Quote from @Mike B.:
Hi all,
I came across the BiggerPockets and the episode hit close to home. The episode is called Start at 45, Retire at 55: The Late Starter's Rental Playbook. I will be 43 in October and my ride will be 40 next year. To this point, our money is either in HYSAs, brokerage or retirement accounts (IRAs and 401Ks). We have saved a decent amount and have $100,000 liquid, and access to another $250,000 if we sold assets in our brokerage account which we prefer not to but may need to based on this first property we are vetting. We also have about $400,000 of equity in our home.
We are not super knowledgeable and are open to suggestions as we are looking to build passive income to hopefully retire from our W2 jobs early. Depending on how much we could make in real estate, my wife would prefer to take a lower paying, less demanding job as she doesn’t think she can work in her current role for another 15-20 years.
We live in Atlanta, Georgia and our dream is to retire to the Lake Oconee area (hopefully some on the forum are familiar of the market). If we could afford it, we would buy a lake house to have a place to get away from the city on the weekends. The counties Lake Oconee extends to are Greene and Putnam and there are a ton of STR restrictions. Fortunately we want to go the LTR route as we don’t have a ton of time to actively stay on top of things.
We have formed an LLC that is properly structured and have opened a business banking account. We have identified a property manager who grew up in and has strong ties to the area. From listening to other podcasts I have learned how vital it is to have an excellent property manager you can trust. She introduced us to a local real estate agent and we are now looking to line up potential financing options and would like to work with someone potentially in that area who can take a relationship approach and guide us as we build out our portfolio. We are confused about what options we have and what is best. A conventional mortgage where we put 20% down, taking out a HELOC or cash out refi or I’ve heard of DSCR loans and I’m sure there are other avenues to finance a real estate portfolio.
I’ve been using Claude for properties we have identified and it’s pretty amazing what it can do. It put together a model showing a combination of what we would need to purchase for and/or get for rent to cash flow.
One we are particularly interested in is a new construction single family home in a great neighborhood, a wonderful starter home. It’s going for ~$450,000. I know a lot of the examples I see, even on this podcast, the properties are significantly cheaper. I just don’t know that in this area I’m looking at that there is a ton of low cost housing and to be honest I’m not so sure how gung-ho I am of dealing with what would probably be more work in most likely needing to do renovations and having a harder time finding a good renter among other obstacles. But again, I’m open to options from others who have been in my shoes and have a different view as how I should get started. Bottom line, I want to be successful in this and don’t want to rush and make mistakes. I’m not trying to buy more than one property a year.
If you’ve made it this far, I appreciate it and can answer any questions people have.
Thank you!
Mike
First, real estate investing is NOT passive - unless you invest in REITs or syndications like @G. Brian Davis offers.
Second, how did you vett the PMC you mentioned?
- Do you even know how to vett a PMC?
Third, up until about 5 years ago you could buy almost anything and cashflow.
Now, many newbies are chasing cashflow by investing in Class C & D RISKIER properties and severely underestimating the risks involved.
Below are a couple of copy & pastes that may help you with my 2nd & 3rd points.
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We’re a Property Management Company (PMC) in Metro Detroit ONLY, with 25+ years of experience, and we’ve seen owners make the same mistakes, over & over again when looking to hire a PMC – which drives us nuts!.
In our experience, the #1 mistake owners make is ASSUMING all PMCs offer the exact SAME SERVICES and PERFORM those services EXACTLY THE SAME WAY.
So, owners mistakenly think price is the only differentiator – and look for a PMC like they’d shop for groceries☹
We encourage you to learn from the mistakes of others by reading posts here on BiggerPockets from owners that picked a PMC solely by price and regretted it.
We 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.
Even if someone gives you a referral, do NOT make the mistake of assuming that just because a PMC met their expectations, they’ll meet your expectations. We all have our own expectations and what works for someone else, may not work for you.
If you’re new to all of this, it's often a case of not doing enough research, as you don't know what you don't know!
So, ask more questions!
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😊
Here’s some articles we’ve contributed to BiggerPockets about screening a PMC BETTER than you would a tenant!
20 Questions to Ask When Vetting a Property Management Company: Processes
13 Questions to Ask to a PMC: Communication and Documentation
24 Questions to Ask When Evaluating a Property Management Contract
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You’re ALWAYS better off investing locally, where it’s easier to:
- Learn the market
- Network to find deals
- Network to find contractors
- Be more hands-on
- Driveby property to keep tabs on it
- Network to find a decent Property Management Company (PMC)
Next best location is somewhere else you lived, where you have an existing network of family & friends to help you as accomplish the above list as needed.
If you invest OOS, your biggest challenge won't be finding properties to meet your goals on paper, it’ll be successfully building a knowledgeable & trustworthy local team.
The biggest mistake we see OOS investors making in our market, over and over again, is not fully understanding Neighborhood/Property/Tenant Classes and how they impact your probability of success!
They all run their ROI numbers assuming Class A results – when buying Class B, C & even D rentals.
Then they’re shocked when their performance expectations aren't met😞
If you choose to invest OOS, and have little to no landlord experience, we highly recommend targeting Class B Neighborhoods/Properties/Tenants. If you target Class C, you better be prepared emotionally & financially for plenty of challenges.
You can find Class B properties in the Midwest to BRRRR, but it will take more digging and YOU will need to understand how to analyze & identify them - because a lot of agents, wholesalers, PMCs, etc. will try to sell you Class C or D misrepresented as Class B:
- Many of them don't know/care what Class the properties are, so they're incompetent.
- Others know exactly what they are doing, so should be labeled as crooks!
EITHER WAY YOU LOSE!
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 will affect what type of contractors, handymen and property management companies you should target and be willing to deal with a property.
The Property Class will also impact the maintenance & renovations you do to, “Maintain to the Neighborhood”.
Why is that important?
Well, if you buy & renovate a property in Class D area to Class A standards, what Tenant Class will actually 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:
|
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
Make sure you understand the Class of properties you are looking at and the corresponding results to expect.
For example, Metro Detroit has 132 cities and the City of Detroit 183 Neighborhoods, which we’re analyzing and classifying to make better investing decisions.
Horror Stories from those that did NOT Understand What they were Buying:
https://www.biggerpockets.com/forums/48/topics/1137397-baltimore-a-path-to-never-ending-pain
https://www.biggerpockets.com/forums/432/topics/1231840-sell-at-a-loss-or-rent-at-a-loss
https://www.biggerpockets.com/forums/311/topics/840134-memphis-turnkey-tenant-turnover-costs
https://www.biggerpockets.com/forums/963/topics/1195280-experience-of-oos-investing-in-cleveland-after-15-years
