All Forum Posts by: Harish Pasupuleti

@Harish Pasupuleti

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.

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.

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

Yeah, sure can! Columbus has given me some decent cash-flow but I'm more in it for the appreciation. Let's hop on a call sometime this week

You've received great advice already. I second a lot of that and would offer that you only receive returns that make it worth it, as i see it, when you are hands on. I'd rather toss money in the S&P than a turn key property in a cheap market with low or no population growth. Focus on the property/location you want to own the most 10 years from now. We all chase cash flow in the beginning, but property and rent appreciation over time is how you get the big wins. 

A home that is selling for $100k after we just saw the biggest run up in real estate values in my adult lifetime means that it's probably not a very desirable place to live for people that have options. That property is unlikely to go up in value or rents faster than the rate of inflation. We overcomplicate real estate. It's mostly the intersection of "Would it be cool to live here?" and "How can I employ a strategy to make this property work?"

I have nothing to sell and would be happy to help if you think that I can be a resource. I've invested both locally and out of state. 

Hey Harish,

Congrats on getting started on your investing journey out of state! First thing I would do is to do your research on what type of market you want to be in. Some cities are going to be better for cash-flow and others will be great for appreciation and cash-flow. After you find what city/state you want to invest in I would do build your Core 4. Core 4 consists of having a great realtor, contractor, property manager, and attorney.  Finding a great realtor in whatever city you invest will help you get connected to everyone else. Let me know if there is anyway I can help!

@Harish Pasupuleti As someone who is beginning to invest in real estate for the first time, what is motivating you to invest in a market other than one in your backyard? I believe most investors are better served hitting singles locally than swinging for the fences (and usually missing) in outside markets they don't know and with far less control over the day to day functions. Not to mention, your knowledge grows exponentially when you have the ability to be hands on with your investments. Even if you view yourself as a passive investor, I always recommend investors take a hands on approach with their earliest properties as it lays a helpful foundation.

With respect to turn key operators, I've personally found their objectives to be at conflict with the objectives of investors like yourself. You will constantly hear of shortcuts during construction and the conscientious decision to use lower quality materials during the renovation. For example, I  never hear stories of the turn key provider spending extra sound proofing between units or investing in better quality fixtures or other high touch building materials so that the end buyer can enjoy reduced maintenance costs and better tenant engagement. The turn key providers have moved on by the time these issues manifest themselves. Most also rely on beefed up rents and unrealistic operating expenses in their pro-formas to justify higher sale figures and can generally take advantage of their investor clients who are not familiar with the nuances of the market.

Again, my recommendation is to be more active with your earliest investments but if you feel so strongly about a particular market network and partner with the leading developers  in that  market. Chances are they are a better operator than the turn key providers and are developing better assets but this is something to consider down the line.

Hey Harish, I do a ton of stuff in the Detroit market both for myself and with other investors.

If turnkey is your thing, definitely interview some folks. But it's not a strategy I love and it's not one that I believe is all that profitable.

In terms of general tips... do your research on your target markets. If you can visit, that's great, even if it's just to get a general lay-of-the land.

Understand what your goals are and what property classes you're targeting (A/B/C neighborhoods). Also, understand the real risks of whatever market you're planning to invest in. That sounds silly, but a lot of these midwest markets have risks that you wouldn't think of being from Seattle.