All Forum Posts by: Brian Ellwood

If you are wanting to buy rentals right now, but you’re fed up with the overly competitive and expensive real estate market…

This post is for you.

Today we’re going to talk about how you can STILL buy cashflow rental properties with EASE during the craziness that is 2020.

First off, let me start by saying who this is NOT for:

* Flippers

* Wholesalers

* Developers

* Househackers

* Land Investors

* Rent To Own/Lease Option Investors

* People investing primarily for appreciation

This is for people who want to:

* Invest in single family or multifamily rental properties

* Are open to the idea of investing long-distance/out of state

* Are planning to buy and hold for the long term

* Are investing primarily to create monthly positive cashflow

I recently wrote a part one to this post, explaining my story in detail and the many shifts I’ve had to make to be able to continue to find good deals throughout this surging real estate market….

The long of the short is that I acquired a few dozen rentals and achieved the proverbial “financial freedom” (cashflow covers expenses) but I had to shift to many different markets to be able to continue buying at the right prices.

The biggest epiphany I had is that I should have stuck with what is called a “linear market” to achieve maximum scale with ease in a market like the one we’ve been in over the last few years.

If you haven’t read Part 1, go back and read that before you read any further, or the rest of this post won’t make nearly as much sense.

Part One:

https://www.biggerpockets.com/...

OK, so if you’re ready to choose a linear market to invest in, but you have the question of:

“how do I go about finding a market like this? What does it look like?”

Let’s dedicate the rest of our time to answering that question.

Cheap Properties

One thing is for sure...we want cheap properties. When properties get past 100-150K in purchase price, they typically don’t have positive cashflow.

This is because as prices rise, rents don’t follow. At least not for long. Rental rates flatten out a good bit as prices continue to go up.

The good news is, the same thing happens as prices go down.

As house prices go down, rents go down as well. But, the curve eventually flattens out as you get lower and lower.

There’s a “sweet spot” for rental property investors, and it’s C class properties.

A house you can buy for 40K, put 15K into it, and rent it for $800/month.

You'll get your $200+ in net monthly cashflow, have 20K equity, and you can do it BRRRR style and leave little to no money in the deal.

(By the way, Brandon Turner recently released some excellent content on the best cashflowing markets in each state. You can find that here:)

https://www.instagram.com/tv/C...

(And here:)

https://www.biggerpockets.com/...

Now, just because a market has cheap properties does NOT qualify it as a good rental market.

There are a lot of larger markets (let’s say 600K population size or greater) that have a ton of cheap houses for sale.

What I’ve noticed is that most of the time, the majority of those cheap properties are in D class neighborhoods.

I have a theory on why this is, but I can’t prove it.

My gut tells me that a larger town will have a broader spectrum of socioeconomic classes. This means there will be a lot more D class neighborhoods by default.

A small town, on the other hand, should have a “tighter” socioeconomic spectrum. More middle class and less rich versus poor.

This seems to lead to a higher percentage of cheap properties being in C class neighborhoods.

Smaller towns also tend to have a lower cost of living, lower average incomes, and thus lower house prices.

Smaller towns also have less eyes on them, thus less demand.

But, if the small town is growing, it’s been discovered. And as I’ll share with you in a minute, that’s something I want you to steer clear of for now when selecting your rental market.

You’ve probably heard the mantra that goes something like:

"Look at what everyone else is doing and do the opposite”

This is one of the times to heed that advice.

But, before we look at what criteria makes a great linear market, let’s examine the “old criteria” (that I used to recommend) and exactly where it went wrong.

This will help you get an even better understanding of why we’re going with the new criteria moving forward.

Typical (Old) Market Recommendations:

Find A Market With 1% Rule Deals On The MLS

1%’er = a house where the rent divided by the all in price is at 1% or greater.

Example $700 (rent) / $70,000 (all in price) = .01 or 1%.

This is typically the bare minimum ratio that a rental property investor will accept. (I look for 1.5%’ers myself)

1% deals ON THE MLS is a good sign for your market. It suggest that when you go deeper to the "off market"deals you'll find even better deals.

The issue with this is - a lot of markets have these types of deals - BUT they are not in good neighborhoods.

We need to find the markets where these 1% deals are in C class neighborhoods or better.

100K Minimum Population Size

This was my old criteria, because I felt that larger towns had more room to scale and a larger selection of tenants, contractors, property managers, wholesalers, lenders, etc.

These things are true, but right now bigger cities have a lot more competition and they also have more variance on neighborhood and house quality. So we need a tighter range for population size.

Economic Diversity & Strength

We want economic strength, but too much is linked with growth, which is linked with rapidly rising prices and competition, which means you get no deals!

Population Growth

I used to strongly recommend markets with a growing population. Now I suggest avoiding these areas because of price and competition.

OK, those are the main “downfalls” to the criteria I used to use. Now, let’s move on to what I feel is the “right”criteria to use moving forward.

