How to Find a Good Rental Market

Question

Hi All,

I am a new investor looking to find a good market to purchase Rental Properties.  I live in Southern California where it is tough to find areas where you want to buy properties that cashflow.

What I'm hoping to get is some good indicators of good rental markets that have been gleaned from experience.  Since I am in CA the closer the better, but the only places I'm not interested in are the complete other side of the country (with maybe the exception of FL?).

Any input is appreciated.  I am doing research of my own and have established some loose "criteria", but I wanted input from those that have done it on what makes a good market and how to find it.

Thanks in advance!

Darren Sager · Answer

@Nik Parks and @AMY NEWTON I read both your posts and even if you're new to real estate investing a good piece of advice is to invest as close to where you live as possible.  You don't have to leave the NYC metro area to find good investments.  They're out there right now and its the reason why our area is having the largest influx of investment in dollars compared to any other place in the US.  You might not be able to meet the 2% rule that many talk about, however having your investment close to home allows you to properly monitor your investment and save money on property management costs, increasing your cash flow. I personally prefer to buy and hold and that's what I've done here in NJ.  Being a landlord is not all that difficult as long as both parties have the same expectations of the other.   Please watch the forums also and you'll see there are a number of us in the NYC area to meet up.  You both should join us at the next event.

Nik Parks · Answer

Justin  Joseph, even though we're on opposite ends of the country (I'm in NYC) I think we're going through the same thing. Best of luck.

Michael Lauther, can I send you a PM? I would love to talk to you about investing out-of-state. I've been renting in NYC for about two years. I'm brand new to REI (still saving up my down payment) and the numbers are absolutely crazy here. I was hoping to be a OO of a multi family in NYC…but the numbers just don't add up. I'm trying to find a good market but I don't really know where to start.

Mark H., those are really good points—especially no. 4. I've learned that the eviction laws in NYC are ludicrous. It can take up to 12 months to evict someone. I know of someone who currently has a bad tenant. The tenant has not paid his rent in five months.

Michael Lauther · Answer

Justin  Joseph , Mark H. makes very valid observations. I could not find a market close to home I live in NY and Invest in Dayton OH. It has been a challenge and I am still finding my way. I prefer to drive because the flights from NY to Dayton are expensive and the airport hassle is more than I want to deal with. I need to visit my properties several times a year and maintain contact with those I have met to help me manage the properties. I fully agree with you that if you can find a deal that fits your needs close to home it is preferable but take it from me, do not invest close to home simply for convenience. If the market does not support your  objectives you eventually will lose money.

Account Closed · Answer

Justin,

Hailing from the Silicon Valley where jobs are abundant, but the cost of living is expensive. It has been that way for decades, and it appears to get more expensive every year, or is our standard of living going down?

I feel your pain.  The 2% rule is out the window.  The 1.5% rule is out the window.  The 1% rule applies to some areas, but the 0.3%-0.5% rule is more of the norm. :)

Given how cheap interest rate is, the break even is around 0.75%-0.8% IMO.  Here in the Silicon Valley, vacancy is almost non-existence based on my experience if you have a desirable unit, which outshines your competition.  You could charge a 10% premium for your unit, and you get better tenant.  I only look at net cash on cash return at the end of the year. Appreciation is icing on the cake, but it has outperformed my cash on cash return lately.  Buying right would give you instant equity in your investment.

As I was taught, there is no right way; there is no wrong way; there is always a better way.  Hope you will discover a "better way" to invest to give you the return you're looking for.

Cheers.

Pete Nater · Answer

http://reianyc.org/ is the official REIA in the NYC area, a chapter of the National REIA.There's a meeting next Wednesday.

There is also a meetup group of NYC area BP members: http://www.meetup.com/Unofficial-BP-NYC-Real-Estate-meetup/

Justin Joseph · Answer

@Arthur Garcia not offended at all, apologies if it came off that way.

I appreciate your input, I have heard the same arguments from others before and it is very valid and probably a good way to go.  It's just not the way I have chosen.  I see the value to both sides very clearly.  I am purchasing properties using financing while interest rates still make it easy to do.  I am also considering cash purchases, which is where the real advantage in other markets comes in. For 120k I could get two properties which rent for 750-850 in probably comparable neighborhoods than I could find in a CA market that pulls 1050-1150 for that one 120k property.  The appreciation potential is certainly not there, but that's something I personally am willing to sacrifice to a degree.

Justin

Arthur Garcia · Answer

@Justin  Joseph - I hope you didn't take my comments offensively. I was merely trying to point out that CA is a very valid option for cash flow.  When I mentioned the competition has heated up for "deals" that, as you know, is all relative.  Since I can no longer qualify for financing, I have to find property significantly under market value, which isn't possible on the MLS (at least at this time).

However, if I was in your shoes (assuming you can qualify for a fannie mae loan).  The number of deals would be much higher, especially if you are measureing a "deal" by the Cash on cash percentage or the internal rate of return.  There are numerous properties between 90-120K that will rent for 1050-1150 a month.  Interest rates are still super low so your yeild will still preform quite well until you decide to liquidate or exchange the property for larger units (which is the strategy I would reccomend in CA).

I TOO work a full time gig in corporate america. So when I first got started I spend a few months learning various markets that could meet my cash flow needs and after I found a market I liked, I pulled the trigger and built my team over time.

Anyway, let me know if I can be of any additional help.

Best,

Justin Joseph · Answer

Arthur Garcia the points you make are all valid, but are exactly why I made the choice I did.  The biggest of the things that you said was that deals have gotten much tougher, but they are still around.  For a guy like myself who is still working on embracing working my butt off, and who is often already working my butt off at my full-time or more salaried work, I dont need the added workload, pressure or stress of being in a market where good deals are hard to find and harder to close.

So I chose to go to an area where good deals are common, and GREAT deals are hard to find, but available.  So right now I am comfortable with good deals, and when I find the time I am looking for great deals there.

And you're right it's certainly more convenient to be in California.  So to moderate that extra inconvenience your only choice is to build a better team, not saying I have that, but it's my goal.

In the end it's always to each their own, but I chose to pick where I think there is great value instead of trying to find great value in where I am.  Hopefully that strategy continues to suit me well and hopefully your strategy of staying close to home continues to suit you well also!

Justin

Arthur Garcia · Answer

@Justin  Joseph  - As a California investor myself (mostly buy and hold - some flips). I buy ALL my properties in this wonderful state.  Contrary to popular belief, there are great rental markets in California!  The competition has gotten tougher, but there are still deals to be had.

What I WILL say is you probably won't find what you are looking for in your back yard, unless you consider condos or mobile units.   That being said, buying cash flowing rentals will require you to jump in your car for a few hours to learn a new market.

This means you'll likely have to build a team to help you manage the process - property manager, realtors, contractors, etc.  However, if you want to build a rental portfolio you would have to do this anyway, so why not take the time and learn about markets 1.5-2.5 hours from your door?

Is it conventient?  No.  BUT, it is much more convenient than flying across the country and cheaper too.

I hope that was helpful.

Best,

AG

Jason Miller · Answer

I strongly suggest listening to last weeks podcast.  Aaron Mazzrillo does quite well in southern california with rentals. Its one of the best podcasts to date.

How to Find a Good Rental Market

Most Popular Reply