Potential deal and rental buying criteria in high priced markets

[Zachary A.]

Hi! I'm a newish wholesaler (I've completed a couple deals) in the Sacramento area, and I frequently run across houses that are too nice (and expensive) for the typical flipper on my buyers list. I'd like to figure out how to sell wholesale leads like this to landlords, but I don't understand how to analyze rental property in high price markets. 

The thing is, I've read the Bigger Pockets Book on Rental Property Investing, and listened to enough podcast to know that the general wisdom around here is that you don't invest in properties that don't cash-flow. Most of the houses you can buy around here, even at a discount, don't cash flow if you include all of the oft-forgotten expenses such as cap-x, property management, and maintenance. So, when I try to analyze based on cash flow, every property looks bad, but I know there are investors out here, even professionals, that own SFR rentals.

Here's an example deal. I'm talking to someone right now who wants to sell a property for 168k, and it probably needs 20k in work, so let's call acquisition about 188k. Market rent is $1200. ARV is only about 210k, so the margins aren't great enough to flip it. With 20% down, PMI and taxes would be around $870/mo, so setting aside $100 for maintenance, $100 for cap-x, $100 for property management and 10% for vacancies, we're pretty close to breaking even, but not really positive cashflow.

So my question, especially directed at professional landlords in high price markets, is this: what do you base your purchase decisions on? If not cash flow, maybe cap rate? Who's buying rental property that doesn't appear to cashflow? And how do I find these people? I'd also be interested in talking to any local landlords who are actively looking for more properties.

[Derek Daun]

In general, I like tweener properties that are too expensive for the flippers, but also not nice enough for a home owner looker for turnkey. I've bought three properties like this off the MLS in the last three years.

With that being said, though, that property by the numbers is not really investment grade, even for me. 1200/188k = .64%. I can find better deals than that on the MLS. You also didn't include water/garbage which a lot of landlords still pay around here, so that's another $150 cost. (Unless you're confident that 1200 rent is with the tenant paying).

When do I see people buying for that rent ratio, it's often in nicer areas, where they will high grade tenants to at least keep the vacancy and repair numbers lower.