NEW Market Recommendations:

1- Population Size between 50K and 250K

I feel like markets of this size are the sweet spot right now. Just large enough to where you’ll find a decent amount of other professionals you can work with to reach your goals. But not so big as to have a large percentage of the market in D class neighborhoods, or to have attracted a lot of attention.

2 - MLS Starting Price Point Under 50K

I want you to see a "grouping" of houses at or below $50,000 on the MLS. Not just one house, but at least 7 or 8 around that price range. 3 bedroom houses, and in decent looking areas (check out Google street view). This will give you a good idea of what you'll run into if you decide to invest somewhere.

Seeing houses in that price range on the MLS means you won't have a hard time finding deals where you can meet or beat the 1% rule, especially off market.

3 - Flat Population Curve

I want you in markets where the population is neither growing or declining. Declining is bad, people are leaving the town. This points to economic weakness. Growing means that if it isn’t already too expensive to invest there, it will be soon enough.

No one is looking in the towns that stay flat, and that’s the best part.

4 - Flat Average House Prices

House prices not going up or down, but staying flat. This part isn’t sexy and appreciation investors (aren’t we all after the last 10 years?) will say I’m crazy.

That’s fine, we’re all a little drunk on appreciation right now. But it won’t last forever, and you can’t spend appreciation without selling and paying taxes and then turning a real asset back into cash (trash).

Look for a market with flat house prices in order to be able to scale your cashflow more easily in 2020.

5 - Economic Diversity & Strength

For diversity, look for a market that is supported by multiple economic sectors. Not a one horse town.

Find somewhere that has tech, a college, healthcare, retail, and automobile. Or something like that.

Just not a place with only one or two of those. You’d be rolling the dice, because if that industry crashed, so would the entire city.

For strength, just make sure it’s stable. Growing is likely to mean population growth. Declining is not good for obvious reasons.

6 - Landlord Friendly

Pick a state that is considered landlord friendly. This will protect you in the event that you get in a sticky situation with some tenants. You want to invest somewhere that has a healthy level of respect and fairness toward the investor herself.

7 - Vacancy Rates

Make sure that vacancy rates are not exorbitantly high. Great vacancy rates are like 5%. 15% would be too high for my taste.

High vacancy rates can be worked around by offering a better product than what’s currently available in that market, but make sure to work that into your numbers.

8 - REI Activity

There should be at least a small to medium amount of REI activity in your market of choice. The fastest way to "get plugged in" to a new market is to network with existing investors who are already successful there.

Also, if practically nobody is investing in a market, there’s probably a reason for that. I don’t believe there are markets out there that “absolutely nobody has discovered yet”.

(And please don’t show me the deal you found in a city with a population of 5,000 as evidence that I’m wrong!)

A lot of you may say I’m running from money by avoiding growth and appreciation. I’ll admit, I feel crazy even suggesting these things.

But if you’re a cashflow investor, the truth is this:

If you‘re in a growing market, it’s either already too expensive or competitive to find positive cashflow, or it will be soon.

This doesn’t mean you can NEVER find a deal. It means that it’s HARD to find a deal, and when things are hard we tend to run away from them.

How many would-be investors would never have quit if they would only have chosen an easier market to do their first few deals in?

Also, it’s not worth it to me to have to completely rebuild in a new market every time the one you’re in gets too hot, just to capture a handful of deals there that are likely to appreciate more.

Moving forward, I’d rather keep things simple and scale in one place and master that market.

That’s it. I hope this list has been valuable for those of you who are looking to scale your single or multifamily portfolio.

If you simply want to do some deals in 2020 and create more cashflow on your bottom line, this criteria will take you a long way towards achieving that goal.

 The issue I have with looking at appreciation so highly is that it keeps you needing to earn additional income to pay the bills. Most people just want to make 5K/month passive so they can quit their job ASAP. I could def have made more money in Nashville (it kept appreciating for sure) but I would have had to hold negative cashflow properties in the hope that they appreciated. And this bull market isn't going to last forever. 

How come it isn't an option to invest OOS? 

 Land is definitely something I want to learn soon!

 I love appreciation, but it doesn't pay the monthly bills. I'd be happy to stay in a market and scale big - you're absolutely right about that - but not if I have to fight tooth and nail to find a single cashflow deal. And cashflow is my primary goal because it pays the bills each month, causing me to not have to work. 

It has worked out for me. I'm curious what those people did who failed with cheap SFH, because I know countless others who have done great with it too. But to each his own, I don't think there's one strategy that everyone should do, there's so many routes that can take you to the same destination.

My post was referring to buy and hold specifically, not flipping or househacking. Are people making the #'s work on buy and hold deals in Denver? Do you have an example? I'd like to see the #'s. I've heard of people making it work out here so I believe you, but just trying to wrap my head around how. 

50% of the new investors I talk to live somewhere that's not affordable as a rental market.

They want to invest but feel handcuffed by the high prices and competition around them.

I say "dude, you need to pick a new market and invest virtually!"

They are usually both surprised and excited...

To learn that they could have been investing all along.

