Purchasing 4 low income rental properties analysis and discussion

Purchasing 4 low income rental properties analysis and discussion

New York City, NY · Member since 2013 · 110 posts · 15 votes

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.

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Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
11y

I would not invest in such a small market. Just because its your hometown does not make it a good investment. Far too much risk of vacancy and you will end up with non ideal tenants just to fill the place. Long term demographic trends also work against you so you never get rent increases OR appreciation while your costs go up every year.

 I would also not invest remotely in low income properties and especially not without a solid PM. These properties and tenants come with lots of hands on management needs. Rent is not paid automatically through some direct deposit. They are hard on the property. More maintenance calls. Screening and selection is very critical and you may show the property a dozen times before you get a suitable tenant (even harder in a small town and low income). 

I assume you would buy cash. I strongly suggest looking at alternative investments (lending, private placement funds, etc) where double digit returns are possible without the risk and hassle of owning these kinds of rentals.

@Brice Hall

See this reply in the discussion

33 Replies

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  • Real Estate Investor · Philadelphia, PA · Member since 2015 · 34 posts · 9 votes
    11y

    @Brice Hall Disclaimer: I do not own any investment properties....yet.

    Here's what;s swimming in the great abyss of mind.  I hope you don;t mind me responding as I'm just starting out in evaluating properties for buy-and-hold and so I figured I'd give this one a shot.  Oh, and my numbered list has no correlation to yours.

    1. Get the actual numbers for the past couple of years from the seller.

    2. Have an inspector look at the properties to get a true picture of your cash investment. Looking at those dates you might be paying a lot more than the $89k.

    3. Get the cap rate for other properties in the area. That looks like an average cap rate of 12% you need to compare this to the average cap rate in the area (not county/city) and ask yourself why is this one 12% regardless if it is lower or higher than the average.

    4. As far as population growth or shrinkage, look at the area businesses.  What and how are they doing?  Who are the top employers in the area? Is that unemployment rate a trend up or down? What is the job growth rate?

    5. If you did a mortgage ( $71.2k @ 4.5% 30yr). Your cash flow, based on what you posted, per door would be about $130.  I don't know if that is worth it or not.

  • Investor · Whitttier, CA · Member since 2015 · 405 posts · 110 votes
    11y

    Great work @bricehall. That is a great analysis/front-end legwork and a great system to have. 

    My .02 begins with your unique comfort zone. To want to be an absentee landlord is not a bad thing however, if your systems are not structured and therefore haphazard it could be a disaster overtime.

     I am aware of multiple "one-stop shops" for hands off investors. The naturally required 25% down as an investor and sit back and collect a check every month, ach deposit, whatever. The point is they do everything for you, in house; why leave so much to chance when they do all the work for you.

     From what it sounds like, your flush with capital and are looking to park it somewhere. If it were me I would team with a lender and sit back and wait for the deals to come to me. Let the other guys get their hands dirty. Alternatively, if you have to be a guy who is involved with the mechanics of the operation, find a trusted GC in an area that isn't so speculative. Maybe take a 2 hour flt every three months to spend 3-4 days patrolling your target market, once you've invested there, to look for more deals, check up on your team and current performing units.

     Namely, why reinvent the wheel when we have access to proven professionals that you can partner with, ergo lower you exposure to risk while maximizing leverage and fluidity of capital.

     warm regards, 

    Davon

  • Investor · Singapore · Member since 2013 · 1k+ posts · 3k+ votes
    11y

    I would not invest in such a small market. Just because its your hometown does not make it a good investment. Far too much risk of vacancy and you will end up with non ideal tenants just to fill the place. Long term demographic trends also work against you so you never get rent increases OR appreciation while your costs go up every year.

     I would also not invest remotely in low income properties and especially not without a solid PM. These properties and tenants come with lots of hands on management needs. Rent is not paid automatically through some direct deposit. They are hard on the property. More maintenance calls. Screening and selection is very critical and you may show the property a dozen times before you get a suitable tenant (even harder in a small town and low income). 

