All Forum Posts by: Eric Fernwood

Hello @Mark Kumm ,

Many would-be flippers buy a dilapidated property, remodel it to their own taste, discover that they can't sell the property for what they need to break even, run out of money and sell at a loss. I am a Realtor in Las Vegas and my business is almost exclusively remote investors. I am in potential investment properties all the time. And, about twice a month, I see properties that have been remodeled to the flipper's personal taste such that there is no way to break even let alone make money. Unless you really know what you are doing you can lose a lot of money flipping. But, if you are inclined to try, below is a process that I have used and worked for me and I believe will work for everybody.

Once you find a property that you believe has flip potential, take the time to really think the entire process through with a spread sheet. Start with what you conservatively believe that the property will sell for if it is brought to market standards (more on market standards later). Do not be optimistic on the eventual sales price or time to sell; be very conservative. Once you are reasonably confident about the sales price and how long it will take to close once the rehab is complete you are ready to work backwards to the maximum you can offer for the property.

Work backwards to make money

As an example, suppose you find a property that looks like a good flip. You carefully study recent sales comps and decide that, remodeled to market standards, the property should go under contract for $200,000 within 60 days after the rehab is complete and it is placed on the market. And, your trusted contractor conservatively estimates it will cost $40,000 and take 2 months to bring it to market standards. Since profitable flippers are pessimists you estimate the total rehab will cost $50,000. Your hold time will be:

As to profit, suppose you will be happy with a 10% return. So, your goals are:

Also during your due diligence you learned that the real estate tax rate is 1%, property insurance is $450/year, purchase (closing) costs are 3% and cost of sales (commissions, closing costs, etc.) will be 8%. I put these numbers in the table below.

Now that we have an (over simplified) estimate of the total cost, we can work backwards from the probable sales price to determine the maximum price we can offer.

Based on the above, you cannot pay more than about $110,000 for this property if you are going to make money. Yes, you can probably reduce cost of sales and perhaps other numbers but you cannot significantly reduce rehab costs and there will always be surprises which will burn you if you do not have sufficient funds set aside.

Flip considerations

• Typically, lenders will only finance properties that are already livable so financing damaged properties can be a challenge. Talk to a knowledgable lender about 203k loans and possibly HomePath. You need to get this nailed down before you even start looking. The alternative is cash or a hard money loan. The terms on the last hard money loan one of my clients did was 5% closing costs, 40% down, 10% interest rate and the life of the loan was 18 months. Hard money loans vary significantly so the numbers you get might be completely different.

• You may have noticed that I used the phrase "market standards" multiple times. There is a common erroneous belief that if a property is "really improved" that it will sell for more than what similar homes have sold for. This is never true. If similar homes are selling for $200,000, even if you put $100,000 of "improvements" into the property, it will not significantly increase the sales price. One of the biggest challenges for new flippers is the tendency to remodel the property to their taste as oppose to rehabbing to market standards. If similar homes are selling for $200,000 with vinyl floors, travertine tile will not significantly increase the sales price. You need to really know what characteristics made similar properties sell and not go much beyond that. Cost control during the rehab is critical. Of course, there are small things that can make the property much more desirable to potential buyers without spending a fortune. For example, ceiling fans in the master bedroom and family room, improving the curb appeal and the front entrance area, fresh paint, etc. 

I hope the above helps. Flipping can be a profitable business but only if you really know what you are doing and you have a well thought out plan. Be careful and good luck.

Hello @David B. ,

Buying turnkey is only a purchase method, it does not assure you that you are getting a good property or that you are going to get good tenants. Also, a property is no better than the jobs around it so if the economy is going down in the location in which you buy, what is a good investment today could be a disaster in 6 months. I believe that the process should be:

1. Determine where and what kind of property will generate a sustained positive cash flow and is located in an area likely to appreciate over time. I call this a property profile. (I will elaborate on this later.)

2. Once you have determined the best property profile for you, then you need to consider all your purchase options in that specific location. Whether or not you buy a property turnkey or some other approach is a trade-off you can evaluate based on differences in money, time and risk.

Below is a diagram illustrating the process.

Below I will explain about each block in the illustration.

Property Profile

There are two parts to a property profile: where and what.

Where

• Choose a city which is experiencing sustained growth and is likely to have continued growth. See population changes by state here.

• A rental property is no more valuable than the jobs around it. The local chamber of commerce or university will likely have the information you need. Avoid boom towns where the jobs are here today and gone in 5 years. An example would be a town fueled by a major construction project (a dam, pipeline, high speed train, etc.). Once the project is complete all the construction jobs will vanish as will your renters and you will likely have a disaster on your hands. Job growth and population increase are the basis of long term appreciation.

• Check the landlord/evictions laws. For example, in Las Vegas the typical eviction takes less than 30 days and costs less than $500. I have heard from clients that evictions in California (and some other states) can take up to a year if the tenant actively resists and costs thousands of dollars in legal and other fees (not to mention the accumulated damage over the extended eviction period). No investor initially worries about evictions, until one happens to you. So, check the appropriate laws and regulations before you buy. Your simplest option would be to talk to local property managers. They deal with such issues every day.

