All Forum Posts by: Joe Hines

@Randall Alan is exactly right.  And to clarify one thing:  I don't think it is a good idea to run your property at a hard loss (negative cash flow) thinking that you'll get a big pop when you sell it.  I know plenty of people do this and I wish them every success.  It's great if you are in the right location and in the right market conditions.  Speaking for myself, however, negative cash flow is a deal breaker.  In addition to insurance, taxes, P+I, landscaping and vacancy rates, be sure to include a capital a percentage of your rental income for major capital events (roof, air conditioner, etc) and basic operating expenses to be sure the investment is going to be sound even when you hit a rough patch.  

Sorry if I'm telling you something you already know, but I sensed you might be very new to real estate investing and this is a mistake I see a lot. 

Hey Austin!  Welcome to BP!

I've focused my investment in North Central Florida which I'd classify as 'rural' even though it has seen steady growth over the years.  I've concentrated in SFHs and now looking into small MF (less than 10 units) in this same area.  

I've seen decent success, but it isn't what you would see in areas with stronger industry or in costal areas.  There are a few key guidelines I watch out for:

• Check the demographics and make sure you keep your rents in the right zone.  Too low and you have a lot of headaches with tenants, too high and you get priced out of the market.  That zone has steadily creeped up, but just be mindful of where the boundaries are.  In a rural market, the available tenants are much thinner when you get out of that zone.  There simply isn't the economic base to fuel higher rents, but you can do well in the upper middle rent zone. 
• Invest in decent areas.  This is obvious, but even in smaller rural towns, there are good neighborhoods and bad ones.   I buy good houses in the good areas, often rehab them, and rent them for premium rents (premium in this market).  My philosophy is that I rent quality houses to good people and my rents are fair.  
• I find better deals in off market sales. I have bought a lot of homes from the MLS, but I get a lot of referrals from word of mouth.
• Be very clear on your estimates.  The smaller markets leave a lot less room for mistakes, so use the deal calculators on this site and be very clear on your expense estimates.  Don't be afraid to walk away when the margins are too thin - and in a small market it is easy to get desperate for a deal and underestimate the expenses.  Thankfully, I haven't made this mistake yet, but I have definitely done better on some deals than others.  

There is a lot more I've learned, but these are probably the major lessons.  Good luck!

Joe 

Hey Marci!

I try to maintain a steady 1.5% to 2.0% annual increase on my SFHs. That tends to keep up with increased costs of taxes, insurance and lawn maintenance.  In properties in costlier markets (like Ft Lauderdale), I build it into the contract.  My other SFHs are in semi-rural North Florida.  

Hope that helps!

Joe

Hi Rachel,

I've got a similar arrangement with a portfolio in Florida, in an area where I grew up and still have an extensive social and family network.  

Despite the background I have in the area, it is absolutely crucial to visit the area frequently, make good contacts and build trusting relationships in order to get a good 'team' in place.  For me, my team consists of a realtor, property manager, handyman (for small repairs), plumber, electrician, lawn maintenance, flooring people and even a small construction outfit for those bigger jobs.  I meet with them every time I go there.  I buy them lunch or coffee.  I send texts to them occasionally just to say 'hi' and check in.  I recommend them and send them referrals.  They also let me know when properties come up for sale that I might be interested in buying.  Those "eyes and ears" on the ground mean everything.

I can imagine that the prices would be higher and the service slower if I didn't have the personal relationships behind these business transactions.  It is one reason I've avoided 'blind' property investing in an area without a longer term commitment to build such a team.  

So my advice would be to either invest in the relationships or invest in an agent (property manager) you can trust who has them.  That might mean paying that extra 20% you mentioned, but that too could be negotiated if you build the relationship with your property manager and they see you as a longer-term investor with more business to come.  

Hey @Rik Patel

A little more context might be helpful.  Are you looking to bring potential tenants to property managers and owners?  Are you finding rental properties for potential buyers?  

@Bill Meeks

I've invested primarily in SFH in rural areas of North Florida with about 15 units online at this point. My acquisition strategy focuses on older homes in solid, nice areas. The neighborhoods are well established. The homes are typically brick ranch style and need some updates. As in all things, there is good and bad, but I'm happy to share my observations and experiences.

