What Market would you recommend

Question

Hi my name is Abraham Berkowitz from Brooklyn NY, I didn't do a lot in real estate investing although its always in back of my mind, for about 3 years ago I Invested in Newark NJ, I bought a 3 family house, and now I could sale it for an amount that is almost double from the amount I bought it because the appreciation was sky rocking,  I would like to sell it because the its not a good area the tenants are constantly changing, and not stable, they keep on breaking things and I don't see any money in the short term, I would like to get advice what market is a good market with better tenants and a good cash flow, and not too expensive a mean a 3 family for about 650k, thank you all for your advice

Eric Fernwood · Answer

Hello @Abraham Berkowitz,

Rather than listing investment locations, I will provide a process for selecting a dependable income location and choosing reliable income properties.

The Process

Years ago, when I was selecting a location to set up my investor services business, I faced the challenge of finding a good investment location. As an engineer, I don't believe in opinions, gurus, or luck. Instead, I took the time to develop a straightforward process for selecting both a reliable passive income location and properties. To date, we have successfully delivered over 480 investment properties using the process, which is shown below. There are clear metrics at every decision point so you know you're making the right choice.

Selecting a Dependable Passive Income Location

The location selection process involves starting with a list of possible cities. Then, using a series of filters, eliminate cities that are unlikely to provide the dependable passive income you need. By the end of the process, you will have narrowed your search down to a small number of cities. The starting list is a metro area population greater than 1M, which you will find on  Wikipedia.

• Both state and metro populations are increasing. Do not buy anywhere if the state or metro populations are static or decreasing. Wikipedia
• Low crime - High crime and long-term appreciation and rent growth are mutually exclusive. Do not invest in any city on Neighborhood Scouts’ list of the 100 most dangerous US cities.
• Inflation compensating - Every time you go to the store, the same basket of goods costs more and more dollars. In order to have the additional dollars needed to pay inflated prices, rents must rise faster than inflation. Therefore, a critical location selection metric is that rents and prices are rising faster than inflation. Rents tend to lag behind prices, so you can use the appreciation rate if you do not have historical rental data. Zillow Research
• Low operating cost - High operating costs can turn what appears to be a profitable property into a money pit. The three most apparent are income taxes, property taxes, and insurance. Insurance - ValuePenguin, Metro Property Taxes - LendingTree
• Low disaster risk - When a tornado or other natural disaster strikes a city, it doesn't just obliterate individual properties. The entire community, including jobs, shopping, and retail, is destroyed. Your tenants won't wait for your property to be rebuilt in a year or two; they'll move immediately to a location where they can work and live today. Even if your insurance company rebuilds your property, there may be no one to rent it. Everyone in the community will have resettled in other locations, and there's no reason for employers, retail establishments, or people to move back. Locations hit by natural disasters may take many years or never recover. However, your mortgage, taxes, insurance, maintenance, and other expenses will continue without interruption. The cost of homeowners insurance is the best indicator of the likelihood of a natural disaster in an area. Choose a location with low-cost homeowners insurance because they have the lowest risk of natural disasters. Insurance - ValuePenguin
• Rent control - Some states and metro areas have implemented various kinds of rent control. Rent control may prevent you from increasing the rent fast enough to keep pace with inflation. It may limit your property manager's ability to select the best tenant. It may make evictions of non-performing tenants difficult or impossible. Never invest in any location with rent control.

At this point, you will have a small number of potential cities. The next step is property selection.

Property Selection

A property is only as good as its tenant. If your tenants don't pay rent, move frequently, or damage the property, you will lose money. A reliable income requires keeping the property continuously occupied by a reliable tenant. What is a reliable tenant? Someone who stays for many years takes care of the property, and always pays the rent on schedule. However, such people are the exception, not the norm.

To increase the likelihood of always having a reliable tenant, choose a tenant pool segment with a high concentration of reliable tenants. You can select such a segment through property manager interviews.

Once you have identified the segment you want to occupy your property, the next step is to attract that segment. You do this by purchasing properties that match the segment's housing requirements.

You will achieve this by utilizing the nearly one-to-one relationship between a segment's housing needs and the unique characteristics of individual properties. This approach works because people will only rent a property if it meets all of their housing requirements. The relationship between a segment’s housing characteristics and a matching property is shown below.

