Purchasing 4 low income rental properties analysis and discussion

31 Replies

Hello everyone!

As the equity market gets more and more unpredictable i'm looking at putting money in real estate rental properties. This will be my first deal and venture into real estate. As i am living in NYC currently, it's difficult to find the right deals at the right prices here. Things are pricy, international investors park so much money here and thin out the margins and taxes and CAM fees are through the roof, and i don’t like the idea of speculating on appreciation. With that being said, i've witnessed what i perceive to be some people making pretty good returns with low income properties in my small hometown, so i’ve decided to take a much closer look. Please see below for a complete overview of the deal I'm analyzing. As i progress, i will make this into a full diary so hopefully others can learn from all of your insight and feedback to what i present

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Looking to purchase four well maintained, single family low income rental properties located in low income neighborhoods. Properties are all up to date, need no rehab, and are within 5 miles of each other. Three of the four properties are currently occupied by paying tenants (waiting for rental payment verifications).

More about the location and demographics:

The counties population, as of 2010 was 66,501

The properties are located within city limits, which has a population of 36,837

(In year 2000, 35,318 people. The population has and continues to slightly decrease)

Nearest majore metropolitan area (1 million +) is 47 miles away.

Median household income is $34,288 (it was $33,124 in year 2000)

Estimated median house or condo value in 2012 was $78,505

Median gross rent in 2012 was $664

Unemployment rate: 5.9%

Median age is 37.3

Under 5 years - 2,431 - 6.6%

5 to 9 years - 2,225 - 6.0%

10 to 14 years - 2,129 - 5.8%

15 to 19 years - 2,308 - 6.3%

20 to 24 years - 2,739 - 7.4%

25 to 29 years - 2,812 - 7.6%

30 to 34 years - 2,687 - 7.3%

35 to 39 years - 2,486 - 6.7%

40 to 44 years - 2,614 - 7.1%

45 to 49 years - 2,830 - 7.7%

50 to 54 years - 2,706 - 7.3%

55 to 59 years - 2,309 - 6.3%

60 to 64 years - 1,936 - 5.3%

65 to 69 years - 1,301 - 3.5%

70 to 74 years - 1,006 - 2.7%

75 to 79 years - 848 - 2.3%

80 to 84 years - 771 - 2.1%

85 years and over - 699 - 1.9%

Single-family new house construction building permits:

2009: 3 buildings, average cost $133,200

2010: 5 buildings, average cost $229,200

2011: 22 buildings, average cost $107,300

2012: 2 buildings, average cost $60,000

Housing Occupancy:

Total housing units 15,066

Occupied housing units 12,868 - 85.4%

Vacant housing units 2,198 - 14.6

For rent - 816 - 5.4

Rented, not occupied - 31 - 0.2

For sale only - 263 - 1.7

Sold, not occupied - 48 - 0.3

Homeowner vacancy rate 3.4%

Rental vacancy rate 12.9

Properties:

Property A - 2/1 - 640 square feet - $25,000

Property B - 2/1 - 1040 sq ft - $22,000

Property C - 2/1 - 1070 sq ft - $20,000

Property D - 3/1.5 - 1248 sq ft - $22,000

Properties all well maintaned and rented, or rent ready. Details below:


Financials

(Properties pass 2% rule and look good after 50% rule)

Asking Price:                                 $89,000

Gross rental income                      $22,800

Expenses:

Insurance (1.2% of value)              $1,200

Taxes                                             $2,400

Vacancy (7.5%)                             $1,710

Maintencance (10%)                     $2,280

CapEx (10%) $2,280

Property Mgt (10%)                      $2,280

HOA $0

Total Expenses                              $12,150

ROI 13.6%

Questions, Thoughts, and Concerns

The following are some questions and conerns i’m currently internalizing. If anyone can shed some insight, i’d be greatly appreciative!

1)I need to be an absentee owner. However, there are no real property management firms in the area, but there are a handful of indivudals/handymen who look after properties for other owners. Thus is it possible to find a qualified property manager at a price that makes economical sense? Perhaps i can find another local landlord, and see if he or she would like the added income of managing additional properties. I’ve chosen the area due to it being my hometown and having friends and family in the area.

