All Forum Posts by: Bobby Noubiap

If you care to understand the perils of chasing cash flow look no further than this forum thread. Remember this forum thread began with Rich seeking recommendations on where to buy cash flowing properties below $200k. We now have a turn key operator having to defend whether the neighborhoods their remote clients/investors buy are C rather than D neighborhoods.

Even more amusing, to validate their services we are directed to another forum thread where current/past investor clients are singing their praises because they received a favorable appraisal, got their initial investment back and are cash flowing XYZ per month in year 1. News flash for those who are drinking the Kool-Aid, C/D neighborhood appraisals are not indicative of true value. If you think otherwise, list your C/D properties and see what happens. 

If you sell to a home owner, prepare yourself to pay 5-6% seller assist & get absolutely abused during the home inspection/repair addendum process (yes, even if this was a "turn key" or completely rehabbed property). Now try repeating that process to unload an entire portfolio. Most lack the perseverance after sale 1 and resort to selling the rest of the properties to an investor who doesn't pay remotely close to that appraised value.  Oh, and let's see how well that property is cash flowing a few years from now when the first cap ex event that hits wipes out 2 years of cash flow because these low priced properties are disproportionately impacted by operating expenses, most notably repairs.

Why do you believe there's constantly portfolios or packages of C/D neighborhood single family homes available? I would imagine most are accidental portfolio sales because of the false sense of  reliance on the appraisals/cash out refinances that led to the second, third, fourth purchase and so on. I can only imagine the number of investors who are banking on putting their children through college with these turn key investments and are in for a rude awakening. 

@Richard Wilkinson

Recommend you first figure out the property Class you want to invest in, THEN figure out the corresponding location to invest in.

If you apply Class A assumptions to a Class B or C purchase, your expectations won’t be met and it may be a financial disaster.

If you buy/renovate a Class A property in Class D area, what quality of tenant will you get?

Similarly, if you put all Class D tenants in a Class A 4-plex, what do you think will happen?

So, when investing in areas they don’t really know, investors should research the different property Class submarkets.

Here’s our OPINION for the Metro Detroit market (use as a template for your target area!) that we’ve learned in our 24 years, managing almost 700 doors across the Metro Detroit area, including almost 100 S8 leases.:

Class A Properties:
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% the more recent norm.
Tenant Pool: Majority will have FICO scores of 680+ (roughly 5% probability of default), zero evictions in last 7 years.

Class B Properties:
Cashflow vs Appreciation: Typically, decent amount of relative rent & value appreciation.
Vacancy Est: Historically 10%, 5% should be applied only if proper research done to support.
Tenant Pool: Majority will have FICO scores of 620-680 (around 10% probability of default), some blemishes, but should have no evictions in last 5 years

Class C Properties:
Cashflow vs Appreciation: Typically, high cashflow and at the lower end of relative rent & value appreciation. Can try to reposition to Class B, but neighborhood may impede these efforts.
Vacancy Est: Historically 10%, but 15-20% should be used to also cover tenant nonpayment, eviction costs & damages.
Tenant Pool: majority will have FICO scores of 560-620 (approaching 22% probability of default), many blemishes, but should have no evictions in last 2 years. Verifying last 2 years of rental history very important! Also, focus on 2 years of job/income stability.

Class D Properties:
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation
Vacancy Est: 20%+ should be used to cover nonpayment, evictions & damages.
Tenant Pool: majority will have FICO scores under 560 (almost 30% probability of default), little to no good tradelines, lots of collections & chargeoffs, recent evictions. Verifying last 2 years of rental history and income extremely important to find the “best of the worst”.

Make sure you understand the Class of properties you are looking at and the corresponding results to expect.

The City of Detroit has 183 Neighborhoods we’ve analyzed.

PM us if you’d like to discuss this logical approach in greater detail!

Quote from @Richard Wilkinson:

I'm a Los Angeles based Realtor w/ 17 years of experience and I am looking to invest out of California.  At this point I would like to keep each purchase under $200k.  Can anyone recommend any markets where one can make a purchase for $200k or less and still have positive cashflow?

Thanks, Indianapolis is very interesting due to the low price but a quick search on Zillow shows 749 rental available for SFH and about 165 SFH on sale under $200k. It looks like an oversaturated market to me and very low appreciation region...