To determine the housing requirements of a specific tenant segment, determine what and where they currently rent. From these properties, you can build a list of the segment’s housing requirements. Below is an example of a segment’s housing requirements.

• Rent range: $1,500/Mo. to $2,250/Mo.
• Type: Single-family
• Configuration: 3+ bedrooms, 2+ baths, 2+ car garage, 1,200  SF to 2,100 SF
• Location: North of the river and east of Line Rd.

You can convert the rent range into a property price range by doing the following.

• Find rental properties that match the housing requirements for your segment on any major real estate site.
• Find properties for sale or recently sold that are similar to the rental properties. This will give you a price range to work with.

Once you have the housing requirements for a segment, any realtor can locate properties that meet those requirements.

However, there is more to selecting than just matching the housing requirements of a target segment. See the image below.

Abraham, I hope this helped. Feel free to reach out to me if you have questions.

Parker Robertson · Answer

@Eric Fernwood

Thank you for this excellent post! There was so much information in one comment I just had to add this to my bookmarks.

I have a couple of questions for you. First, is this a strategy you only utilize for LTR or have you applied it to other RE strategies like STR? I can see some aspects that would translate to STR investing, but not all.

Second, how strict is your "no top 100 crime cities" rule? Many investors give the advice of investing in your own backyard, but I live in one of the cities listed that is in the high 90s of the list (97-100) and was shocked it was up there! Every city is a combination of disparate neighborhoods so if I stick to the areas that I know are relatively crime-free will I be fine?

Thanks for your time!

Margaret Christy · Answer

Welcome to the BiggerPockets community! I'm an investor-agent in Northern NJ (Union) with KeyVest Realty. We are a professional full-service property management company. We were started by investors for investors. We help Real Estate investors manage, acquire, lease, and sell investment properties throughout the state of New Jersey.

Looking forward to connecting with you!

Joseph Guzzardi Jr · Answer

@Robert Webb Atlantic & Cumberland counties primarily

Joseph Guzzardi Jr · Answer

@Abraham Berkowitz Welcome to the forums! There are plenty of other markets or asset classes that may fit your needs of improved cashflow and steadiness of tenants. I invest in Newark but also invest down in South NJ. Better bang for your buck in my opinion and the rents are rising. Can also consider investing in different asset classes or partner with other folks to continue to get a return on your money without dealing with the tenants, toilets, trash and other headaches

Abraham Berkowitz · Answer

Thank you Eric, wow I will look and digest your massive load of information, Thank you soo much for your time.

Eric Fernwood · Answer

Hello Parker Robertson,

Good questions.

On STR and MTRs, I recommend buying a property that is an excellent long-term rental and then using it as either a short-term or mid-term rental. This way you have a fallback position. However,  if the property is going to be used as a short or mid-term rental, this does change some aspects of the properties that we recommend. For example, short-term rentals are not allowed in most homeowners associations. Immediate access to restaurants and entertainment is important. So while our selection process doesn't change, we just add additional criteria on the location and configuration.

The renovation also changes slightly for MTRs and STRs. For example, on an LTR, we might put carpet in the bedrooms. If it's going to be an MTR or STR, we put LVP in the bedrooms. The reason is to cut down on turn costs and reduce maintenance costs.

Another example is the external door locks. We normally remove smart locks because they are likely to cause service calls but do not increase the rent. However, if it's going to be an STR or MTR, then we want electronic locks so that they can be remotely reprogrammed.

On high-crime cities - there are multiple reasons to avoid them. Appreciation and rent growth only occur if demand is increasing, and that requires the population to be increasing.  The high-crime cities I’ve investigated have declining populations. Unless rent growth keeps pace with inflation, your time off the corporate treadmill will be short-lived.

Also, all private sector jobs are temporary.  Unless new companies are moving into the area and creating replacement jobs that pay similar wages and require similar skills, sooner or later, all that will be left are low-paying service sector jobs. As higher-paying jobs vanish, area incomes fall, and city services are cut back. This results in higher crime and lower-quality schools, which causes more people to leave.

Hope I answered your questions. If not, please ask again.

...Eric

What Market would you recommend

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The Process

Selecting a Dependable Passive Income Location

Property Selection