• Remember that you need to have sufficient cash reserves so you can carry the property for several months if necessary. This dictates the price range of properties that you can afford. I would start by looking for rental properties in the cities you are considering and then looking for sales comps of similar properties.

• State/city/county income taxes. Most states have a personal income tax. This can significantly impact your return. For example, a property with a 5% return in Nevada, Texas, Washington or Wyoming will actually earn you 5% (subject to your own state income tax and the ability to deduct from your state/federal taxes paid in other states). If the same property was located in areas with taxes you would also have to adjust down the return based on these taxes.

• A city where climate is not a major factor. For example, people rarely move during heavy snowfall seasons in the North East. Or, if the population swells and contracts rapidly with the season as in south Florida where rentals tend to be seasonal.

• A location where annual maintenance costs are reasonable. Higher costs are sometimes due to climate or how the homes were constructed. For example, in heavy snow country you will have to include snow removal costs and more physical damage to driveways and the structure in your annual maintenance cost provision.

What

Now that you have a location that may be profitable, you need to know what to buy. And, what is a good type of property in Cleveland will not necessarily be a good type of property in Phoenix. So, you need to determine four criteria for each specific local, which are listed below. Your best source will be interviewing three or four local property managers. Tell them you are staring out and that you are looking for a property manager to work with.

• Type: Condo, high rise, single family, duplex, single story, two story, etc.

• Configuration: Two bedroom, three car garage, mud room, etc.

• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.

• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.

I have a set of property manager interview questions which I use (I am a Realtor in Las Vegas and my practice is almost exclusively remote investors and I occasionally have to move my clients to a different property manager when the current one starts to go bad.), and I will be happy to send to you (or anyone else who want it). Just drop me an email.

Profitability

After talking to a few property managers you will have a very good idea of what properties rent best. The next step is to determine whether you can make money with these properties. Look on Zillow (or similar sites) for recent sales of such properties. Once you know the sale price of such properties and know what they will rent for (from talking to the property managers) you can use a tool I created to determine if you can make money. (Break-Even Calculator - see here for more information.)

Using this tool and data from Zillow, I looked at properties in three cities: Austin, TX; Cupertino, CA and Las Vegas, NV.

If the Break-Even Price is lower than the Actual Sold Price it is unlikely that properties in that city will generate a positive cash flow. As you can see in the table above the prices of properties in Cupertino (and possibly Austin) are too high relative to the rent to generate a positive cash flow. 

If you cannot make an acceptable level of profit, look somewhere else. 

Acquisition Method

At this point you are ready to consider your acquisition options. I believe this decision can be made through a spread sheet and a thorough evaluation of the property manager involved if you are considering turnkey. Even though you buy a property that has the potential to be profitable, only a good property manager can make it happen. Be very careful on choosing the right property manager. Once you evaluate this and you are satisfied, it is time to buy.

Remote Investing Considerations

• Choose a location where you would like to spend some time. When I was setting up manufacturing for a certain item (past life) I chose India as opposed to Vietnam or China. I like spending time in India. I find the other two places more challenging. Almost all of my clients are remote investors and they like to come to Las Vegas to "inspect" their properties once or twice a year. It is actually a vacation for them but they can deduct a portion of the trip cost from their taxes (in most countries). During winter, I find that Canadians are especially interested in "inspecting" their properties!

• As I mentioned before, be VERY aware of issues like: landlord laws (eviction process and costs), climate factors, population trends, job stability and rent stability.

David, I hope the above helps.

Eric Fernwood

Hello @Marshall Holmes ,

In order to achieve a goal you have to first define what that goal is. In my opinion, the goal is to consistently buy properties which generate a sustained positive cash flow and are located in areas likely to appreciate over time. However, meeting these two goals are not easy. There is no simple answer but I can tell you a process that should work. First, an overview:

• Find out what is the best type, configuration, rent range and location within the area you are considering.
• Determine whether you can make an acceptable profit? If you can't make a profit in the area you are considering, buy somewhere else. Never buy a no-profit property.
•If you determine you can make an acceptable level of profit, contact a Realtor and look at appropriate properties. Always run all properties by the property manager before you consider making an offer.
•During due-diligence, get combined rehab lists from the property inspector and property manager and have a contractor estimate the actual rehab cost. Once you have this, recalculate profitability and only proceed with the purchase if it makes sense.

Below is more detail on the process:

What is the best type, configuration, rent range and location?

You need the intersection of four factors.

• Type: Condo, high rise, single family, duplex, single story, two story, etc.
• Configuration: Two bedroom, three car garage, mud room, etc.
• Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.
• Rent Range: If the majority of the population to which you want to rent are willing and able to pay $1,000/Mo to $1,300/Mo. you should only be looking at properties that you can purchase, rehab and profitably rent in the same rent range.

