Best practice for requestimg an MLS drip

[Allen Vestal]

Hi, first time post! This site is awesome, been lurking for a few weeks.

I’ve been listening bp podcasts for little over a month now. I’ve also read buy, rehab, rent, refi, repeat.

Both myself and colleague at work are about to start real estate investing. After watching the 90 day challenge webinar yesterday, Brandon mentioned Leads, Analyze, Pursue, Success (LAPS) to start a mls drip for leads

—Leads—

Are there certain parameters to give to an agent when setting up a daily drip? Like zip codes? School ratings > n? Price range? We would like to build a big list and throw automation around our leads. Should we dump this data into a crm?

—Analyze—

Using Zillow, homesnap etc coupled with bp calcs and rentometer what's a good ROI to target? >12%?

—Pursue—

Should we put our seed money into one property or break the seed money up into buying multiple houses carrying a conventional loan if we can figure out our ROI > 12%?

TIA!

[Eric Fernwood]

Hello @Allen Vestal,

In order to have a Realtor set up a useful drip for you, they need to know exactly what you are looking for. In this post I will show a process for determining which property characteristics will likely appeal to your target tenant pool. Let’s start with what I consider to be a “good” tenant.

Good Tenants

The only way to make money is to keep the property occupied by tenants who:

• Have stable employment in a market segment that is very likely to be stable or improve over time.
• Pay all the rent on schedule
• Take care of the property
• Do not cause problems with neighbors
• Do not engage in illegal activities while on the property
• Stay for many years

While the above may seem obvious it is not easy to achieve with any consistency because it depends on:

• Selecting properties that target a tenant pool with a high percentage of “good” tenants.
• Working with a skilled property manager who can select a good tenant from all the applicants.

Good tenants are not the norm and property managers who can consistently select good tenants are not common.

Selecting Your Tenant Pool

The first item under the good tenant description is that they have to be employed and stay employed. This means jobs. Your property is no better than the jobs around it. However, even if they are employed today it does not meant that they will remain employed. Employers are like people. They are born, mature, grow old and die. The average life span of a company on the S&P 500 is only 15 years. If new companies are not setting up operations in the location, long term you have a big problem. As the current employers naturally die off and there are no new jobs being created to replace these jobs, all that will be left is low paying service sector jobs. As the percentage of service jobs increases the median per capita income will fall and rents and property prices will follow. Remember that you will own the property for a long time so how the property performs today is not as important as how it is likely to perform over the long term.

Start by determining the key current and probable future employers. Is the market segment they service growing or static or shrinking. Once you identify major employers in a market segment with a good future, look at their employee pool. See below.

Companies generally have a wide range of jobs. Some may be minimum wage while others are highly paid. Based solely on income, there are characteristics which are generally true (which means that it can be false for any individual). See the image below.

Transient Renters

Low-income property tenants tend to be cash-based and have relatively few possessions. They tend to move often and are almost unaffected by an eviction, skip or a property damage judgment. This means that leases mean little or nothing so skips and evictions are common and expensive. In the C class properties our clients own, the average turn cost is between $1,000 and ​$2,000. The average tenant stay is typically 9 months to 1 year. You need large profit margins to make money with this tenant pool.

Also, in a financial downturn low wage workers are usually the first to be let go and the last to be rehired. In Las Vegas in 2008, vacancies ran higher than 50% in many C class properties forcing the owners into a short sale or to let it go back to the bank.

Unless you really know what you are doing, I do not recommend targeting this tenant pool.

Permanent Renters

As rents increase you move from largely cash-based tenants to largely credit-based tenants. There is a large segment of this credit-based population that, for whatever reason, choose not to or cannot buy a home. This rental population is highly dependent on credit cards, auto loans, and bank accounts. They know that if they pay the rent late or are evicted, they will suffer, credit wise, for a long time. This population has the greatest percentage of what we call good tenants. This is the population we target for our clients. Our average tenant stay for this population is about 5 years.

Transitional Renters

These are also credit-based renters and they make enough money to buy a home. They usually rent because they are in transition from a divorce, a death, or some other event. A soon as they resolve the issue, they move out and buy a home. Just looking at data, the average tenant stay is about 2 years. These tend to be larger homes and turn costs tend to be high. You also need large profit margins to make money with this tenant pool.

Choose Your Target Tenant Pool

Choose your tenant pool carefully based on the percentage of good tenants. Once you decide on your tenant pool, you are ready for the next step, the property profile. See the image below.

Property Profile

A property profile has at least 4 elements:

• Property Type - Condo, high rise, single-family, duplex, single-story, two stories, etc.
• Configuration - Two bedrooms, three-car garage, large lot, etc.
• Location - Reasonable access to the primary employers of your target tenant
• Rent range - What are members of the target tenant pool willing and able to pay

This is where phone calls to a few property managers will get you what you need. Some of it is fairly straight forward. For example, people tend to rent the best place they can reasonably afford and the maximum they can qualify for is about 1/3 of their monthly gross pay. So, if your target tenant pool makes between $3,000 and ​$4,000 per month, then the properties you target will need to rent profitably for between $1,000 ($3,000/3) and $1,300 (​$4000/3) per month.

Work with your property manager to sort out the specifics for property type, configuration, location and verify the rent range. Let’s suppose that after your research you determine the property profile for your target tenant pool is as follows:

• Property type: single family, one or two stories.
• Configuration: three bedrooms and at least a 1 car garage. Two is better.
• Location: North of 11th street, east of the river, west of Grand street and south of the university.

Notice that I did not include the rent range. Realtors cannot search for properties based on what it might rent for. You need to convert property type, configuration, and location into actual properties and look up how much these properties sell for using Zillow, Redfin, or your Realtor. Once you know the price range, verify that you can cash flow with these properties before you continue.

If you find properties that meet the property profile and are profitable, time to provide the property type, configuration, location and price range to your Realtor. They can then set up a drip-feed that meets your needs.

On analyzing, never use the predictions from Zillow or any of the real estate sites. You need to look at historical data, what similar properties near the subject property recently sold or rented for, and base your estimates on them. Basically, run rental comps. Be certain to check for the time to rent. If it takes 6 months to get a tenant, it will be very difficult to make money. If you would like information on how to run rental comps, let me know and I will post how to do this.

Also, keep in mind that ROI and cash flow are snapshots in time. They only predict how the property will perform today but tell you nothing about how the property will perform in the future. You will hold that property for a long time so how the area is likely to perform over the next 10 to 20 years is more important than today. Pay attention to per-capita income, job creation, major employer growth and population growth. These are good barometers of a healthy market.

Allen, a long answer to a short question but I hope this helps. Feel free to post or email questions.

I wish you the best.