    I assume you would buy cash. I strongly suggest looking at alternative investments (lending, private placement funds, etc) where double digit returns are possible without the risk and hassle of owning these kinds of rentals.

    @Brice Hall

  • Investor · New York City, NY · Member since 2015 · 122 posts · 67 votes
    11y

    I agree with Anish, long distance management seldom works well with all but mid-high to high end rentals. If the tenant skips out, you won't be holding enough of a deposit to cover your clean up and rehab costs. My last long distance rental was four and a half hours away resulting in infrequent inspections (my fault) and a less than ideal ending. It's a cute place and the numbers work for a little cash flow but I agree that you could do better. 

    Good Luck,

    Wayne

  • New York City, NY · Member since 2013 · 110 posts · 15 votes
    11y

    @Tatum F. thank you for the feedback!

    @Davon Lowerythank you for the suggestion, aside from BP, where would you suggest investing? Any companies specifically you could reccomend?

    @Account Closed thanks for the feedback! I see we are neighbors, any place in particular you are investing currently? Any suggestions about where to go instead? thanks!

  • Investor · Whitttier, CA · Member since 2015 · 405 posts · 110 votes
    11y

    Thank you. I think your own backyard should be the most optimal place to shop for a deal, as we have been taught via the podcasts. However I see you and I are in similar perdicaments; in that we live in areas where price points are high making investing challenging if not completely unfeasible.

    So, I began reaching out to those cousins/uncles/aunts sooner than turkey day and Christmas and had conversations about real estate. I then crossed referenced the substance of those covos with market direction in those areas. Some were plausible but just not practicable to move on. 

    To make a long story longer I moved on an area where the prices are low but the rents are high. I will PM you with the company that is the one-stop shop for us. I don't want the bosses, @brandonturner @joshdorkin to mistake it for advertising ;) 

    Truthful Brice there is no magic area, ppl have problems all over the place. It's our job to help them if we can. 

    My paradigm shift came when I stopped thinking about the $$$ and began thinking of myself as a service provider.

    Warm regards,

    Davon

    @Brice Hall

  • Investor · Dyersburg, TN · Member since 2015 · 320 posts · 100 votes
    11y
    All of my investments are in a small hometown 25k population. All my properties are sub 25k also. You can make money anywhere as long as your team on the ground is solid. I actually live in the town and still utilize a pm for many reasons. One of which I don't want any tenants knowing who I am. Small town everybody knows everyone sort of thing. My pm is great and he brings me more and more deals everyday. I have had nothing but positive interactions thus far. I also am making 150-200 bucks per door per property also. It all depends on your team and your comfort level with them.
  • New York City, NY · Member since 2013 · 110 posts · 15 votes
    11y

    @Kyle Penland thanks for your feedback! If you don't mind me asking, how do you compensate your pm?

  • Los Angeles, CA · Member since 2015 · 59 posts · 8 votes
    11y

    I invested in my local market by default last time around, didn't go well. Not to say it cannot go well in your case. 

  • Investor · Dyersburg, TN · Member since 2015 · 320 posts · 100 votes
    11y

    @Brice Hall several ways.  One he is my pm so he takes 10% of rent off the top.  Second, he is also my realtor and gets a commission when I purchase a property, third he is a turnkey pm.  My definition of turnkey is that he has his own maintenance crew and clean out crew.  He does everything from cleaning out my units to maintenance on the and does a great job of keeping them in good shape.  When a leaky faucet, he sends out his maintenance guy to fix etc...  It's truely passive income at its best!  Hopefully you have the same experience with your pm that I do.  Let me know if you have any other questions.

  • Broker · Logan, UT · Member since 2013 · 1k+ posts · 1k+ votes
    11y

    @Brice Hall

    The absence of a property management company in the area would be a deal killer for me.  A property management company is more than a handyman and a rent collection system.