For many people I talk to...

Picking the market is their very next step.

If this is true for you, this post is going to spell out exactly how to go about doing that.

I got started by investing in Nashville around 2014.

I knew nothing about picking markets.

I just happened to live there.

The properties I bought appreciated a huge amount over the years after I bought them.

But, Nashville quickly became too expensive to continue to invest in.

I had to branch out to a new market.

I picked a couple surrounding cities in TN, and bought a dozen or so properties in those markets.

But within a year or two, those areas became too expensive as well.

Then I went down into Huntsville, Alabama and got some deals done there. It seemed like the next rapidly appreciating market so I was excited to lock in some deals and create the opportunity for long term appreciation.

But very soon after I arrived, Huntsville became too expensive and competitive to find deals in. There were still deals to be had, but finding them was so hard it almost wasn’t worth the effort.

Investors still did deals in all of these markets, but they became “fix and flip” markets more so than “buy and hold markets”, because the numbers just didn’t work.

At this point I grew frustrated.

“How many times will I have to move to a new market?”

“As soon as I get set up with a good contractor and property manager, and learn a new area, it becomes too expensive to invest in!”

Then I questioned my strategy:

“Is looking for growth markets really the best thing to be doing right now, given the crazy inflated and competitive status of the market in 2020?”

I shared my frustration with my business coach, who, while not a full time RE investor, has some rentals in Tulsa, OK.

His reply was “You should look in Tulsa. Nobody is looking here. Maybe you’re just looking in the wrong areas!”

After researching Tulsa and seeing how many cheap houses are freely available there, I considered the idea of starting to buy houses in that market.

When I did that, an interesting feeling arose within me.

It was RELIEF.

By giving myself permission to NOT fight tooth and nail in the hot, growth markets…

I could remove all pressure of “finding a good deal”.

(Which, by the way, is everyone's biggest bottleneck fright now. They might think it’s financing, but that’s usually caused by a misunderstanding of all the ways you can invest in RE with little to no money. It’s your market, bro)

I realized that by insisting on investing in growth markets, I was actually shooting myself in the foot.

These markets have a narrow window of time where there is opportunity.

But, much like an exploding stock price, the value soon gets baked in and the opportunity is gone.

I didn’t ultimately settle on Tulsa, but picked a similar but smaller market, Little Rock, AR.

It’s not often talked about on Bigger Pockets, nor does it make many lists of the “Top 10 markets to invest in”.

But, I'm seeing deals on the MLS for 40K. I just got a deal from a wholesaler for 35K, the house is in good shape, rents for $700, and is across the street from new construction!

Is this real life?

(Better believe I made an offer on that one)

So what’s the difference between a market like Little Rock, and all the other markets out there?

One of the key differences is that the other markets are growing in population, while Little Rock is “flat”.

Meaning, the population has roughly stayed the same for quite some time.

This causes the average home price to stay the same as well. Since it’s not growing, the demand for houses has not outpaced the supply.

Another word used to refer to a market like this is a “linear” market, whereas other markets that have large swings in price are called “cyclical markets”.

Linear markets don’t go up much during a bull market, but they don’t go down much during a recession either.

But, it’s clear that investing in these markets is not an appreciation play. It’s a cashflow play.

Which, if you want real financial freedom, is all you should really be concerned with anyways.

Also, keep in mind that in addition to monthly cashflow you still get the benefits of:

1) debt paydown

2) depreciation, and

3) getting to pay todays debt with future dollars

(#3 can be confusing one. It basically means that, since the value of the dollar is always decreasing, it will be easier to pay a debt in the future than it is now. 50K won’t be as much money 20 years from now than it is now. Since many mortgages are fixed for 5-30 years, the person who holds the debt gets in an easier position to pay the debts off as the years go by)

Some will point to the markets I’ve mentioned as being “high crime”.

I just want to say that many of the good RE investing markets are riddled with crime. Memphis is simultaneously a very popular market to invest in, as well as one of the highest crime cities in the U.S.

I own multiple rentals in high crime cities and haven’t ever had a problem, because I bought them in the right zip codes/neighborhoods.

The key to success comes down to learning the market. Knowing which neighborhoods to invest in and which to stay out of.

Now, this post is not to get you to invest in any certain market, or to act like my markets are the best ones out there.

There are literally hundreds of qualified “linear markets” in the U.S., just waiting for you to come and buy houses in.

If you are open to the idea of considering a market like this, the question becomes:

“How do I go about finding and selecting a linear market?”

In Part 2 of this post next week, I’m going to highlight the specific “6 Pillars” that you should look for in your market if you want to find deals with ease, get positive cashflow, while also protecting yourself and making solid investing decisions.

Isn’t that the dream?

Let me know what questions you have, and I’ll see you for Part 2.

Get referrals from other active investors, have them introduce you so that the contractor will take you seriously 

Nice, shoot me a DM if you want some help on the market piece. There's a good bit of nuance to getting that right. 

Thx Bill. What step are you on?