Below is a graphic illustrating the above.

Where can you quickly get this information? Interview some property managers. Property managers work with the same rental properties you want to buy every day of the week. They know what type, configuration, location and rent range works best in their specific market area. And, just as important, they know what will not rent. Locate a few property managers and make an appointment to meet with them. Tell them that you are just starting and you are looking for a property manager to work with. I have a set of property manager interview questions which I use (I am a Realtor in Las Vegas and my practice is almost exclusively remote investors and I occasionally have to move my clients to a different property manager when the current one starts to go bad.), and I will be happy to send to you. Just drop me an email.

Can you make a profit?

After talking to a few property managers you will have a very good idea of what properties rent best. The next step is to determine whether you can make money with these properties. Look on Zillow (or similar sites) for recent sales of such properties. Once you know the sale price of such properties and know what they will rent for (from talking to property managers) you can use a tool I created to determine if you can make money. (Break-Even Calculator - see here for more information.) If you cannot make an acceptable level of profit, buy somewhere else. 

Time to look at properties

If you determine that you can make an acceptable profit, it is time to find a Realtor. Ask each property manager for a recommendation. Since you will know what and where you want to buy you can be very specific in directions to your Realtor. Tell the Realtor up front that you will not buy the first property you see but that if they work hard with you, you will buy through them. If they do not fulfill that commitment, get another Realtor.

Once you see a property that matches your requirements, make a video walk through and send it to your property manager and anyone else that makes sense (handyman, landscaper, etc.). Remember that the last thing a property manager wants is (another) unrentable property so if they tell you no, listen to them. Like you, they only make money if the property rents. I look for investment properties every day and I never recommend a property to a client unless the property manager approves.

A frequent question I get from new clients is, "How much should I offer?"

• Offers must be based on ROI, not on the listed asking price. I do this in my practice and end up making multiple offers to get one property. However, when we do get an offer accepted, my clients make a solid return.
• Buy a property not just for renting but also for your next buyer. Sooner or later you will want to sell the property (maybe for a 1031?) and if it is an unusual configuration you will not get the best price or have an easy time selling it. Remember, if potential property owners do not like the floor plan, potential renters won't either. This is where a Realtor's experience really pays off. While the property manager knows what will rent, the Realtor knows why since they deal with clients feedback every day. Also, I would expect a Realtor to know what the market trends are and what is happening with the major employers.
• Be certain to consider rehab costs in your total acquisition costs. More about this later.

Your offer was accepted. Now what?

During the due-diligence period you need to get two people into the property ASAP: the property inspector and the property manager. The property inspector will generate a report containing a list of defects and you will want to have most of them repaired immediately after close. The property manager will provide a list containing cosmetic issues that need to be corrected. In general, I do everything the property manager recommends and most of what the property inspector recommends. Potential tenants select properties based on cosmetic reasons; they assume that the A/C, plumbing and such work. Once you (intelligently) combine the lists you need to have a contractor (or handyman you trust) provide a written estimate of the total cost to make the property market ready. Once you know this amount, re-run your profitability calculations and if the profit is still at an acceptable level, continue to close. If not, terminate the purchase.

Marshall, I believe that if you follow the above process you will not go too far wrong.

Feel free to ask questions or ask for clarifications if any of the above does not make sense.

Hello @Yusuf Mathai ,

One thing I should have mentioned in my previous post was the cost. It will vary depending on the location and such but below are typical numbers for my clients:

• Realtor (me) - I do not charge any fees to buyers; my services are paid for through the regular commission (which the seller pays). All my other services including my finding properties, coordination of the rehab, etc. are free to my clients.
• Property manager - All the services I listed, plus monthly statements and annual tax documents are included in the 8% management fee (most charge 10% but my clients get a discount due to the volume of properties I have with the property manager). This pretty much takes care of the bookkeeping associated with the properties. The 8% does not include evictions which will be very different depending on local laws and such. In Las Vegas an eviction generally takes less than 30 days and costs less than $500.
• Property inspector - Usually costs between $250 to $300 (in Las Vegas) per property. My property inspector also reviews videos and provides advice if I have a question on a specific item.
• Contractor - He views videos, will meet me at a property if I am concerned about something and, once I have the property manager and property inspector lists, he provides estimates. He does this based on the business relationship we developed over time.

The point of all the above is that you do not need to "hire" anyone and you do not want to hire anyone. Over time you will end up changing team members due to your changing focus or a member stops performing. This is another reason you never want to work with friends or family; it is hard to fire friends or family.

Hello @Yusuf Mathai ,

You have learned a lot. Too many new investors decide to do everything by themselves and they end up losing a lot of money, time and effort. Your decision on putting together a team is absolutely the way to go. Before I continue, know that I am a Realtor in Las Vegas and my practice is almost exclusively remote investors. However, what I will explain in this post should be relevant anywhere you choose to invest.