• Overall demographics: Income levels in these areas are low.  Average income is about $40K.  If you estimate 30% of income spent on housing, that leaves the average renter at around $12K/year or $1,000/month to spend on rent.  I would not target that market.  Instead, I shoot for the demographic that is a tier up from there.  These are people who are seeking decent homes in established areas.  I never have vacancies.  
• ROI: The returns are not stellar, but they are steady. I see 5% to 8% annual ROI. I've purchased most of my homes with modest appreciation. Last year, the economic indicators pegged SFH appreciation in the area at 8%. It's not the Bay Area, but it's okay.
• Home prices: Even though home prices have increased significantly in these areas, I have not ramped down. As I've become more established in the market, I get presented with a lot of 'off market' deals. As with any For Sale By Owner (FSBO), some are good deals (meaning they easily exceed the 1% rule) and bear out a good ROI after more rigorous analysis. My average acquisition cost is around $100K with ARV in the $150K - $200K range.
• Rents:  Rents have steadily increased and that has put some of my earlier purchases, which were at the worst point of the Great Recession, in the 2% rule territory.  I have steadily increased rents with the market.  In an annual business review with my property manager, we raised rents on nearly the entire portfolio.  It was exhilarating experience to basically make an entirely new unit's rent by raising the costs of existing units.  That means more income without the acquisition expense. 
• Expenses: Because of the age of these homes, they sometimes need roofs, kitchen remodels, etc. You just have to build that into the cost models because those expenses will come. I typically put aside 3% of the purchase price into a CapEx fund and monthly transfer 10% of rent. Time is proving that this is probably a little on the heavy side, but I'm going to keep it at that level and accumulate the cash and await other opportunities.
• Evictions:  In my 8 years in this business, I have not yet had one.  I realize I am extremely lucky, but I do attribute some of this to my core business strategy:  Buy and maintain decent homes and make sure you get decent people.  Hopefully my luck will hold out.   

That's a summary of what I've seen.  I'm not sure I'd go so far as to recommend investing in rural areas, however.  You really have to know the area and the people to make it work.  I'd also go for sunbelt states that have growing populations.  

I'm in line with the thinking around the population trends and the migration towards Southern states in particular. I invest mainly in SFH and the rental market is still very strong when targeting people who want to rent their residence, but don't want to be packed into apartments. MF has better financials over the long run, even with the inflated market we see now, but I'm still liking the SFH strategy.

Hi @Alexander Gruber!

Generally speaking, you have it right.  The 2% rule should be viewed as a rule of thumb that lets you quickly evaluate a potential investment property.  To do a deeper analysis, I'd recommend using the Rental Property calculator under tools on the BP site.  There are some things about it that are a bit cumbersome, but it's pretty thorough.  It will guide you through capturing key cost drivers and assumptions and then provide you with several key property investment performance indicators.  I used to use my own spreadsheet and my build some of those functions into that, but it's pretty good.  

You will find that you can find good cash flowing properties that might be under 2%.  I'd also add that most of the time its more like the 1% rule.  I've found that 2% is pretty rare.  I think I have 2 that perform that well and over time I've been able to raise rents to get them closer to 2%.  

Good luck!

Hi @Jonathan Williams

I used Numbers for a few years when I was starting out (that is Apple’s spreadsheet application). It worked well enough with a few properties, but beyond 3 or so the expenses and accounting get to be so much that it is better to go with a full scale accounting package. I use QuickBooks online and it works great for accounting and property performance reports, but it isn’t made to manage properties. There are a lot of other applications for that and I would suggest you search here in the forums for them.  What it is great at is tracking the profitability, expenses, income, depreciation and building really useful property performance reports off of this information.  There is also a mobile app that's great for entering expenses while you are traveling or in the field.  

For the spreadsheet, I had a different page for each property. Each page (property) had details of expenditures and a summary ‘property scorecard’ that summarized performance and expense categories. You get all this and much more with QuickBooks.

If you go with QuickBooks, definitely spend some time with your accountant to get it set up. It is great for generating financial documents, reports, tracking depreciation, travel exoenses, etc. The key is getting it set up right in the beginning.

Take care!

Put another check mark in the "NO" column.  Agree with everything here that's been said:  It never seems to work out.  The deal is that you provide them a decent place to live in exchange for the stated rent.