How I Bought two High Cashflow Rentals Unseen From 1,000 Miles Away

Gone are the ‘good old days’ where below market deals were plentiful, and the average investor could scoop up as many deals as they could finance, in their home town, and even in their own neighborhood. In many markets, home prices are on the rise, and in some markets, prices have far surpassed the peaks seen just before the housing crisis. In my local market (Austin, Texas), buy and hold speculators are now buying break-even and negative cashflow rental properties in hopes that the rents will eventually catch up with property values or that the property will appreciate enough to sell for a profit. Notice I called these people ‘speculators’, they are not investors, as they are betting on appreciation or rent growth in order to turn a profit. As we saw in 2008, we cannot bank on the market always going up.

The dramatic rise in values has led many investors to sit on the sidelines. For example, in Austin I routinely see duplexes that sell for $400,000 and rent for $1,500 per side. When adding together mortgage payments, taxes and insurance, the total monthly cost to own that property is approximately $2,750, assuming that you made a 20% down payment of $80,000. If we assume that there are no repair or turnover costs (trust me, that NEVER happens) then the return on your investment of $80,000 is only $250 per month, or a paltry 3.75% yearly return. After factoring in expenses, this property would almost certainly be cashflow negative!

But not all markets haven seen dramatic price increases like Austin. There are still many tertiaries and a few major markets were deals can be found right on the MLS. But what if those cashflow markets are hours away? For most investors it can be prohibitively expensive and time consuming to hop on a plane to see a property that may or may not met their investment criteria. This is where investing remotely can keep you in the game, buying quality, cash flowing properties in a market with strong fundamentals. Below I will walk you through step-by-step how I bought my first out-of-state rental property that has provided a steady 20% return on my investment.

Know Your Market

I know you are probably sick of hearing this, but the most important factor in real estate investing is “Location, Location, Location”. I can’t stress enough how important it is to spend time upfront selecting a strong rental market with good underlying fundamentals. There are many excellent blog posts and forum threads on the topic, so I wont rehash this in great detail here. Essentially, your goal is to find a market where the ratio of rents to purchase price is such that you can more easily find cash flowing properties. You also want to look for a market that is growing, and not one that is shrinking. Since most of the major markets now do not make sense for cashflow rental investors, you will most likely have to turn to a tertiary market that is a suburb of a major market. 

Just be sure to look for markets with multiple major employers and avoid those that have only one major employer. Major employers can include education, healthcare, government, manufacturing, or others. Avoid towns with only one major employer as the closure of a plant or similar event could totally wipe out every rental investor in one fell swoop. I also recommend buying an a Class B or Class C neighborhood as these properties will typically have the greatest chance of cashflowing. Below is one of my properties located in a Class C neighborhood near Atlanta. All of my tenants are steadily employed and hard working. You can also tell that they take pride in their home and keep the property neat. 

Build Your Team (as you go)

The most important member of your team is your Realtor. This is the person who knows which neighborhoods to consider, what types of properties to look for, what areas have the best rent to purchase ratio, and most importantly, which neighborhoods to avoid. Unfortunately, finding a Realtor who understands what an investor is looking for is not an easy task. Many Realtors do not want to work with investors (rightfully so) because they previously worked with an “investor” that required a lot of attention and would not pull the trigger on good deals, wasting the Realtor’s time and costing them money in lost sales. It is well worth your time to contact several Realtors in your target area and find one that is a good fit for you and you for them as well. Bigger Pockets is a great place to start that search. Type the name of your target market into the search box at the top of the page, and then click on the “Members” tab. There you will find a list of members from your area and you can view the profiles of the Realtors in your target market. One great tip is to look at the recent forum activity of that member (which you can find to the right side of their profile page). Read through their posts and you will quickly get a feel for how knowledgeable and active they are in your market.

The other members of your team may include a property inspector (don’t skip this), property manager (unless you plan to mange yourself), contractor (if you plan to rehab) and potentially a closing attorney. If you select a good Realtor, they will already have many great contacts in your market including all the team members listed above, so I won’t go over these in detail. If you want more details on these team members and how to find them check out the book “Long Distance Real Estate Investing” by David Greene.

Here’s an important tip, don’t wait until you have assembled your complete and perfect dream team before you start looking for properties! Start by finding a great Realtor and then get down to business. Don’t hesitate to leverage your Realtor’s contacts to build your team, that’s what they are there for!