The only way to accomplish anything is to have a clear definition of the end goal and to work backwards from there. In my opinion, your goal should be to consistently buy properties which generate a sustained positive cash flow and are located in areas likely to appreciate over time. Meeting these two goals is not easy. To achieve these two goals (which I will shorten to just "profitability & appreciation") requires a lot of correct decisions . I believe that it is almost impossible to do this on your own, especially if you are just starting. I work with a team and I've owned over 20 investment properties and now I work with investors every day. How do I consistently find the right properties for my clients? An experienced advisory team, proven processes and software I developed. Here is how my process works.

1. My analytic software analyzes thousands of properties and usually returns a very short list of potentially good properties. (usually <20)
2. I visit all properties and evaluate the area, the drive path from the property to the major job areas, the subdivision and the specific property. I also developed software for estimating the rehab cost so I know up front if the property is likely to meet the profitability & appreciation goal. If I think it is a good property, I take a walk through video and send it to my property manager, my partner and my client. If there is any maintenance issue that I do not know, I send it to the contractor I normally work with for his opinion. Unless all these team members agree that this is a good property, I do not proceed. Saying it another way, if one team member does not like the property we eliminate it from consideration. If everyone agrees we make an offer and if it is accepted (offers are based on ROI, not asking price so our hit ratio is low), the second phase of the evaluation starts; the due-diligence period.
3. As soon as the due-diligence period starts, the property manager and a property inspector examine the property. They each generate a rehab list. The list from the property inspector primarily focuses on defects (defective water heater, etc) and the list from the property manager primarily focuses on cosmetic issues (property flow, paint colors, etc.). I combine the lists and my contractor meets me at the property and we go through all the items and he provides me a cost and time estimate. With an estimate of the total rehab cost in hand, we re-run the profitability calculations and if it still meets the profitability & appreciation goal we proceed with the purchase.
4. Once the property closes I work with the contractor and the property manager to get the property market ready as quickly as possible. I also put together a set of marketing photos since photos are what sell the property to potential tenants. Below is a diagram of our process.

Now that I have explained our process, below is the role of each player. Note that the following is a general case which should apply anywhere, not my specific case (as I outlined above).

The key team members:

Property Manger

The property manager is your key team member. Below is a diagram of what I expect from a property manager and below that a brief explanation of the items.

Local Market Knowledge

Most new investors I talk to think that the only function of a property manager is to collect the rent. Not true at all. They are the go-to person from start to finish. When you are first evaluating a potential investment area you need to know what works in that specific local. You will learn more by talking to 3 or 4 mid-sized property managers for 30 minutes than attending a dozen seminars. Why? Because the seminar information, while helpful and important, is general in nature. You need to know what works in a highly specific area. The property manager deals with tenants, renting units, repairs and a dozen other issues every day of the week in a specific area. They probably have no idea what would work 20 miles away but in their area they are the experts.

Property Evaluation

Once you find a property that appears to meet the profitability & appreciation criteria, send a video of the property to the property manager. What you are seeking from the property manager is their opinion on:

• Is this a rentable property? Recently, I found a property that looked good and had a reasonable rehab cost. I liked it, my partner liked it, the client liked it and the property manager rejected it. She stated that that specific floor plan just does not rent. I did not see it but I did some research and found the same floor plan for rent in a few areas in the city and they all took 30 to 45 days longer to rent than other properties in the same area. Listen to your property manager! I do. The last thing a property manager wants is another unrentable property to deal with.
• Estimated monthly rent and time to rent. I do my own calculations but I want the property manager's independent opinion. Most times we are pretty close but occasionally we are not. And, it is the times when we are not close that is the most beneficial to me and my clients.

Due Diligence

Until the property manager and the property Inspector walk the property and provide rehab lists, I only have a guess as to the rehab costs. As I stated earlier, the property manager's list and the property inspector's list are very different. We re-calculate profitability with the total estimated rehab costs before we decide to proceed with the purchase.

After Close of Escrow

While I can find what should be profitable properties for my clients, only the property manager can make them profitable. It starts with marketing the property through multiple channels and having dedicated people to show and promote the rentals. I will not elaborate further on this but this is critical.

A rigorous tenant screening process. The process must include:

• Financial - Note that a high credit score alone does not indicate a good tenant. And, a low credit score might not indicate a bad tenant. For example, a recent applicant had a high 500's credit score. When the property manager looked at the details she saw that there were medical collections. It turned out that the daughter got sick and needed a lot of care. The money they owed was way over what they could hope to pay and they lost their home. If you removed the medical collections and the foreclosure, they had a low 800's score. So, the property manager needs to really look at the numbers.
• Criminal - If the applicant appears on the nation, state, county, or city's sex offender list, has court orders on back alimony or child support, reject them.
• Past landlord reference - You can usually ignore their current landlord. If they are bad tenants, the current landlord will give them a positive reference just to get them out of their property. However, prior landlords are likely to provide solid information. Especially if you were to ask them, "Would like the tenant back?"

