New to investing, no more flipping
Member since 2024 · 1 post · 3 votes
New to investing, no more flipping
Most Popular Reply
Nicholas L.Pro Member
Flipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ voteshello. a few reactions.
-you can find stable inventory and solid property management anywhere if you look hard enough. what you won't get is cash flow.
-returns on non-value add LTRs have gone to zero in the short term. so you need to think hard about where to invest that 80K. if you have a strategy that is going to produce a return for you, that's great. but there is no "cash flow" whatsoever in the short term on LTRs right now. none. not in any market. run honest numbers that actually take all costs into account and you'll see. for example, if you pay 5-10K in closing costs, 1-2 months' rent to lease up, and a few thousand to freshen up, and then your first tenant turns over after 12 months and you spend 3K to clean and re-rent, how long will it take to pay yourself back if you're netting $200 a month?
-OOS investing is more difficult than advertised. a lot of new investors assume that if you have the "team" in place - agent, lender, PM, etc. - things will just be handled. they won't. the QB of the team remains you. no one is going to take ownership of the whole process. a PM doesn't guarantee you a smooth experience; they do whatever their PM agreement says they'll do/
-read every thread @Drew Sygit posted and take it to heart.
hope this helps
6 Replies
- 1moDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 8k+ votes
Quote from @Soung Won Moon:
Hi BP Community!
I'm a CA resident looking to purchase my first out-of-state duplex for a long-term rental investment.
Here are my criteria:
• Purchase Price: Maximum $250k
• Capital Available: $80k (intended for down payment and closing costs)
• Strategy: Looking for a solid, functional cash-flow property —nothing flashy or distressed. Since I am unfamiliar with markets outside of California, I’ve been looking into the Midwest and parts of the South based on general cash-flow trends. Which specific cities/submarkets would you recommend for this budget where I can realistically find stable inventory and solid property management? I’d love to connect with anyone investing in these areas!What do you want to know about our Metro Detroit market?
Some other helpful info below:
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/Market”.
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?
What do you think will happen if you rehab a Class D rental to Class A standards?
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/Market.”
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%
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
Logical Property Management4.9446 Reviews - 1moNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
hello. a few reactions.
-you can find stable inventory and solid property management anywhere if you look hard enough. what you won't get is cash flow.
-returns on non-value add LTRs have gone to zero in the short term. so you need to think hard about where to invest that 80K. if you have a strategy that is going to produce a return for you, that's great. but there is no "cash flow" whatsoever in the short term on LTRs right now. none. not in any market. run honest numbers that actually take all costs into account and you'll see. for example, if you pay 5-10K in closing costs, 1-2 months' rent to lease up, and a few thousand to freshen up, and then your first tenant turns over after 12 months and you spend 3K to clean and re-rent, how long will it take to pay yourself back if you're netting $200 a month?
-OOS investing is more difficult than advertised. a lot of new investors assume that if you have the "team" in place - agent, lender, PM, etc. - things will just be handled. they won't. the QB of the team remains you. no one is going to take ownership of the whole process. a PM doesn't guarantee you a smooth experience; they do whatever their PM agreement says they'll do/-read every thread @Drew Sygit posted and take it to heart.
hope this helps
- Investor · Los Angeles, CA · Member since 2022 · 15 posts · 8 votes3wThere is a ton that goes into real estate, so don't just pick any old town and start investing there if you don't know it well. You have to learn the ins and outs of each market and get connected. Do you have any family or friends in other markets? That could be a good way to start. I'm based in LA too and the dynamics you are used to here (very high demand from renters) isn't the case in a lot of other markets. Be careful just picking any random market and investing. You have to really study the markets and learn them inside and out.
Just my 2 cents - 3wArman AhmedPro MemberReal Estate Agent · Columbus Cleveland Dayton, OH · Member since 2024 · 2k+ posts · 890 votes
Quote from @Soung Won Moon:
Hi BP Community!
I'm a CA resident looking to purchase my first out-of-state duplex for a long-term rental investment.
Here are my criteria:
• Purchase Price: Maximum $250k
• Capital Available: $80k (intended for down payment and closing costs)
• Strategy: Looking for a solid, functional cash-flow property —nothing flashy or distressed. Since I am unfamiliar with markets outside of California, I’ve been looking into the Midwest and parts of the South based on general cash-flow trends. Which specific cities/submarkets would you recommend for this budget where I can realistically find stable inventory and solid property management? I’d love to connect with anyone investing in these areas!With an $80K budget and a $250K ceiling, I’d definitely keep the Midwest high on your list. The Midwest market can give you more options for duplexes in that price range, especially if you’re focused on functional properties with solid cash flow rather than heavy rehabs. Since you’re investing from California, I’d put just as much emphasis on finding a dependable property manager and local team as finding the property itself. A good submarket and strong boots on the ground can make remote ownership a lot easier.
- Real Estate Agent · Louisville, KY · Member since 2017 · 1k+ posts · 1k+ votes3w
@Soung Won Moon "nothing flashy or distressed" is the right instinct for a first out-of-state deal, and most people don't have it. You'll get talked out of it about nine times. Don't be.
Louisville numbers at your budget, pulled this morning: 34 active 2-4 unit multifamily listings in Jefferson County under $250k, starting in the mid-$40s. So your budget isn't a stretch here - it's comfortably mid-range, which is exactly where I'd want a first out-of-state buyer to be rather than at the very edge of what they can afford.
The honest catch, and it's a real one: a lot of what's cheap here is cheap for a reason, and Louisville changes street by street more than almost any market I've worked. Two blocks can be completely different investments. So the rule I'd give you is don't buy a neighborhood, buy a street. If you can't get someone to walk it for you or drive it yourself, don't buy it at all at this budget.
On property management, which you specifically asked about and most replies skip: at $250k and under you're in the price band where PM quality varies the most, because the management fee on a $900/month unit doesn't fund much attention. I'd interview managers before I picked a market, not after. Whichever market you land on. That one change in sequence saves more first deals than anything else I could tell you.
One thing about the Midwest generally worth knowing before you commit. The affordability squeeze is hitting the bottom of these markets hardest. In our county, showings under $200k are down 24.5% year over year while $600k and up are up 41.5%. The cheap houses are getting ignored. That's a headwind on your eventual exit and a tailwind on your entry price. Just know which one you're buying.
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