2) OR, would you immediately recommend staying away from absentee owning low income properties? I understand screening tenants, expecting great turnover, higher maintenance, etc. With that being said i question whether it’s more of a job than an investment? Would i need to be physically present for evictions or any other matters?

3) Neighboorhoods could further deteriate, making the houses unapealing to renters. However, there is currently no new developments in place in the town, low inventory, and high demand for rentals. I don’t expect any appreciation, but how far could low income properties depreciate?

4) I presented demographic information because i do think there could be longer term risks with small towns like these. People migrate instead of renovate, people are moving off to larger cities, the population is aging (leaving less people who may likely rent), and the population is decreasing. Anyone invest in a similar environmnent and disagree?

4) Does it make sense to pay cash for a deal like this, with the low interest rate environment. In other words, should i use my good credit and cash to take advantage of the low interest rates in order to take advantage of leverage. Along with having interst payments that are tax deductible. Or perhaps seeing about owner financing, or if someone else has a more creative way of funding it that could make more money long term?!

5) The expenses in my financials are rough estimates. Could these be far off for such properties?

Thank you all for taking the time to read.

Marion, OH hasn't had population growth since 2000. You are right to be concerned about the long term demographics. Combine that with the absentee owner aspect without professional property management options, and I'm quite wary. Even if the yields are appealing, if the underlying capital disappears, the investment doesn't work. 

If you are going to go the absentee owner route and want to keep it close to your hometown, maybe consider something closer to Columbus with better demographics & a property management presence.

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thank you for your feedback. There were a couple other responses that seemed to have mysteriously disapeared? 

@Gregory Hiban you make very good points as well, thank you. Thank you also for the suggestion regarding pine hills. I just looked this area up briefly, but don't seem to be seeing the same returns. Are you referring to turn key properties, or rehab properties? Are you referring to a 20% cape rate of return? Or gross rental return? Or something different. Would love to explore the area more.

Thanks again 

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@Brice Hall My demographics research would be quite different from yours since I focus on Class A properties and am content with a lower but more stable return. I tend to look heavily at median household income, income growth, 10-year population growth, % of the population below the poverty line, and quality of the school district. Definitely focus on employment centers and major metro areas since it gives you a large/stable renter base. 

I am sure there are property owners content with their returns over the past 15 years; however, they most likely live locally and personally manage the properties. This allows them to keep a close eye on their properties and add a couple points to their yield by removing management fees. Unless you can find a few absentee owners who have been profitable long term with non-professional property management, I wouldn't touch it.

Originally posted by @Christian Marin :

The fact that you will be an absentee owner far away and there is no real property management company I would not buy. Low income properties have amazing returns but you must be prepared for the high turn over rate, high vacancies, and not getting rent all the time.

I agree with the advice about being an absentee owner far away but how can a property that has high turn over, high vacancies where you don't get rent all the time have "amazing returns" Vacancies and turn over costs are the biggest cash flow killers. All the best property management company can do is manage the constant churn of tenants and damage repair with each vacancy. They can't turn bad tenants in to good ones.

@Brice Hall I don't want to rain on your parade or dampen your enthusiasm but I see a few red flags that would make me think long and hard. I don't know your market at all, so I'm no expert on it but in general, these are the things I would be concerned with:

  • Very small market
  • Declining population (shrinking renter pool and not a sign of a thriving economy
  • Low median household income
  • High vacancy rate (if the number is accurate

I can't see anything that says "wow, this is a great market to invest" The economic and demographic fundamentals look very week to me. What are you seeing in it that makes you want to put your money there other than that it's local?

It looks to me like you're looking at the right criteria for evaluating a market. The problem is you're ignoring what you're own research is showing.

 

@Brice Hall I completely missed the fact that this is NOT a local market. Why on earth are you considering it then? There are lots of non local markets with thriving economies and growing populations that are still very affordable. I wrote a report on how to choose a market and another one on how to invest out of state. I'd be happy to send you copies of both.

