All Forum Posts by: Michael Smythe

Hopefully, you can do what Zillow wasted millions of dollars on!

@Jinming He

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:

Source: Fair Isaac Company

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

Metro Detroit has 132 cities, the City of Detroit 183 Neighborhoods, which we’re analyzing and classifying. Check out the map on our website where we’ve made this all easy to follow.

We can also share numerous examples of properties & portfolios we’ve assisted investors with!

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

@Oladosu Segun why would you put a S8 tenant in a brand new property?

Your rent should be too high for their voucher!

More & more owners are posting here on BP about their rentals sitting vacant too long.

Which means owners aren't paying attention to the rental market - which is slowing, causing Days On Market (DOM) to increase:(

Take a look at the graph below from ShowMojo, comparing average DOM for 2018-2024.

DOM are now about 40% longer than they were 2 years ago.

Many owners also don't seem to be aware of real estate market fundamentals, such as seasonal effects:
1) After September, when kids go back to school, there's a noticeable dip in activity in both the sales & rentals.
2) After Halloween, there's another noticeable dip. Tenants, "go into Holiday-mode" and start spending disposable income (and racking up their credit cards) on Thanksgiving feasts & trips, Xmas presents & trips, and finally NYE plans.
3) Income Tax Refund checks start being received towards the end of February and corresponding, the rental market starts picking up again as tenants payoff their “Holiday Hangovers".
4) Spring Fever starts, sometime in April-May, causing both sales & rental markets to start picking up. Market activity continues to increase and peaks June-August when kids are out of school and parents don't have to worry about mid-term school transfers.

Finally, many owners only look at Agent/PMC pricing, so have never asked their PMCs enough questions about rental property marketing, showings, prospect screening and what information about all of it will be provided to them.

Here’s some questions we hope it’s not too late to ask:

• What websites does your property show up on when you Google the address?
  - The best PMCs advertise properties on at least 20 websites.
  - NOTE: FB Marketplace is difficult due to their strict policies (they really do NOT want PMCs advertising there)
• How are webviews, inquiries, emails and calls tracked, if at all?
• How are showings handled – agent-showings, open-house showings or self-showings?
  - How are they tracked?
• How do interested tenant prospects apply?
• What’s their application fee?
• What is the PMC’s specific application screening process?
  - What documents do they require applicants to submit & why?
• What feedback & data can your PMC consistently supply to you?
• When have you tested your PMC’s processes
  - Click on whatever links you find on their ads to schedule a showing and start an application to see what happens!
  - Many PMCs have processes designed to weed out non-serious prospects, but often these processes aren't adapted to the specific marketplace or changing markets.
• Since the PMC processes are NOT working, what are they doing to change it to improve results?

No PMC is perfect, so don’t rush to fire them until you have a serious conversation with them about all the above. How they respond and what they’re willing to adjust will tell you if it’s time for a change

@Shahrzad Amin as already stated, don't fret it. If current lease auto-converts to MTM, just do an addendum for increase.

RECOMMEND you Google for Texas leases, many PMCs share them online, and copy & paste to create one YOU like & fully understand. THEN have an attorney review & approve:)
--- Many PMCs have a bunch of addendums which they use 100% of the time. So, why is it an addendum? Just incorporate as standard part of the lease!
--- Even if only use it 65% of the time, you can incorporate as standard part of lease with a checkbox to activated it:)

We do NOT recommend a small increase for MTM lease! 
--- Ours is a 10% increase to go MTM, OVER market rent!

Here's one way to approach tenant about increasing the rent:

We’ve found a great way to raise rent is:

• Determine market rent
• Share the proof with the tenant (they can see it on Zillow anyways)
• Tell the tenant, given your rent is $x and market rent is $y, what do you think if a fair increase?
• Often, they may volunteer a higher amount than you were hoping for.
• Those that respond “$0” or something ridiculous, you can request income documentation from them to justify.
• Don’t be afraid to share with them how much your property taxes & Insurance increased and that YOU cannot afford to absorb them.

ALWAYS get an increase or something of value annually when rents are increasing or tenants will start thinking they should never have an increase, making future increases that much more difficult to negotiate.

@Hamidreza Rajabzadeh Oghaz you're probably looking at a Class A or B property, which no longer cashflow at purchase - unless you find a really motivated seller!

Typically, Class A & B properties will take 2-5 years for rent increases to outpace tax & insurance increases, so they really cashflow.

@Dexter Goodrum

Recommend exploring as many sources as possible to get referrals AND cross-reference them to get as much accurate information as possible.

Check out NARPM.com, BP’s Property Manager Finder (BiggerPockets: The Real Estate Investing Social Network), etc.

Also, encourage you to learn from the mistakes of others - by reading posts here on BiggerPockets about owners not having their expectations met by their current Property Management Company.

To avoid going through the same poor experience, keep reading.

Even if someone gives you a referral here, do NOT make the mistake of assuming that the PMC will meet your expectations, just because they met the expectations of the referral source.