Realtor

While the property manager knows "what" will rent, the Realtor knows "why" people select a property because they get feedback from buyers every time they show a property. And, the reasons people choose to buy a property are the same reasons people will choose to rent a property. This kind of knowledge comes from experience; showing thousands of properties and closing hundreds of deals. I could add a lot more here but I will summarize it with the following points that the Realtor on your team must provide:

• Property Access - You need to get into the properties so you can see them in a timely manner. Good deals tend to go fast. Also, you need to see both properties for sale and similar properties for rent. You want to see the rental properties so you understand your competition. Look for the best competition in your rent range, prospective tenants will.
• Buyer View - They know which floor plans, configurations and characteristics are desirable and which ones are not. If homeowners are reticent to buy a property, renters will not want it either.
• Information - You need sales and rental comp data as well as market trends.
• Patience - They must understand that you are not going to buy the first property you see. This is difficult for many Realtors. Also, the Realtor needs to understand that you are not looking for a "home". You are looking for an investment property that must meet very specific criteria in addition to being a property that future buyers would find desirable.

Property Inspector

A good property inspector can save you a fortune by finding problems during the due-diligence period. Here is a recent example: I found a property, everything looked good, everyone approved it and we entered into contract. The property inspector discovered that the large back patio had a negative slope; it sloped towards the house. Sooner or later a big rain would come from the right direction and the house will be flooded. The insurance company adjustor would discover the negative sloped patio and promptly cancel the policy and no benefit would have been paid.

In summary, I believe that if you want to consistently buy properties that are profitable and likely to appreciate you need a good team. The minimum members of that team are:

• Property manager
• Realtor
• Property inspector

Yusuf, I hope the above helps to get you started. Feel free to contact me with questions.

Best regards,

Eric Fernwood

Hello @Alis B. 

Before I answer your question (as best I can), know that I believe you should only buy properties that generate a sustained positive cash flow and are located in an area likely to appreciate over time. Meeting these two goals (sustained positive cash flow and appreciation potential) is not easy. Let me explain:

Sustained positive cash flow

Sustained positive cash flow means that rent consistently exceeds the total recurring costs. What criteria must the property and the area meet in order to achieve sustained positive cash:

• A good tenant. I define a good tenant as one who: pays all of the rent on schedule, takes care of the property, does not cause problems with neighbors, does not engage in illegal activities on the property, and stays for multiple years.

• Low maintenance cost. This is a combination of the climate, condition of the property, and the quality of the property manager. 

• Stable or growing job market - Rental property profitability is dependent on a stable job market. You want a job market that is growing and not dependent on industries like manufacturing. Also, it is better to have a lot of smaller employers than a few large employers.

• Property price vs. rent. There are areas where it is virtually impossible to rent a property at a profit due to the cost of the properties vs. the rent.

• Landlord friendly laws and taxes. Clients have told me that in California, if the tenant knows what they are doing, it can take up to 1 year to evict a tenant. Also, state, local and property taxes are very important. It is very difficult to have a profitable property in a high tax area.

• A property that will rent quickly at a price which will exceed recurring costs thus generating a profit.

• There are other considerations as well but I think I covered some of the more important ones.

Potential Appreciation

• Low crime. High crime and appreciation do not go together.

• Sustained population growth of people who can and will rent your type of property.

• A stable area in which people desire to live and have good schools.

• Overall state population growth.

If you limit your search to any single geographical area you are unlikely to find such properties. Focus on your goals and not geography. I am a Realtor in Las Vegas, and my business is almost exclusively remote investors; at this time I have zero local investor clients. People invest here because some properties here meet their profitability and appreciation goals. However, Las Vegas is not the only place where you can meet the profitability and appreciation objective and I will now tell you the process I would use to find others.

The process

Note that the following is more of an outline rather than a description so please ask if you want more information on any point.

• Start by understanding the overall population movement trends. See population changes by state here. In general, I think the population is moving towards the southwestern states. This should narrow your search to only a few states.

• Each state has a limited number of viable cities since you need cities that are sufficiently large so that there is a stable (and growing) population. I am guessing a population over 1 million people would be a good start. This should get you to 5 to 10 cities.

• A rental property is no more valuable than the jobs around it so you need to look at job stability in each of the cities. Googling each city and the local chamber of commerce web site is usually a good source. This should eliminate one or two more cities.

• For each of the remaining cities check the taxes/landlord/eviction/rental/rent control laws. For example, in Las Vegas a typical eviction takes less than 30 days and costs less than $500.