@Brice Hall

  I did a few loans there and end up foreclosing on the investors in each case then selling the assets for loss's... if you want smaller town.. try Kokomo.. more happening there price points can be the same.. but remember these little towns have very low wages..

Like last year I had a duplex there in Kokomo and the winter was so cold tenants could not pay rent and heat... so of course being the superior land lord investor that I am I let them stay 3 months for free.. but then they just moved out anyway... there way of saying thankyou. But you don't have the theft and vandalism and other issue you have in the bigger cities.. but for cash flow I think only if you live there and can watch them like a hawk

@Brice Hall 1) Never use estimates for these kinds of properties. Chances are the taxes for 1 of the 3 is $2400. Taxes in these NY properties where the values are low are not low.

2) The 50% rule will not work here with low income. I have seen houses in Rochester that are beautiful for 25k that lose money when F&C .

So, forget the 50% rule. And, the 2% rule won't help you either. For 3 properties I would estimate at least 750 mo for maintenance and capex.

You really need a good shot at decent/good appreciation to do that.  You probably need to see how they did in last "boom" (2006)?  Also if eventual exit strategy is to sell, can the retail buyer get a mortgage that low (say $40K)?  Always like a chance to sell to retail buyers...they pay the most.  I just won't buy any more rentals (even great cash flowing), unless there is a good shot at appreciation/selling retail in future.  Only real exception is if you pay cash, and can get all you money back in about 3 years for sure (then own for nothing, essentially).  That is rare, but can happen, especially ALL IN at the $10-$15K range (I've done a couple). 

I like all your "do (due) diligence", just find your "niche" and you will probably due (do) well. Good luck with everything.

Brice,

The demographics you describe sound exactly like my investment area, except the unemployment rate is more favorable in your area! We purchased 8 units, then stopped buying, mostly due to the concerns raised about the future of the small town. Our units are throwing off cash and the debt is getting paid down, so we’re happy, but it has been with a lot of continuing hard work and hassle.

Check into the rules in this area about who can manage. In our area it has to be a professional. If you don’t have that restriction, maybe a friend or family member would like to do this as a part time job; is there any way to make them equity partners so they have skin in the game? We have found that 8 units is an annoying size – too many to just handle in evenings/weekends, but not enough to be a full time job. We are busy making multiple trips to collect rent the first two weeks of the month, always seem to have some sort of mtc or drama we have to attend to, and it gets full time when we have turnover.

Your properties are only 5 miles from each other, but getting them even closer would be better, to provide more efficiencies. Personally I would not want the 2/1 houses, they are a dime a dozen in my area and thus a lot of competition. I would be interested in the property D. Perhaps look at options to get a diversified portfolio of not just low income to reduce your risk, and have some more expensive properties that make sense to finance. I’m wishing we didn’t have all low income properties.

You probably have no idea if the inherited tenants are quality or not – they could be headaches or they could be a wonderful long term tenant. If you get an inexperienced person to manage the properties, be sure that they get well educated, on both the tenant-landlord laws and the uniquenesses of low income landlording.

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Thank you all again for sharing your feedback. It seems like many of you are saying - go to a market that is growing, good economy, etc. I think this is probably the right call, but perhaps I'm a bit contrarian. What do you do to take into consideration the SUPPLY side of things in these newer/growing markets? I like the idea of going to a newer growing market, but what do you do to ensure there isn't too much growth, development, etc? I was drawn to this market because, though it isn't growing, there is solid demand for rentals and no new development.

Considering you have family there that is a great bonus. Thinking that having a small portfolio would be harder than a large one.  5 to 10 like this could be a lot of work but lots of money going back in and then how much do you make. 

On the size, if you can find an old tired LL to sell you 25-50 then it could be worked into a system where you could afford to manage them (as in your own mgt co).

Start small to get a feel about this type of tenant @Brice Hall . If you have what it takes to deal with people with lots of problems then you might be cut-out for it. At that point get as many as you can and make a living. Good luck.

