What factors to consider and which markets to focus for rentals

Question

Hello big pocketers :-),

I am new here and am looking for some insights into the world of real estate investing from a rental property perspective. I am trying to assess 2 things:

1) Which markets would be a good fit for buying a rental property

2) What criterion should I use to 'filter' which property to buy for rent and which markets to focus on: For the markets, my initial thoughts are that in addition to location and it making financial sense (positive cashflow and value appreciation, resale value etc...), it has to be something in proximity to where I am to manage it, it also needs to be more than a property to me: as in, I could see myself living there for say a vacation or in retirement (which is far away but still). Do these sound reasonable or am I viewing this decision and my criteria the wrong way? Any other factors to consider?

I wonder if my staying in California and buying relatively cheap property in say TN or NC/SC for rentals is unmanageable and then hiring a property manager eats into the profit.

Thanks for any advice in advance!

Account Closed · Answer

When making a decision on the investment itself, there are a few things to consider:

1.  Market Analysis - are you investing in an area that will get you the best returns and cash flow?  What are the taxes like in that area?  Is it a landlord friendly state?  What does the future economic and population growth look like?  Answering these questions leads many people to out of state investing, especially when they are in states with high taxes with properties that are going well over asking price already.

2.  Returns - obviously everyone wants appreciation and cash flow.  Look at your cash on cash returns on the property.  It is also helpful to factor in depreciation, appreciation, and paydown of mortgage.  Different markets appreciate differently - are you more of a speculative investor or are you looking for more steady historical performance?  This can dictate what markets to look at as well.

3.  Criteria - different for everybody.  Is this truly an investment to you, or as you said in your post, is it a property that you could see yourself living in or retiring in one day.  This is going to affect your investment strategy - if it is a home that you could potentially retire to one day you are going to be looking at locales that you would want to be in, and not necessarily the best places from an investment standpoint.  If retirement is still far off in the distance maybe focusing on developing a real estate portfolio to ultimately fund the home of your dreams for retirement.

In summary, there are so many factors that go into determining where to invest, but start with the end in mind.  What is the purpose of this investment - is it to build upon your portfolio?  Is this a market for short term or long term rental?  What exactly are you trying to accomplish with the next investment, and what is the best way to deploy your resources.  In some states $80k isn't enough for a downpayment, in other states it will start a small portfolio of 3-4 homes providing some diversification.  Answer for yourself first - what are your goals, what criteria do you have when investing, the resources you are looking to deploy, and the timeline you are working with.  With this information you can develop a plan and strategy to accomplish your goals!

Good luck to you on your journey!

Liz Lynn · Answer

I'm still looking for my first property, but from what I have learned so far you aren't looking at it right. They should absolutely have a positive cash flow and the numbers should all work out. For my first rental, I want to manage it to save on the costs of hiring a pm, but if the numbers work well enough where I can still cash flow then why not have a pm? Eventually it'll most likely end up being professionally managed anyways so I look at it with and without that cost. I only hear horror stories about California's prices so I wouldn't look in that market, however if you want to stay close to home then you don't really have a choice right? If you do invest in remote markets that gives you an excuse to travel and it counts as a business expense if you register it as an llc (pretty much means free travel). I wouldn't think looking it as more than it is (a property) is a good idea because you don't want to get attached to it and end up ignoring the red flags because it's pretty. I am looking to BRRRR and I don't know what your strategy is, but I've heard to buy as low as you can (which means the house will be ugly, and you'll have to make it pretty) so you can sell later and have the highest ROI. If you buy rent ready properties that means you are paying the cost of repairs and the in between of what the flippers bought it for and that is what can really eat your profit. For example, if you're looking at some properties in the same area, same b/b etc. One is a pretty property at 183k and it ends up cash flowing $200/month as is. The other property is ugly but it's only 130k and it needs 30k worth of repairs into it. If you buy the fixer upper and bring it up to 180k value. You make 20k before you even rent it, plus you save $ on the mortgage payment and you end up with a higher cash flow. So you can look for vacation homes, but I don't know if it's ideal if you're focusing on roi

Bob Stevens · Answer

@Simran Singh its actually very easy, just do the math, PP less expenses equals the net return. EVEN easier ,simply  connect with those doing deals, they will provide everything.  9- 13% NET CAPS are to  be had 100% hands off. Its all about knowledge

Good Luck

2

@Simran Singhundefined

Aj Parikh · Answer

Hi Simran,

I will try to answer to the best of my knowledge and my 18 months of rookie experience with out of state investing.

1) Which markets would be a good fit for buying a rental property?

From what I have read, the midwest states like OH, MO, TN, AL, FL, GA, NC are good for buying turnkey rentals that cash flow. I have spoken to multiple investors who have purchased in these states and are cash flowing on their properties. I am from Northern VA and I bought out of state investments in OH and TN using Martel Turnkey and Roofstock.

2) What criterion should I use to 'filter' which property to buy for rent and which markets to focus on: For the markets, my initial thoughts are that in addition to location and it making financial sense (positive cashflow and value appreciation, resale value etc...), it has to be something in proximity to where I am to manage it, it also needs to be more than a property to me: as in, I could see myself living there for say a vacation or in retirement (which is far away but still). Do these sound reasonable or am I viewing this decision and my criteria the wrong way? Any other factors to consider?

Since you are in the bay area, I would suggest exploring buying a vacation rental in Joshua Tree. I know Tony Robinson from the Real Estate Rookie podcast has a few properties in that area and they are making close to 30% COC returns. I would connect with them.

I would definitely explore out of state. With an investment under 80k, it shouldn't hurt. If anything, it will be a good learning experience. Good luck on your investing journey and let us know how it goes!

Simran Singh · Answer

@Liz Lynn Thanks for you inputs, Liz.  Over the past few weeks, I have become more open to OOS investing and looking into rental markets outside my vicinity and even other states. So, thank you for that. Any thoughts on using HomeUnion OR Roofstock for Turnkey Investing? Is it worth it?

Simran Singh · Answer

@Bob Stevens Haha - that's the Zillion dollar Q. Isn't it.?  How do you calculate that and what are the pitfalls to avoid? Any calculators you'd recommend?

Bob Stevens · Answer

@Simran Singh  the one that provides the best overall return,,,,,,,, not just on paper but real return,,,,

What factors to consider and which markets to focus for rentals

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