All Forum Posts by: Anton Ivanov

There has been a lot of discussion about this on the forums, I strongly suggest you search and read a few threads. Many of them are very good and will give you several different perspectives on how this is done.

Some people follow a more analytical approach, others only invest in their local areas and yet others invest in areas where they know somebody.

I myself follow a more analytical approach by starting with the 50 largest metropolitan areas in the US (from here https://en.wikipedia.org/wiki/List_of_Metropolitan...) and using my criteria to eliminate the markets that I'm not interested in until I have just 2-3 left.

Here is a summary of the criteria I use. This is re-posted from here (https://www.biggerpockets.com/forums/88/topics/350...):

++ Geographical Location ++
- How far is it from where you live: The closer to you, the better, so you can go there to look at neighborhoods and properties when looking for deals or if something happens. If not close, look for a place with a non-stop flight from your city.
- Climate: I prefer milder climates, as extreme hot or cold temperatures tend to wear the properties more. This will reduce maintenance costs and capital expenditures. There is also some evidence that suggests most people would prefer milder climates to any extremes and are actively moving there.
- Disasters: No significant probability of a natural disasters like hurricanes/tornados/floods/fires, unless you're OK with the risk or going to pay for extra insurance.

++ Population ++
- Size: I think focusing on metropolitan areas with a population above 1 million is a good start. Markets smaller than that can be good, but you really need to know the area to estimate rental demand. With populations above 1 mil, it's usually a safer bet.
- Growth: I like to see a progressive population growth over the last 5-10 years, or good reasoning why population growth is expected within the next 5-10 years if it hasn’t been present in the past.

++ Economy ++
- Diversity: No dependence on a single job sector/industry – availability of diverse job opportunities.
- Job/Economic Growth: Progressive job and GDP growth over the last 5-10 years, or good reasoning why job growth is expected within the next 5-10 years if it hasn’t been present in the past.

++ Real Estate Prices ++
- Median Price: How much is an average house worth? Depending on your available cash at hand and the type of financing you will be using, you will not be able to invest in some markets because entry points are too high for you.

- Cash Flow vs. Appreciation: I tend to lean more toward cash flow, however I like markets with strong demographics that will naturally yield appreciation. I never invest on appreciation alone, but it's a nice bonus when it happens.

- Average Rent to Value: In some markets prices are really high, but rents are not. Other markets prices are low, but so are the rents. Ideally you would find a market that has lower prices, but higher rents. I like markets that have an average 2% Rent to Value ratio.

++ State Legislature ++
- Some states are more landlord-friendly than others. I don't put too much weight on this, but if I can't decide otherwise, I will look at this.

Hope this helps!

@Luke Jacobsma

I would strongly suggest you either:

1. Visit the property and neighborhood yourself.
2. Have a trusted friend or family member visit the property and neighborhood.
3. At the very least, order a professional inspection and look at least 20-40 pictures of the property.

Listed in the order from less risky to more risky.

@Todd Ryan

Regarding your question, I would not call your vacancy/repairs/cap ex "conservative". Maybe average? Conservative would be 10-15% for vacancy, and the same for maintenance/cap ex.

In my experience multi-family properties will have higher vacancies and maintenance than SFRs, but it's hard to judge your estimates without knowing the local market (for vacancy) or the exact condition of the home (for maintenance). It does sound like you will be replacing a lot of high-value items soon, so definitely make sure your cap ex allotment is coving for that.

@Chris Thomas

It sounds like you're doing a pretty good job with estimating expenses. Two things I'd like to point out is make sure you're covering for utilities if the landlord pays any and landscaping, as often landlords are responsible for landscaping for multi-family properties.

As far as what the others pointed out about the neighborhood, it does come down to personal preference, but you you also need to be accounting for the lower tenant quality, meaning higher vacancy and maintenance. If these are Section 8 tenants, research how long it takes to get a Section 8 tenant approved. I own 3 houses in Birmingham, AL, where it often takes 4-6 weeks to place a tenant just because the Section 8 administration is so slow with their processing.

@Christopher Wright

I would maybe start over on a new report and just go through all of the fields one by one, making sure you understand the numbers you are inputting. As @Brian Grubb pointed out, some expenses are dollar amounts, others are percentages of the gross rent, so be careful.

@Zack Ellard

In my opinion/experience, the biggest pro of buying a turnkey property is that you will be eliminating time and risk associated with finding a deal and rehabbing a house. With turnkeys that will be done for you.

The biggest con is that you will end up spending more on a turnkey than if you bought and rehabbed the house yourself.

@Seth Leiboh

My 2 cents - don't worry about lawyers and accountants at the beginning unless you will be buying large multi-family or 10+ doors in your first year. Focus on picking the right market, building your team and learning how to analyze deals.

Doing accounting on 1-2 houses yourself is more than doable, especially if you're organized. I have 7 and I do all of my own accounting and tax filing - doesn't take me more than a few hours a year.

As far as a lawyer, I assume it's because you are thinking about buying your first properties in an LLC? One again, I don't think you will gain any benefit of doing this on a few houses, especially if you will be using conventional financing.

@Nick Vehr

Like other people above pointed out, if you're actually serious about buying this property, itemize the actual expenses you will have instead of using the 50% (40%) rule. That may be good for quickly comparing deals, but it can be way off when you actually run the itemized operating expenses.

Get the numbers or estimates for at least the following:

• Property taxes (look it up on the county website, keeping in mind they may adjust up after you buy)
• Insurance (get an actual quote or use estimate based on past experience)
• Maintenance (I use % of gross rent that varies based on age or property and quality of neighborhood; 10% is a good start)
• Cap Ex (same as above)
• Any miscellaneous property management fees. I know you said they charge you 10% of monthly rent, but do they have tenant placement, leasing, vacancy, advertising or other fees?
• Utilities - are the units separately metered or will you be paying some of the utilities yourself?
• Landscaping - most landlords are responsible for multi-family property landscaping, including things like snow removal

@Jay Kaltenbach

I bought 3 turnkeys in Birmingham last year. Overall, I think it's a good market with good potential for cash flow. At the same time, I would keep in mind the following:

• There are many areas around downtown which are very high crime, with many abandoned hoses, etc. They may look good on paper, but I would not buy them.
• Section 8 administration is extremely slow with processing new tenants, in my experience. I've had to wait 6-8 weeks to get the tenant approved, get a max-rent letter from the city and get the mandatory Section 8 inspection completed. If this is the route you're going, I strongly suggest budgeting for at least a 15% vacancy rate.
• Most of the houses are old, many older than 1950. With that, you'll get additional maintenance and cap ex expenditures, depending on the specific condition of each house.

@Stephen M.

Generally speaking - no, the price is not negotiable. This isn't like bidding on MLS properties, the turnkey companies are usually looking to sell the properties at the listed price. It's like a store in that regard.

With that being said, there are some rare cases when you may be able to get a small (maybe a few thousand) discount off the listing price. If the property has been listed for a while, the turnkey seller may be willing to let it go cheaper because they are paying holding costs every month it doesn't sell.

Second, some turnkey companies will give you a discount if you're a repeat buyer from that.