TJ,
The first thing you need to do is to set aside all of the wonderful advice that comes from all these experienced investors. Aside from @Jay Hinrichs , none of the comments here address the fact that you are starting out your investment career.
Your main concern right now is RISK MANAGEMENT! Unless you want to be one of the guys at the club who complains about his bad rental experience, you have to take care of your money and your ability to handle the things that go wrong with rental real estate. Let the big players who have the cash to burn and tons of experience to bail them out, look for the best market in America. There are 1,570 cities, towns, villages in New York State and 18,443 in the USA and you can easily make enough money to satisfy your investment criteria even in the 275th or 521st or 18,443rd best market in the country or 1,570th best market in New York.
What you really need to know has nothing to do with any of this! Concentrate your efforts on locations that have a good rental rate as compared to the cost of ownership. This is more important if you are borrowing than if you are paying cash because you can get a nice return on investment and cash flow even on one of those hideous shacks you mention on Long Island if you have no mortgage. These will ordinarily be in smaller markets but not necessarily far away from large metros. I have houses in the third largest city in Illinois for example. Rockford Illinois is a city that is largely scorned by Chicago area investors but, consider these factors I do, and compare these to your own markets.
- Can I cash flow the property if I borrow the money? Nobody wants to be in a negative cash flow like you are now with your first project. In Rockford, there are neighborhoods of varying quality just like there are in every large city and prices range from $1 to over $1,000,000 with the median being $82,044. This means that at 4% fixed for 30yrs with $4,000 down a homeowner will pay $534 per month PITI. At the same time the median rent in Rockford, IL is $954. That means before maintenance, utilities, and management you cash flow $380 per month on your investment of $4,000 down or, before expenses, a cash on cash return of 114%. Your depreciation and expense write-offs for income tax purposes will increase this amount by 12-20%, depending on the Trump Tax bill.
- Can I afford to wait for the most qualified tenant? At $534 per month total cost of ownership exclusive of maintenance and utilities, it should be a breeze as compared to buying a $350,000 house in one of Atlanta’s hot suburbs.
- Can I handle things when they go wrong? Things go wrong, PERIOD. If you are not prepared for things to go wrong in a hurry and when you least expect it, this is the wrong business for you. Your property manager will quit because the tenant insulted him over his shoes (true story), the furnace will fail on the last cold weekend in March and has to be replaced now, the tenant or the tenant's teen-aged son will get arrested for manufacturing meth in your basement. Even simple things become a hassle, the property manager will leave payment for the lawn mowing contractor on Friday before he leaves for 2 weeks in Hawaii. His assistant won’t know where the payment is, so the contractor won’t mow. The city will send you a citation on Wednesday stating that if you don’t cut the grass by Monday at noon, they will do it for you at a cost of $250 and a fine of $500. You will get the notice Saturday afternoon when you get back from your kid’s soccer game. The Mariners are in the playoffs and no landscaper in town is answering your call! What will you do about this situation with your home in beautiful Seattle? Will you get on a plane for $350 round trip get the mower from the shed yourself and then fly back? Will you just suck back the fine and scream at your manager when he gets back? What happens next week at lawn mowing time before he gets back in town? My point is that if the house is under 100 miles from your home you can get in the car and handle the situation. I live 30 miles from Chicago’s lakefront and 60 miles from Rockford. In traffic, Chicago can be 90 minutes or more away, whereas; Rockford is an hour away all the time (less if I put on my lead foot). I can still use professionals to do the work and never even see my houses but, when I need to handle an emergency, I can get there quick.
- What does it cost to do business in this other market? Rockford Labor is less than Chicago by 20% or more and the regulation is less so many things are less costly. Perhaps more important, Lawyers cost 10-15% of what they do in the big city and evictions in the area can be accomplished in 2-4 weeks. Chicago has favorable tenant rules and with the 45 days back up at the sheriff’s office, it can take several months to get a tenant out and professional deadbeats can keep you at bay for a year or more if you are inexperienced or unwary.
- What is going on in the town? Every city, town, and village across America has a website that touts its merits. Not only that, it will contain links to the city’s long-term planning, the State government has similar information if it effect that city and the feds have more information than you could ever believe on whats going on in any part of the country from how much crime to the price of a loaf of bread to how many jobs to the condition and maintenance of the roads. If a city has money to spend improving itself and/ or some money for you to improve it, you can find it in their plans.
- What is the market like? You can find all the prices and comps on the internet. Look at velocity, how long does a house stay on the market? This could mean trouble selling but it could also mean easy purchase and if you are interested in cash flow, you can hang on to it until it sells.
- Are there enough jobs? All of the information sources I mention will give you an idea of what jobs are available and what plans the city has to attract more. You want your tenants to have good work and to be able to find work in changing times.
- Do you understand the laws, ordinances, and practices in the area and the risks you will face? If the practice of law or customary rental expectations in a market are very different from what you expect, you will not be prepared to deal with the unexpected. That can cost you.
Manage your risk above all else! Don’t worry about what Forbes says. Keep your focus on your own dollars.
There is plenty of money to be made an hour or two out of town. It’s far enough away that you won’t get called in the middle of the night to play plumber and close enough to deal with emergencies as they arise. A free house in a highly ranked market, with high expenses and low cash flow, is not a good deal. A house that earns twice your monthly expenses is a bargain no matter how “bad” the deal or the market is (just don’t buy houses in “the hood” unless you are accustomed to that lifestyle or prepared for the people who are). If you pay double the market value for it and double your money every year who cares? There are some strategies even for selling a house at a loss and walking away with cash if the deal is right!
I hope this helps!
Best of luck,
Mark
