All Forum Posts by: Cole Jennings

Quote from @Cole Jennings:

I am new to real estate investing and I am planning on buying a 100k house in the Cleveland area and renting out to section 8. I don't live in Ohio so I would be an out of state investor. The market around where I live is too expensive for me at the moment. Just want some advice on whether this is a good idea for a first-time investor or if I should take a different direction.

Hi Cole.  I see this situation a lot and in most cases it can comes down to miss information. Regardless of the market you live in from New Jersey to the midwest leveraging a house hacking strategy is very tough to beat.  NJ is extremely high priced with high taxes but we also have extremely high rents that appreciate fast.  when you break down what it takes to by OOS compared to owner occupying a duplex multiple things will happen.  
-25% down loan means 100K property requires you to have 25K.  Leverage a 5% down owner occupied loan will get you a 500K property for same down payment
-when things go wrong in your house hack, you live on site already. When something goes wrong with OOS your 6+ hours away
-you need a place to live right now, why not have tenants pay for portion of asset you are living in
-100k property today.  maybe appreciates slightly at some point but not much.  There is a reason why NJ is expensive, we appreciate fast.  No joke cash flow is the joke, equity blows cash flow away.  Few hundred bucks per month does not change lives, hundreds of thousands of dollars in equity through appreciation is life changing.  Appreciate then buy the cash flow if you must (or keep property because cash flow comes with rent increases)
-management fees are not cheap, learning to self manage is easy
-having team in place 6 hours away is tough, situating team locally much easier especially if you align yourself with people doing what your doing.

To me OOS is taking step in wrong direction for new investor. 

Bad idea. Your instinct is to curb your risk by buying a cheaper property and going Section 8. In real estate risks go up with lower prices. The other way around, if you want to reduce risk, go a little up in price.

Many good comments here https://www.biggerpockets.com/forums/963/topics/1234351-out-...

Prices are very low in Cleveland - 139k median. While I can't speak to the demographic, investing at or a little above the median is a good idea and gets you into better quality investments with a lower risk profile.

@Cole Jennings It's always better to be hands on when possible.

You'll learn more and the knowledge will be great going forward.

Just make sure you TRACK your time! Many owners on BP claim they manage their property(s) better than any PMC. This is true, but taken out of context. Owners do more managing their properties than they will pay a PMC to do, because owners don't properly track the time they actually spend on their property(s). 

If you go the 2-4 unit route, an FHA loan is a great option. Suggest you look into the FHA 203(k) loan, which allows you to roll in repair costs into the purchase mortgage.

In addtion to renting out the other units LTR, suggest you consider:

1) Trying MTR or STR on one other unit for more income.

2) If it works out, do it on the other units.

3) Try MTR or STR on the other bedrooms in the unit you occupy.

4) If the property has a decent basement, see if you can make it liveable for yourself, so you can rent out all the other units. Most cities will NOT allow you to rent out a basement, but there's rarely no laws against an owner living in their basement.

5) If you can make this all work, you can refi out of the FHA mortgage, so you can re-use it to repeat the process and grown your portfolio.

Forget looking for a mentor and work on your self-reliance. I am saying this as someone who was just as scared as you when I bought my first duplex in 2009 (Milwaukee real estate did not look very promising at that time)' The reality is nobody is going to make the decisions for you. Even worse, you wil get conflicting advice and that will paralyze you even more. So, ultimately it's your call.

Read some books (I used to say all you can find, but there are so many now) about REI. You can always post numbers here on BP - that is probably the single best way of getting feedback and you can tap into swarm-intelligence.

The best tip I can give you is instead of analyzing deals and never knowing how good is good enough, at some point: define your buy box. this will get you out of the maybe-zone into a pass/fail decision. Either it's in or out. That makes it a lot easier. 

Also make sure your buy box is realistic. If you are looking to buy a single family for 50% less than the best deal in the last 12 months in that neighborhood you are chasing a unicorn. Be realistic.

Finally, don't overthink it. It's not rocket science. Buy the best quality deal you can find in an at least decent neighborhood. Stay away from the hood, no matter how mesmerized you are by the theoretical cash flow on your spreadsheet. 

You don't need to make all your money on your first deal. Remember you are looking to build a portfolio, so buying a lower ROI, but less risky deal for the first one is never wrong!

@Cole Jennings

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

Why is Property Class so important for investors to understand and apply in their investing strategies?

Because the Property Class dictates the Class of the tenant pool that the property will attract.

The Tenant Class greatly impacts rental income stability and property maintenance/damage by tenants.

Both Property Class and Tenant Class affect what type of contractors, handymen and property management companies will work on a property.