In our experience, the #1 mistake owners make when selecting a Property Management Company (PMC) is ASSUMING instead of CONFIRMING.

It's often a case of not doing enough research, as they don't know what they don't know!

Owners mistakenly ASSUME all PMCs offer the exact SAME SERVICES and PERFORM those services EXACTLY THE SAME WAY, so price is the only differentiator – so, they often select the first PMC they call or that calls them back!

So, the first question they usually ask a PMC is about fees - instead of asking about services and HOW those services are executed.

EXAMPLE: PMC states they will handle tenant screening – what does that specifically mean? What documents do they require, what credit scores do they allow, how do they verify previous rental history, etc.? You’d be shocked by how little actual screening many PMC’s do!

This also leads owners to ASSUME simpler is better when it comes to management contracts.

The reality is the opposite - if it's not in writing then the PMC doesn't have to provide the service or can charge extra for it!

A well written management contract should clearly spell out what is expected of both the PMC and the owner, to PROTECT both and avoid misunderstandings. Why do you think purchase contracts are so long and have such small print?

We recommend you get management contracts from several PMCs and compare the services they cover and, more importantly, what they each DO NOT cover.

EDUCATE YOURSELF - yes, it will take time, but will lead to a selection that better meets your expectations & avoids potentially costly surprises!

P.S. If you just hire the cheapest or first PMC you speak with and it turns into a bad experience, please don’t assume ALL PMC’s are bad and start trashing PMC’s in general. Take ownership of your mistake and learn to do the proper due diligence recommended above😊

https://www.biggerpockets.com/member-blogs/3094/91878-how-to-screen-a-pmc-better-than-a-tenant-part-2-communication-and-docum

https://www.biggerpockets.com/member-blogs/3094/91879-how-to-screen-a-pmc-better-than-a-tenant-part-3-the-management-contr

@Jeff Henderson

Recommend exploring as many sources as possible to get referrals AND cross-reference them to get as much accurate information as possible.

Check out NARPM.com, BP’s Property Manager Finder (BiggerPockets: The Real Estate Investing Social Network), etc.

Also, encourage you to learn from the mistakes of others - by reading posts here on BiggerPockets about owners not having their expectations met by their current Property Management Company.

To avoid going through the same poor experience, keep reading.

Even if someone gives you a referral here, do NOT make the mistake of assuming that the PMC will meet your expectations, just because they met the expectations of the referral source.

In our experience, the #1 mistake owners make when selecting a Property Management Company (PMC) is ASSUMING instead of CONFIRMING.

It's often a case of not doing enough research, as they don't know what they don't know!

Owners mistakenly ASSUME all PMCs offer the exact SAME SERVICES and PERFORM those services EXACTLY THE SAME WAY, so price is the only differentiator – so, they often select the first PMC they call or that calls them back!

So, the first question they usually ask a PMC is about fees - instead of asking about services and HOW those services are executed.

EXAMPLE: PMC states they will handle tenant screening – what does that specifically mean? What documents do they require, what credit scores do they allow, how do they verify previous rental history, etc.? You’d be shocked by how little actual screening many PMC’s do!

This also leads owners to ASSUME simpler is better when it comes to management contracts.

The reality is the opposite - if it's not in writing then the PMC doesn't have to provide the service or can charge extra for it!

A well written management contract should clearly spell out what is expected of both the PMC and the owner, to PROTECT both and avoid misunderstandings. Why do you think purchase contracts are so long and have such small print?

We recommend you get management contracts from several PMCs and compare the services they cover and, more importantly, what they each DO NOT cover.

EDUCATE YOURSELF - yes, it will take time, but will lead to a selection that better meets your expectations & avoids potentially costly surprises!

P.S. If you just hire the cheapest or first PMC you speak with and it turns into a bad experience, please don’t assume ALL PMC’s are bad and start trashing PMC’s in general. Take ownership of your mistake and learn to do the proper due diligence recommended above😊

https://www.biggerpockets.com/member-blogs/3094/91878-how-to-screen-a-pmc-better-than-a-tenant-part-2-communication-and-docum

https://www.biggerpockets.com/member-blogs/3094/91879-how-to-screen-a-pmc-better-than-a-tenant-part-3-the-management-contr

@Kye Matthews-Mason why would you think agents have nothing to do but cater to OOS investors who didn't book ahead?

Oh, and how good do you think the ones are that have no business going on, so have time to respond to you?

@Dominic Petoral would it help to have a list of Detroit's 183 Neighborhoods color-coded as Class A, B, C or D?

@Nicholas Goerss start prepping your home to rent it out NOW:)

Perhaps you can negotiate the purchase offer for the new property to close in 60-days, which will give you more time to find tenant for your current home.

Then, as soon as your offer is accepted, list your property for rent!

OTHER THOUGHTS:

Have you confirmed how much your property taxes and home insurance (landlord policy) will increase on your current home when you convert to rental?