• Seminars and blog answers (like the one I am writing) are general in nature and may not apply to a specific local because each local is unique when it comes to investing. The best source of such local information is a mid sized property manager. They will have enough properties under management to know the market but small enough to be interested in a new client (you). You will learn more about local investing by talking to 3 or 4 property managers than you will get from seminars and books. You are essentially looking for the intersection of four factors:

1. Location: Usually a very specific area. For example, west of 23rd St and south of the river, etc.

2. Type: Condo, high rise, single family, duplex, single story, two story, etc.

3. Configuration: Two bedroom, three car garage, mud room, etc.

4. Rent Range: If the majority of the population to which you want to rent are willing to pay $1,000/Mo to $1,300/Mo. you should be looking at properties that can profitably rent in the same rent range.

• Once you have a property profile (that matches the above factors) you can use Zillow or any other source to determine the typical price these properties recently sold for. Once you know the typical price and the typical rent you can use a tool I created to determine if you can make money in that market. Break-Even Calculator. Using this tool and data from Zillow, I looked at properties in three cities: Austin, TX; Cupertino, CA and Las Vegas, NV. If the Break-Even Price is lower than the Actual Sold Price it is unlikely that properties in that city will generate a positive cash flow. As you will see in the table below the prices of properties in Cupertino (and possible Austin) are too high relative to the rent to generate a positive cash flow. You should be able to generate similar data for all the cities you are considering in an evening. (Note: the following are "typical" prices. You can usually do better than typical once you are actually looking at properties.)

• Next, I would select one realtor and one property manager from each finalist city and go. There is no substitute for personally meeting the people who will be the core of your investment team. Note: tell both the Realtor and the property managers up front that you are in the investigation phase and are not “buying” anything on this trip. If any are “too busy” to spend time with you, then you know to eliminate them from further consideration.

• At this point I believe you will likely have enough information to make an informed decision on where and what to buy.

Alis, I hope the above helps. Feel free to contact me if you have questions.

You asked a question covering a lot of territory. I broke your question into the following items and will address each one as best as I can.

1. Should you manage your own properties?
2. How can you determine a good place to invest in real estate?
3. How can you make the best use of the funds you have?

Question #1: Managing your own properties
Managing your own properties is based on the assumption that you can save money or that there is some advantage. Most new investors believe that the only value of a property manager is to collect the rent. I wish it was that simple. When I first started, I managed my own properties. What a mistake! Each month I had to knock on the tenant’s doors since I did not receive the rent in the mail by the 1st. And, even though their cars were in the driveway and I could hear the TV, no one would answer. After losing a few months rent this way (I owned 8 properties at the time) I placed them in the hands of a bad property manager (I was no better at selecting property managers at that time than I was at screening tenants). She did collect the rent but then never deposited it into my account! Finally, I got the properties into the hands of a good property manager. To make a long story short, 4 of the 8 tenants had to be evicted and good tenants installed. My “management” time went from “most weekends and frequent evenings” to about 30 minutes a month. In total, I believe my attempting to save the 10% property manager fee cost me close to $10,000. Today I am a Realtor in Las Vegas and almost all of my clients are out of state/country investors. I have clients with enough properties that I could easily make a business managing them. Am I considering managing the properties? No. In order to be successful at managing properties you need a lot of property manager experience and hundreds of properties to justify the staff, software and processes. Just don’t do it. (if you would like to see what value a good property manager can provide, see this blog article). Finding a good property manager is not always easy. I have a set of property manager interview questions which I have developed over a number of years. If you would like a copy, send me an email.

I hope by this point you have decided not to manage your own properties. If this is true, the next issue is do you need to live in the same city? Based on my clients, I am convinced the answer is no. So, my advice is to choose a city for investment and choose a place to live. I do recommend that all things being equal, buy properties in a city I would enjoy visiting. When my clients come to Las Vegas to “inspect” their properties, a portion of the entire trip is a tax deductible business expense.

Question #2: Where and what to buy?

There is no easy answer to this question but below is the process I would use. Note that fully answering your question would fill a book so understand that the following is only an overview.

• I would start by understanding overall population movement trends. See population changes by state here. In general, I think the population is moving towards the southwestern states. This should narrow your search to only a few states.
• Each state as a limited number of viable cities since you need only look at cities that are sufficiently large so that there is a stable (and growing) population. I am guessing a population over 1 million people would be a good start. This should get you to 5 to 10 cities.
• A rental property is no more valuable than the jobs around it so you need to look at job stability in each of the cities. Googling each city and the local chamber of commerce web site is usually a good source. This should eliminate one or two more cities.
• For each of the remaining cities check the landlord/eviction/rental laws. For example, in Las Vegas a typical eviction takes less than 30 days and costs less than $500. I have heard from more than one of my clients that evictions in California (and some other states) can take up to a year if the tenant actively resists and cost thousands. (No investor initially worries about evictions, until it happens to you.) The best source for this kind of information would be talking to a few property managers in each city you are considering. I would choose mid sized property managers. They will have enough properties under management to know the market but small enough to be very interested in a new client (you).
• Property managers deal with the issues that concern you every day. They know what rents and what doesn’t. Pose the same questions to multiple property managers and you will quickly learn the real situation. Also ask about their fees and services. The basic issues I would investigate include:
• What type, configuration, location and rent range do they recommend? Remember that the property manager only makes money if there is a tenant paying the rent so they have the same goal as you do.
• Ask about the eviction process (time and cost), tenant rights laws, rent control and any other issues that will impact your profitability.
• Who are the major employers for these tenants?
• The last question should always be, “What have I not asked you about that I should know?” Over the years I have been amazed at the responses I have received to this question.
• Once you know the type, configuration, location and rent range of recommended properties, your next step is to determine whether you can afford to buy such a property and whether a typical property generates a positive cash flow. For example, if a typical rental property costs $400,000 and your budget is $150,000, don’t waste your time. Next, spent some time on one of the popular real estate sites and obtain information about possible rental properties in the remaining. What you are looking for are properties that were recently sold and the rental rate for similar properties. I selected three cities to use as an example: Austin, TX; Cupertino, CA and Las Vegas, NV. Then, using a tool I developed (Break-Even Calculator - see here for more information) I created the following table. The Break-Even Calculator enables you to determine the purchase price where the recurring costs equals the income.

