looking to buy fist rental, considering Lansing, Michigan

[Jordan Szabo]

Hello BP community,

I'm a brand-new member and I'm looking to pull the trigger on my first rental property soon. My primary residence here in San Diego has a lot of equity and I plan on getting a HELOC to pay for my first rental. I would like to buy a SFH in the 100K price range to start. Given this 100K price range, I know that limits my potential housing markets. I am leaning toward Lansing, Michigan although I'm still very much in the research phase right now. I know Lansing has its own set of pros and cons, but so far, I like this area to start out with. One other pro about Lansing is I have a close friend who lives nearby and would be willing to keep an eye on things for me. If I find the right house and the right property management company, I think it could work well. Any opinions, advice? Anyone want to talk me out of this? Can anyone shoot major holes in my theory? I appreciate any feedback. Thanks!

[Dan H.]

Quote from @Jordan Szabo:

Hello BP community,

I'm a brand-new member and I'm looking to pull the trigger on my first rental property soon. My primary residence here in San Diego has a lot of equity and I plan on getting a HELOC to pay for my first rental. I would like to buy a SFH in the 100K price range to start. Given this 100K price range, I know that limits my potential housing markets. I am leaning toward Lansing, Michigan although I'm still very much in the research phase right now. I know Lansing has its own set of pros and cons, but so far, I like this area to start out with. One other pro about Lansing is I have a close friend who lives nearby and would be willing to keep an eye on things for me. If I find the right house and the right property management company, I think it could work well. Any opinions, advice? Anyone want to talk me out of this? Can anyone shoot major holes in my theory? I appreciate any feedback. Thanks!

OOS RE investing has numerous challenges that are greater than when local.  Having a friend from the area that is willing to help is nice, but it does not fully compensate for the challenges.  

residential RE is not passive, even with the use of a PM.  You are still the asset manager.  You are responsible for hiring, managing and directing the PM.  No one will look after your property better than you can. 

As a non local, your market knowledge is likely lower than local investors.  Too often OOS RE investors purchase in poor areas, over pay, and do not understand some of subtleties of the local market.  

$100k properties indicate that the property historically has not kept up with inflation.  This implies you are not likely to make any return from appreciation (after accounting for inflation).  More subtle though is these properties likely have rent growth that does not keep up with inflation.  This would lead to reduced returns over time in inflation adjusted dollars. 

$100k properties have lower rent points.  Why would that matter if I am paying less for the property?  It is because certain costs are similar in all markets.  For example, material costs do not vary significantly between markets and, if they do, you have the option of purchasing online.  Let’s assume this is a 1% percent $100k property and a 3/1 so it gets $1k in rent.  The maintenance/cap ex in a C+ area will be ~$400/month.  In San Diego I can find LTR PM between 6% and 8%.  There is no way a PM can do a decent job for $80/month.  I suspect your all in PM costs including signing new tenant, re-lease, inspections, rent collection, dealing with maintenance contractors will be at least $150/month (and if it is less I would question what sort of service you are getting).  The 50% rule does not work in these low cost rent markets.  $550 for PM and maintenance/cap ex.  Then add principle, interest, property taxes, insurance (PITI), vacancy, and miscellaneous costs (accountant/tax man including OOS taxes), unexpected utilities (such as for a slab leak, umbrella policy (I divide mine across all units, possibly LLC, office supplies, etc.)).  

I challenge you to show me where the profit is going to come from.  

I recognize the challenges of our market and have not purchased in just over 1.5 years (I purchased $4m that month) which I suspect is either my longest time or approaching my longest time without an RE purchase in a dozen years.  However, buying cheap low unit count properties is unlikely to be the solution you seek.  

good luck