SoCal N00B Looking to Invest in the MidWest

[Peter Aziz]

Hey there, BP,

A little about me - My wife and I have been investing in SFRs in SoCal since 2011 and have done okay putting together a small portfolio; However, the market right now in SoCal, or at least in our desired geographies, is at a point where we just can't seem to justify the market rent:price ratio (read high price appreciation without an equal % increase in rental prices). On average, we're getting about an 8.5% CoC return on our properties, but the real 'money' we've made has been through appreciation (110% return on invested capital, but that's all equity).

Our plan all along has been to purchase enough properties where we can retire and not have to worry about taking draws from our 401Ks, Social Security, etc., etc., etc.. We would like to be in a position where our current after tax W2 income is 150% subsidized by real estate cash flow.

It appears that the MidWest might be the region to invest in in an effort to leverage the highest CoC returns. Indy specifically is appealing. I'm seeing properties on the West Side, just south of Questend, going for $40K - $60K that are renting for $600-$650/month. The numbers look fabulous, but I'm sure there's so much more that I need to look into. I'm starting to my diligence, but I have some basic questions. I'm hoping that I can leverage this community's expertise to at least get a tip as to where to begin addressing some of my most basic issues/concerns about investing in the Midwest. 

• What are the typical vacancy rates in the area - I realize the answer to this is going to be very geography specific, but how do you even go about determining vacancy rates;
• Is non-payment of rent (uncollected rent) an issue and what are investors accounting for;
• What are the typical eviction timeframes one should expect in Indy or in St Louis;
• Although $600/mo in rent satisfies the 1% rule assuming a $60K purchase price, can an investor in fact accrue maintenance funds (while operating in the black) quickly enough to satisfy maintenance needs as they arise (i.e. a 10% maintenance accrual on a $600/mo rent is only $60/mo or $720/yr. If a new roof is needed every 10 years and the cost is $5K, you may quickly run out of maintenance funds to satisfy any other repairs, such as a furnace, that may be needed); and
• What should one account for for rental rate appreciation in the region? One of my concerns is that if I'm living in a high cost / high inflation area like SoCal and am experiencing 6ish% annual inflation, but am only able to raise my rents in the MidWest by 2% per year, is my true purchasing power actually decreasing year over year?

I really appreciate you all taking the time to walk me through any details you'd be comfortable sharing.

Cheers, Peter

[Lee Fjord]

Hi Peter,

I currently own 7 doors in Saint Louis and am growing my portfolio rapidly.  I am also an agent with Renters Warehouse handling leasing of other investors properties here as well so, I see all sides of the deal  

All of your concerns are very valid. 

1. Vacancy rates I assume are 10% across the board.

2. Non- payment is rare but you can usually expect for them to be paid late on a regular basis by some tenants if you have several properties (set expectations on your tenants - management should bo this for you) 

3. Evictions take around 45 days to do but only happen around 1-2% of the time   Usually a non-paying tenant will just move out which then you are talking about a vacancy period and higher than average turnover costs for cleaning and painting etc.

3. I set aside $100/door/mo for maintenance and cap-x on my smaller properties regardless of the rent $. 

4. Rental rate increases are not an exact science.  They depend on overall supply and demand of your type of property within a 2 block radius.  I have had properties that went from $650/mo to $800/mo in a single year because the neighborhood improved around my property and demand increased.  I have others where if I have a tenant there who is paying $500/mo and I could probably get $550/mo if I turned it over but, the turnover cost would be $2-4K because it will need to be painted and cleaned and marketed for lease and it will probably be vacant for a month or possibly longer. So, I’ll be happy to let them stay and keep the rent at $500 for a few more years (that tenant has also been there for 6 or more years).  Long story short, make sure you buy in an area where the neighborhood is improving and continually keep your properties in good condition and you will have much fewer issues than if you ignore them.