If you buy & renovate a property in Class D area to Class A standards, what Tenant Class will rent it?

Or, if you put several Class D tenants in a Class A four-plex, what do you think will happen to the property?

So, if you fail to apply the correct assumptions to a property, your expectations won’t be met and it may even be a financial disaster.

We use the following to rank Property Classes, in order of importance:

• Property Tenant Pool: closely linked to location, but not always.
• Property Location: closely linked to tenant pool, but not always.
• Property Condition & Amenities: it’s important to, “Maintain to the Neighborhood.”

Key metrics for each Property Class:

Class A Properties:
Tenant Pool: Majority of FICO scores 680+, no convictions/evictions in last 7 years.
Tenant Default: 0-5% probability of eviction or early lease termination.
Section 8: Class A rents are too high and won’t be approved.
Vacancies: 5-10%, depending on market conditions.
Cashflow vs Appreciation: Typically, 3-5 years for positive cashflow, but you get highest relative rent & value appreciation.

Class B Properties:
Tenant Pool: Majority of FICO scores 620-680, some blemishes, no convictions/evictions in last 5 years.
Tenant Default: 5-10% probability of eviction or early lease termination.
Vacancies: 10-15%, depending on market conditions.
Cashflow vs Appreciation: Typically, 1-3 years for positive cashflow, balanced amounts of relative rent & value appreciation.
Section 8: Class B rents are usually too high for the Section 8 program.

Class C Properties:
Tenant Pool: Majority of FICO scores 560-620, many blemishes, but should have no convictions/evictions in last 3 years. Verifying recent 2-years of rental history very important! Same for 2-years of job/income stability.
Tenant Default: 10-20% probability of eviction or early lease termination.
Section 8: Class C rents usually meet program requirements, proper screening still recommended.
Vacancies: 10-20%, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Should cashflow immediately, at the lower end of relative rent & value appreciation.

Class D Properties:
Tenant Pool: Majority of FICO scores under 560, little to no good tradelines, lots of collections & chargeoffs, but should have no convictions/evictions in last 12 months. Verifying last 2-years of rental history and income/employment extremely important to find the “best of the worst”.
Tenant Default: 20-30% probability of eviction or early lease termination.

Section 8: Class D rents meet program requirements, often challenges to pass Section 8 inspection.
Vacancies: 20%+, depending on market conditions and tenant screening.
Cashflow vs Appreciation: Typically, all cashflow with little, maybe even negative, relative rent & value appreciation.

Where did we get our FICO credit score information from?

Check out this chart:

FICO Score	Pct of Population	Default Probability
800 or more	13.00%	1.00%
750-799	27.00%	1.00%
700-749	18.00%	4.40%
650-699	15.00%	8.90%
600-649	12.00%	15.80%
550-599	8.00%	22.50%
500-549	5.00%	28.40%
Less than 499	2.00%	41.00%

Source: Fair Isaac Company

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

Hey Cole, my advice is to really take a closer look at the neighborhood of the property you're eyeing. There are a lot of single-family homes in that price range, but they're mostly in D/F class neighborhoods. I’d be careful with those, especially in F class areas as they come with higher risks.

You can still find single-family homes in that price range in C class areas. I recommend focusing on west side of Cleveland. Just know that they might need some work, considering the price. An inspection contingency should help you get a good look at the property's condition. Good luck on your search!

@Cole Jennings

i'll simplify.  do not do this. or at least, do not start with this.  that price point will put you in a challenging area, and unless you have the best team in the state, which i doubt you do, you will just lose money on turnovers and capex.  that will set you back.

https://www.biggerpockets.com/forums/48/topics/1137397-balti...

https://www.biggerpockets.com/forums/963/topics/1195280-expe...

https://www.biggerpockets.com/forums/52/topics/868202-tenant...

i get that NJ may be too expensive.  so go 1-2 hours out.

not trying to be discouraging - just realistic

I'ts a high risk proposition for sure. There's a reason some of those properties look so good on paper, yet they are still sitting there, waiting for a buyer. 

I have a friend who bought a Fourplex in Ohio a few years ago- paid $235K and gross proforma rents were $5K. He kept it for 4 years and was only cash flow positive TWO months out of 48. Never once collected $5k in rents, lost money every month and sold it at a loss. 

Make sure you know the neighborhood and tenant base very well- hire a VERY experienced property manager and work with an agent who has high production in that area. 

As long as you have the proper team you should be ok, look out for "turnkey" investments from no creditable operations. Find someone local and build a relationship, if you are going to invest 100k, Id even get on a plane and go visit a few operations and see what/who you can do business with.