Getting started with LTRs in Atlanta

[Michael Verges]

Hey! I'm interested buying long-term-rental property in Atlanta within the next year, currently spending some time to do some research and math. I'm having trouble finding math that makes sense for profitability. I want to share some of my logic and get some advice!

1: My first question(s) is about the target audience: Who is renting? Where are they living? What type of property are they interested in? And how much do they spend? I ask this because I want to make sure there is a market for the type of property I buy, and there are already a lot of nice high-rise and townhome-style complexes to choose near me. From my brief research: 1) younger individuals/couples in townhomes/condos in the city 2) families needing 3 bedrooms in SFHs further out of the city. Next, I should find the median rents for this target audience (~$2,200/mo)... I may be way off-base, or maybe I need a more nuanced approach to this and go deeper into specific neighborhoods.

2: Second question: what properties are profitable? If I'm basing the home value on the 1% rule for renters spending $2,200/mo, I would need to look at listings that are $220,000 ARV, with little-to-no HOAs. Preferably built after 2000 because of reduced maintenance (am I being too picky?). Preferably doing cosmetic-only rehab (replace carpet with LVP, upgrade appliances, new paint) because I am not skilled with DIY and I don't have any good relationships with contractors to get great rates and costs seem hard to estimate on my own (maybe I don't know where to look). Okay... now find in-demand zip codes with lower property costs: south of the airport? college park? maybe further? Is there even demand further out? Okay, filter Zillow and other MLS sites... verrrry sparse.... expectedly, right? because that would be a great deal, and someone probably already bought it!

*Looking for advice on this: what property types / zip codes around Atlanta are <$300k and getting '1% rule' rents? also how accurate is the BiggerPockets estimate?

3: How do I reduce costs? Finding trusted property management that doesn't eat up more than 10% of rent would be great, but I don't know if that's feasible. I live in midtown, should I self manage? I guess probably not.

4: I should pay minimum downpayment, right? Another calculation: leverage (debt) seems to maximize cash-on-cash return assuming I can use the 1% rule and minimize costs for a 9% cap rate (which seems like a unicorn?). On paper, it looks like holding onto as much of my own cash will free me up for unexpected costs or future investments, while a mortgage enables me to profit more than the bank's interest. So, maybe I'm looking at a $40-50k down payment plus closing & light cosmetic renovation costs.

Overall, it's really difficult to squeeze the math and find the right deals on MLS. My conclusion is that I will need an agent to help identify deals, run comps to find an in-demand property that can pass the 1% rule, and hopefully connect me with trusted property managers. I'm also open to doing more rehab work if I had low-cost contractors, but I'm not sure what risks I'm willing to take there.

[Drew Sygit]

@Michael Verges

The Real Estate Crash of 2008-2010 caused real estate prices to crash across the country - but didn't affect rent amounts. This caused a historically unique opportunity for investors - they could buy Class A properties and immediately cashflow when renting them out.

This couldn't last forever, and it didn't, as excited new investors drove up prices.

Eventually, Class A property values increased to the point that even increasing rents didn't allow them to cashflow upon purchase.

So, the flood of new investors switched to buying Class B properties.

COVID created a chaotic spike in both the sale & rental markets, attracting even more new real estate investors. According to CoreLogic, in December of 2023, almost 30% of home sales were to investors!

Investment also spiked in Class A Short-Term Rentals (STR) and investors started paying higher and higher prices based upon anticipated STR rental rates, that exceeded sustainability based upon Long-Term Rental rates (LTR).

Now we're seeing investors pouring money into buying Class C rentals - but, many are getting burned.

In our experience & opinion, the main determinant of property Class is not location or even property condition, those are #2 and #3. The #1 determinant is the Tenant Pool.

If you don't believe us, try putting several Class D tenants in Class A apartment buildings and watch what happens. Or try the reverse - rehab a property to Class A standards in a Class D neighborhood and try to get a Class A or B tenant to rent it.

Unfortunately, many newbie real estate investors are jumping into buying affordable Class C rentals - expecting Class A results.

In our opinion, Class C tenants have FICO scores from 560 to 620 - where their chance of default/nonpayment is 15-22%. See the chart from Fair Isaac Company (FICO) below:

FICO Score	Pct of Population	Default Probability
800 or more	13.00%	1.00%
750-799	27.00%	1.00%
700-749	18.00%	4.40%
650-699	15.00%	8.90%
600-649	12.00%	15.80%
550-599	8.00%	22.50%
500-549	5.00%	28.40%
Less than 499	2.00%	41.00%

Source: Fair Isaac Company

According to this chart, investors should use corresponding vacancy + tenant-nonperformance factors of approximately 5% for Class A rentals, 10% for Class B and 20% for Class C.

To address Class C payment challenges, many industry "experts" are now selling programs to newbie investors about how Section 8 tenants are the cure. If only it was that easy. Yes, the government pays the Section 8 rent timely, but more and more tenants are having to pay a portion of their rent. Then there are the challenges with Section 8 tenants paying utilities and taking care of their rental property.

Investors should fully understand that Section 8 is not a cure-all for Class C & D tenant challenges, it's just trading one set of problems for another.

We see too many investors not doing enough research to fully understand all this and making naïve investing decisions.