Stuck in analysis paralysis and in the military

[Christopher Heidrich]

I’ve been part of the BiggerPockets community for a while, but this is my first post. Thanks to everything I’ve learned from the podcasts, books, and this community, my wife and I currently own:

• A triplex in Maine
• A single-family rental in San Antonio
• A single-family primary residence in Las Cruces, NM, which will become a rental when we move in a few months

For context, I'm an active-duty Army officer with about 12 years left until retirement, and my wife works for a university in Boston. Our initial goal has been to buy a property every time the Army relocates me (roughly every two years) and rent it out afterward. We've utilized the VA loan for our current home, and this strategy has worked well so far. We're fortunate to have an above-average income and live well below our means.

This summer, we’ll be moving to Detroit (PCSing in August), and we’ve saved about $120,000 to invest in addition to having funds set aside for the home we’ll purchase in Detroit.

The reason I’m posting is that I’m struggling to decide how to best allocate the $120k. Our portfolio currently cash flows, but cash flow isn’t our top priority right now since we plan to use this portfolio to supplement our retirement in 12 years when I leave the Army.

My biggest challenge is committing to an out-of-state market. Being in the Army limits my ability to travel and explore markets firsthand. On the other hand, I’m hesitant to simply pay down more of a property, as we don’t need the immediate cash flow.

Fortunately, both my wife’s job and mine are recession-proof, which allows us to be a bit more aggressive with our investments.

I’d really appreciate advice from investors who have experience with frequent moves or military service. I’m not looking for a step-by-step guide, but I know I’m not the only one in this position. Any insights would be incredibly helpful!

[Drew Sygit]

@Christopher Heidrich

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

Property Class will typically dictate the Class of tenant you get, which greatly IMPACTS rental income stability and property maintenance/damage by tenants.

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.

If you buy/renovate a property in Class D area to Class A standards, what quality of tenant will you get?

Similarly, if you put several Class D tenants in a Class A 4-plex, what do you think will happen to the property?

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+ (roughly 5% probability of default), 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 (around 10% probability of default), 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 (approaching 22% probability of default), 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 little, maybe even 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 (almost 30% probability of default), 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.

The City of Detroit has 183 Neighborhoods we’ve analyzed.

DM us if you’d like to discuss this logical approach in greater detail!