@Jeff S. thank you for the feedback. I totally agree and if all goes well in the beginning i'd have plans to quickly get up to a couple dozen properties so it would make sense economically. thx again

Let us address the Supply Side issue in decent, growing areas.  They aren't likely to build anything under $100,000 single family homes.  There is no margin in it.  Part of what makes cheaper single family homes so attractive is THEY AREN'T building any more!  Thus there is NO SUPPLY being built.  Economics 101, too much INCREASING demand (lower priced single family houses), chasing "stagnant" supply.

Hope that helps.

@Ken A. thank you. So you're arguing that even in larger cities and growing areas, there is no increase in the supply of low income single family properties due to the cost to build? 

What about new multifamily complexes that are being built all over? And  cheaper multifamily modular homes?

@Greg Hiban thanks again for your additional feedback. i've also now learned that property managers here have to be brokers. Not sure if this is fact, and how regulated it is, however.

@Mike D'Arrigo thank you for all the great feedback. i do, however, have two brother in laws that have properties in the same town, a father in law thats a GC in the same town, and a grandmother that is a realtor int eh same town. So these contacts, along with seeing other people successful at it, and a high demand for rentals and low to no new development is what made me take a closer look.

Not sure why you have so many posts on this thread disappearing.

You may not find cancelled checks. Most of our tenants pay with cash or cashiers checks.  They don't have bank accounts.

We have two tenants deposit their rent into our account, they go to our bank nearby.  One tenant mails their money order, and and additional check comes from a non-profit on the tenants behalf.  Two tenants bring their rent to us.  Leaving two that we make multiple trips to collect or attempt to collect.  This ratio changes with tenant turnover; this is probably the best we've had it in five years.

Single Family homes offer the most EXIT strategies hands down.  That is something that is rarely mentioned.  Multi-family is awesome as a "business" and has to be run as a business so it's a diferent "skill-set". You gotta run it right - lot's of moving parts. 

Also remember, the GOVERNMENT is most interested in getting Single Family homes into the hands of owner-occupied.  Especially lower income (Politicians love to talk about that).  Of course you can't count on only that, however it is a great consideration (see history and also Fed minutes, etc.).  Again, this is also rarely mentioned at Bigger Pockets.

Multi-families, Condos, etc. don't really compete (per se), with Single Family.  It is a different "mind-set" of buyer at this lower price level.

I always find it funny that the new "generation x, y or z ", etc. of people do not want to buy a home in the future.  That is ridiculous.  Most "family" type people will want to, at some point, own a single family home.  Anyway, you really can't build Single Family for under $120,000 anywhere near "bigger" cities/towns and make much margin (builders).

This applies to within about 20 to 30 miles of a central, core City.  Most of those types of cities have been "built out" during the last boom that peaked in 2006-2007 and there is no cheap land for building under $120,000.

My conclusion/Hunch is that some kind of "financing" (owner occupied or maybe investor financing or maybe who knows), will become "easy/easier" from the Government.  The government will once again back/offer it.  It may also come from Wall Street GREED and they will come up with it.  Stay tuned.

Sell into that greed/bubble.  I'm "guesstimating" around 2022-2024.

That is my plan and I'm stick'in to it.  lol,

Update:

@Mike D'Arrigo

@Gregory Hiban

Thank you all for the continued feedback. As of now, i've negotiated the price down to $67,000 (from the original $89,000). Does this change any of your opinions? Or would any price change your opinion? So the numbers look like this:

Price: $67,000

(Annually)

Max possible rental income: $22,800

Expenses

CapEx (15% rent): $3,420

Maint (10% rent): $2280

Vacancy (12%): $2280

Trash: $1056

water/sewer: $1680

taxes: $1677

mgt (10%): $2280

Total Expenses: $14673

ROI: $8127

Cap Rate: 12%

Do you think my numbers are conservative enough? Perhaps too conservative, as i have expenses as 64% gross rental income.

Thank you all again!

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