have a competitive advantage in - it's close by, you went to school there, you have family there, etc.

Leo R. · Answer

@Jason Carrillo you mentioned old houses, and it sounds like you're suggesting that old houses automatically come with more risk/headaches.

One of the biggest misconceptions by inexperienced investors is that new houses are inherently less costly, and less headache to maintain than older houses.  This is true sometimes, but in some scenarios, brand new properties end up producing significantly MORE maintenance/repair headaches than older properties.

The reasons are:

1) Some building techniques/materials are far superior to those used in the past, but some are not, and some are unproven. For instance, I'm very doubtful that pex will have a longer service life than copper plumbing. The trend toward flat roofs is just silly in most areas (bc it causes water diversion problems, which then cause a myriad of other problems). Etc.

2) A new house hasn't gone through its "growing pains" phase. All sorts of problems can emerge in the first few years. For instance, inadequate/improperly designed water diversion systems can cause major problems (e.g.; rot, masonry degradation, foundation settling) that won't emerge for several years. I personally know people who bought brand new, multi-million dollar, beautiful luxury homes, only to have serious foundation settling over the first 5-10 years of ownership (and the repair bill was in the hundreds of thousands!).

On the other hand, an older house has been around so long that these types of problems have either been addressed by previous owners, or they're often plainly visible. For instance, if there's an unresolved settling issue, you can probably see cracks in the foundation, buckling, un-level floors, un-plumb doors, etc. ...but, if everything is solid now on an old house, it'll probably remain pretty solid for the foreseeable future.  As my GC says: "if it's stood straight and true for the last 100 years, it'll probably make it at least another 25".

Don't get me wrong; there are plenty of issues/problems/quirks that old houses have that new houses don't, and an old house can obviously have hidden problems and big repair/maintenance bills too...but, the point is: a brand new house is not a foolproof solution to repairs/maintenance (and in some cases, a brand new house can be a much bigger gamble than an older house).

This is a particularly important lesson for inexperienced investors, who tend to be the most prone to "shiny object syndrome" (the tendency to let nice aesthetics distract from real, underlying issues). There are no shortage of lipsticked pig properties out there, and learning to spot them is essential for successful RE investing...we're all susceptible to "shiny object syndrome", but being aware of it is the first step to avoiding it!

Good luck out there!

Jay Sausmer · Answer

There's also two types of headaches - the others addressed tenants as headaches above. But part of the renovation process is eliminating those headaches from the house itself now, so they don't cause problems later. I have houses from 1908 and 1935 that will not cause any headaches for a long time.

Joe Hammel · Answer

Really Feel like I/we have nailed down that best balance of Price/Roi/location here in Metro Detroit

My rental portfolio is here and performs extremely well with minimal headaches.

Purchase: $80k-$130k

Rent: $1200-$1500

ROI: 10-14%

Cash flow: $250-$350/door

Appreciation: Double digit (for past 10 years, will gladly send data)

Location: C+, B-  (suburbs and certain markets)

Basically 1.2-1.4% deals

We have over a dozen Fortune 500 companies just in Metro Detroit with huge Healthcare, Auto, and mortgage industry National footprints. Ever hear of Ford, Rocket mortgage, or Beaumont hospitals? All complimented with Amazon fulfillment centers, google, and more tech manufacturing jobs.

The bad reputation comes from OOS investors wanting $20k D market properties. Those are your headache properties lol.

It's a lot about perspective and not getting greedy. The types of properties I mentioned above are easy to find MLS deals. They're double digit ROI and easy to find. Some always seem to want "more" and they end up sitting on the sidelines waiting for unicorns.

Headache-resistant cash flow markets: how do you mitigate?

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