Property Analysis is Critical

Here is another critical step in your search, and it can be the most daunting for many. Now that some target properties have been identified, you need to run an analysis of how the property will likely perform in the future. You will need to make all sorts of assumptions here, so it is imperative that you are conservative with your numbers. Basically, you will be taking the sum of all the income generated by the property (rent, storage fees, laundry income, etc.) and subtracting the sum of all the expenses (property management, mortgage taxes, insurance, owner paid utilities, repairs, vacancy, etc.). The equation looks like this:

(Rent + Other Income) – (Property Management + PITI + Utilities + Vacancy & Repairs) = Potential Income

Most property managers charge a percentage of the gross rent as a management fee and many charge the first months rent or a tenant procurement fee when a new tenant moves in. Some charge additional fees so always be sure to get their fee structure in writing and look over it carefully. Your property manager can also help you estimate any costs associated with owner paid utilities. Property managers are always happy to answer questions from potential clients and exact costs can be found by contacting them. Another great tip is to drive by several properties that the management company currently manages. Do they look well-kept and in good repair? If not, you might consider another management company. I highly recommend that you do thorough due diligence on your property managers as they can turn a great deal into a nightmare.

PITI stands for Principle & Interest, Taxes, and Insurance. Some mortgage companies roll all of these into a single monthly payment and others will only charge you monthly Principle and Interest and leave it up to you to pay Taxes and Insurance. To estimate the monthly Principle & Interest I suggest that you get pre-qualified with a lender. By doing so, you will find out the approximate interest rates that you will be charged for the various loan terms they offer. Knowing this information will allow you to use an online calculator or app to estimate your monthly mortgage payment based on the price you plan to offer on the property. If you are a nerd like me, you can build this calculation into a spreadsheet. Shop around with several lenders as rates and closing costs can vary.

Taxes are another significant expense in some markets. Here in Texas we do not have an income tax but believe me when I tell you that we make up for it in property taxes. On a $200,000 rental in Austin you could pay over $5,000 a year in property taxes! You can find tax info online usually at the county tax assessor website. Beware that when they county finds out about a sale, they may increase the taxes if the sales price is greater than the tax value. Your realtor should be able to help you estimate the potential taxes associated with your target property.

Insurance costs can be estimated by getting several quotes on properties that you are interested in purchasing. You will quickly get a feel for how much it will cost you to insure a house meeting your criteria. Insurance costs do not vary much between similar properties located near each other, unless there is a special circumstance like the property being located in a flood zone. To avoid surprises, always get a written quote on the actual property you plan to purchase well before closing.

Repairs and vacancy can vary from property to property. As a rule of thumb, I subtract 20% of the GROSS rent to account for repairs and vacancy. My properties are located in Class C neighborhoods with hard-working blue-collar tenants. They were built in the 1970s but are in good repair and did not need significant repairs such as HVAC or roof replacement. The 20% rule of thumb has worked well for me. You may need to allocate a greater percentage of the gross rent if your property is in bad repair or in a less than desirable neighborhood. If your property is in great repair and in a more desirable neighborhood you might get away with assuming a lower percentage. During months when there are no vacancies or reapers, I still take a percentage of the rental income and place in an emergency reserve fund because the day will come when a major repair is needed. This came in handy as one of my units recently caught on fire! Even with insurance there were out of pocket expenses, but they were more than covered by my emergency reserves. Not having an emergency reserve has prematurely ended the careers of many investors, so don’t let that happen to you.

If you are a giant nerd like I am, you can create a spreadsheet of your own that will allow you to plug in only a couple numbers and almost instantly calculate the potential income of a property. This will come in handy if you are scouring the MLS or other sources and analyzing dozens of properties. It also allows me to get just a few numbers from my realtor and then immediately tell him if I am interested in making an offer on a property (contingent on an inspection of course). Bigger Pockets also has an excellent rental property calculator that I like for a one-off analysis or if I want a detailed report and projection of income over time.

My Results

Using this method, I bought two properties in a suburb of Atlanta, Georgia in a market I am familiar with because I attended college there. I did my research and verified that the market had great fundamentals including: having a university with an enrollment of 14,000, a regional hospital, a few medium sized manufacturers, is the county seat, and many residents that commute into Atlanta for work. The population of my market has been growing since the Great Recession as has the median income. All of these factors indicate a strong economy and rental market. Both of my properties are located in Class C neighborhoods full of mostly blue collar working class families and university students. Both needed less than $2,000 of repairs and were purchased for around $90,000 each right from the MLS in November 2016. After repairs and placing a few tenants, they have been cashflowing nicely. See my financials below.

After closing, I immediately placed them under professional management. I have never interacted with my tenants and my monthly “work” put into both properties may be an hour or two TOTAL and consists of taking a phone call from my property manager and updating my financials spreadsheet. The best part is that money magically appears in my bank account via direct deposit on the 15th of every month. That’s better than “mailbox money” because I don’t even need to walk to my mailbox or deposit a check! I say this not to brag but to illustrate to you how little time and effort is required after you have done the initial legwork of analyzing and purchasing a solid property and placing it with a professional management company. Unfortunately deals like these are hard to find on the MLS in my market now, but there are plenty of other markets where you can still find these types of deals with no problem. Just put a little time into researching markets that you are interested in and you will certainly find one that is a good fit for your investment goals. I hope this helps, and happy investing!