• If the Break-Even Price is lower than the Actual Sold Price it is unlikely that properties in that city will generate a positive cash flow. As you can see, from the above, the prices of properties in Cupertino (and probably Austin) are too high relative to the rent to generate a positive cash flow. You should be able to generate similar data for all the cities you are considering in an evening.
• At this point you are probably down to two or three cities. Now is the time to call back the property manager(s) you liked the best for each remaining city and ask them to recommend a Realtor. Have each of the Realtors send properties which match the profile (type, configuration, location and rent range) you learned from your property manager interviews. Once you have the properties I would re-validate profitability using the Break-Even Calculator.
• Next, I would select one realtor from each city and go visit. There is no substitute for personally meeting the people who will be the core of your investment team. Note: tell both the Realtor and the property managers up front that you are in the investigation phase and are not “buying” anything on this trip. If any are “too busy” to spend time with you, then you know to eliminate them from further consideration.
• At this point I believe you will likely have enough information to make an informed decision on where and what to buy.

Question #3: How to make the best use of the funds you have?

A difficult question to answer without more knowledge of your situation. However, if you can obtain cost effective financing for investment real estate that is the way to go. One of the big advantages of investment real estate is the ability to finance a property over 30 years. Most of my clients put 20% down and finance the balance over 30 years.

Aaron, I hope the above will provide some ideas for further investigation. If you have questions, feel free to ask.

Thanks for the positive feedback. 

Hello @Will Porter ,

Having an informational interview with (multiple) property managers is essential. What I would seeking to discover is not only the type, configuration, location and rent range, I would also be looking for a future investment team member. I will share my opinion on how to select a good property manager. However, before I continue, know that I am a Realtor in Las Vegas and my practice is almost exclusively remote investors. So, I am biased towards utilizing a property manager based on my working almost 7 days a week with investors and the large number of people who have come to me for help after having disasters attempting to manage their own properties. Also, know that I am not a property manager; I do not manage properties. But, I know a few (very few) good property managers and if I refer a client to them, the client gets a discount on the property manager fees due to the volume of properties I have placed with them. Also, I have nothing to gain from referring clients to a particular property manager; I do not accept a referral fee from the property manager because I want the property manager to know that the only way they get another client from me is to take exceptional care of all my clients. Since property managers are accustomed to paying referral fees to Realtors and I will not accept a fee, they are very aware that I will move my clients to someone else without any hesitation if all my clients are not well cared for.

Before I get into how I interview prospective property managers I want to explain what I expect from a property manager, which is illustrated in the chart below. Expectations drive interview questions. (Note that I will talk about the process not specific questions. I have a list of over 40 property manager interview questions and if you would like a copy, drop me an email.)

The Critical Characteristic

Integrity** is THE critical characteristic for all investment team members. The reason integrity is so important is that there is no way to write a management agreement which will ensure the property manager will do what is actually needed for you to be successful. Saying this another way, there is the "letter" of an agreement and there is the "spitit and intent" of an agreement. A person with integrity will consistently carry out the spirit and intent of the agreement. A person with out a deep sense of personal integrity can usually be relied upon to carry out the letter of the contract most of the time which simply is not enough. Never associate with or deal with anyone who is not a person of high integrity.

Process Questions

These are the questions designed to determine IF they have processes in place that will meet your needs and how well they work. For example, my current process is that if I find a qualified property I send the property manager a walk through video of the property. The property manager gets back to me within 48 hours with her opinons on the property, the location, and the probable rent and probable time to rent. When I was intervewing property managers several said that they do not get involved with the properties until they are ready to rent. This is totally unacceptable to me. 

Fees and Cost Management

Obviously the fee charged by the property manager is important. However, I am more concerned about the value they provide in exchange for the fee they charge. I moved my clients from a property manager who charged 7% to a property manager who charges my clients 8% (My clients get a discount off their normal 10% fee due to the number of properties I have placed with them.) I did this because while the previous property manager was good for several years, they started not doing the job I require. So, worry about the value you get in exchange for the fee, not just the total fee.

Cost management is another critical area. You need a property manager with the processes of handling tenant requests 24 hours a day, 7 days a week. Water heaters (etc.) do not start leaking on any pre-determined schedule. You also want to receive the original invoice from the contractor who did the work; with no markup. Too many property managers view maintenance as another profit opportunity.

You need a well defined approval process. For example the property manager I primarily work with will automatically handle any repair under $200. Over $200 they will contact me or my client for approval prior to authorizing the work.

One final consideration on cost management. There are a small percentage of tenants who are always calling in for repairs. These are usually minor but the costs add up. The property manager must have a process for detecting such complainers and dealing with them.

Area of Expertise
Some of the property managers I know have the majority of the properties they manage in a relatively small geographic area. If you place a property with them and it is not in this area, repairs and everything else will require a special effort by the property manager and their staff. You want to be in the middle of their business channel.

Risk Management
Tenant screening procedure, rent collection and preventative maintainence are parts of risk management. I will talk about tenant screening some other time so I will not mention it here. On rent collection, the property manager must have a process in palce for collecting the rent. This sounds fundamental but I have talked with a few property managers who seem to be very flexable on when and how much is paid. My standard (which conforms to Nevada laws) is that rent is due on the 1st. Period. No exceptions unless the tenant notifies the property manager in advance and the delay in payment is approved. If the rent had not been received on the first, a Pay or Quit notice follows very quickly. And, there is no let up until either the tenant pays the back rent plus late fees and such or they are evicted.

The property manager (or their delegate) must see the property on a regular basis. For example, if there are tree branches touching the roof, you are going to have roof damage over time. Also, if there are drainage issues, you need to get these taken care of before they become a problem.

One last point on this is that every time maintainance people are in a property, they need to be taking note of the condition of the property. If the property is not being cared for, the property manager must have a clear and well defined process for addressing the problem.

There are more topics I could cover but I hope this gives you a start on interview topics. Email me if you want the questions I use.

Hello @Chad Adams ,

Good question. I've faced the same question several times and have found an approach that worked for me as an individual investor and now as a Realtor in Las Vegas whose business is almost exclusively investors.

By education I am an engineer and I've learned that you have to reverse the process in order to find the solution you are seeking. So, instead of looking for a niche, I suggest you look for what niche is profitable. Once you know what is profitable you can then decide if other aspects of that niche work for you. Here is what I would do (and have done multiple times in the past):

I have found property manangers the best source for information on what rents well. Most people think of property managers as someone who collects rent after you already have the property. To me, this is completely backwards. I would start by finding two or three mid-sized property managers. Make an appointment and go see them. Tell them that you are getting into the rental property business and would like their advice on:

* What type of property rents best: By this I mean condo, single family, duplex, etc.

* What configuration rents best: two bedroom, three bedroom, etc.

* What is the best location for such properties: North of the river, east of 35th St, within two blocks of mass transit routes, etc.

* Best rental price range: If the median income for the people who rent properties is $4,000/Mo., trying to rent a property for $2,000/Mo. is not going to work. The rental price must be consistant with the median income of the renters you desire to attract.

The intersection of these four factors are what I call the "Sweet spot". Below is a graphical representation of what I am intending to communicate.

Note that the approach I recommend does not depend on the city or property type. It applies equally well to commercial or residential. And, it is easy to do since you are getting your information from property managers, the people who know the most about what rents and what does not rent.

A few more points:

* Just becase you determine the rental sweet spot for your area does not mean that such properties are profitable. NEVER buy a property for long term capital gains. If it does not make money today you can not afford to buy it. This is what drives so many investors to do remote investing. In fact, almost none of my clients live in Nevada. They do remote investing because they can make money and the laws are pro-business here. What does this mean to you? I have clients that formerly bought properties in California and they learned that it can take up to one year and thousands of dollars to evect a knowledgable tenant. In Las Vegas, typical evection time is under 30 days and it costs about $500.

* I consistently read people who want to buy damaged properties and rehab them. This is only valid if there is a significant price difference between a damaged property vs. a property in good condition. In Las Vegas the gap is very small, which is why flipping does not work in Las Vegas in the current market.

* Do not let your personal bias affect you judgement. You might "believe" a 2-bedroom condo is the right investment property. But if multiple property managers tell you that single story duplexes are the best renters, listen to them. Property managers want properties that will rent quickly. They only make money if the property is rented.

* When it comes to rehab, ONLY do what the property manager recommends and do EVERYTHING that the property manager recommends.

In summary, start by talking to multiple property managers and find out what type, configuration, location and rent range is the best for your area. Determine whether you can generate a positive cash flow. If you can't, don't buy in that area.

My best wishes to you.

Eric Fernwood