    As @Account Closed mentioned, tenants in this demographic tend to be hard on properties.  A handyman might be great for fixing a leaky faucet, but when it comes to turning a unit, you need to coordinate multiple teams to repaint, clean, carpet, etc.  You need a company behind you to turn units quickly.

    I co-founded and operated a pm company for several years and putting together a group of crackerjack subs requires a lot more than a phone book.  For example, we went through about a dozen cleaning outfits before settling on the one they use now.

    Also, pm companies have infrastructure like leases compliant with the latest state regulations, eviction processes, tenant screening infrastructure, marketing and showing mechanisms, and most of all experience with the local tenant pool.  Your handy man or local real estate agent won't have this capacity.

    In the absence of a local pm company, you will essentially be creating your own--remotely and with no experience.  Not impossible, but for it to be worthwhile to get your systems in place to manage properties effectively, you should be looking at 30-50 doors, not 4.  To give you an idea, a property management company turns profitable and self-sufficient at around 250-300 doors.

    That being said, there might be a business opportunity here.  A population of over 35K and probably more in surrounding towns will probably have enough rental housing to sustain a property management company.  If you have a childhood friend or relative that could be a local partner and are willing to invest at least $25K to start a business, you might be onto something.

    As a side note, I can't believe that there aren't opportunities in the New York area.  Your comments about global money parking cash there means that middle income residents (without rent controls) are being displaced.  Figure out where they are going and invest there.  In the history of New York City, has there ever been a neighborhood that was gentrified and reverted back to slum?  I don't think the answer will be the same in the mid-west.

    Good luck.

  • Investor · New York City, NY · Member since 2015 · 808 posts · 417 votes
    11y

    @Brice Hall

    You mentioned that you picked this location because it is your hometown. Does that fact let you find someone that you trust and can rely on? Is there someone else there that you or your family knows that can show you the ropes in that town? Is there some type of community or organization that will give you comfort that you will easily be able to find the help you need, find tenants and/or resolve disputes if they come up. 

    You might want to make a trip there and talk to as many people as you can to see how comfortable you can get. It could be a good opportunity if it is somewhere most people don't look and you have some type of advantage. With that being said, you might want to start closer to home or in a more investor friendly area so you can learn what you are doing before you make a riskier leap. I too am from NYC and there are definitely areas close enough to NYC where deals can be had including NJ, CA and PA. Most of the international parked money is in NYC itself and in higher end properties so it doesn't play as much a little while outside NYC but close enough for a drive. 

    As far as more passive investments that Anish was referring to, if you are accredited you can invest in many of these syndicated deals. Recent regulation is supposed to make it possible for even non-accredited investors to invest in these investments.

    I am also in NYC so feel free to PM me if you want. 

  • Lender · New York City, NY · Member since 2015 · 104 posts · 26 votes
    11y

    Hi @Davon Lowery,

    Great feedback.

    Can you please PM me your one-stop shop as well.

  • Consultant · Oklahoma City, OK · Member since 2015 · 122 posts · 34 votes
    11y

    @Brice Hall 

    If I'm reading your projections right it looks like you are assuming a total CAPEX of $190/mo for 4 houses. That is a little less than $50/mo per house for ~1,000 sqft houses.

    You may have already gone through all the details to come up with this figure, but if not, this article gives some ideas of costs you might take into account:

    http://www.biggerpockets.com/renewsblog/2015/03/03...

    That isn't to say that the numbers in that article are right, but those line items would be things you might want to put into your calculations.

    Also, will you be buying these properties with cash or financing?

    It looks like you have put alot of time and effort in coming up with this possible plan--keep up the good work!

  • New York City, NY · Member since 2013 · 110 posts · 15 votes
    11y

    UPDATE

    @Frank B.

    @William Hochstedler

    @Kyle Penland

    @Davon Lowery

    @Wayne V.

    @Account Closed

    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!

  • Investor · Dyersburg, TN · Member since 2015 · 320 posts · 100 votes
    11y

    @Brice Hall curious as to why you are figuring in water sewer and trash?  Not sure about your location, but my tenants pay their own water and sewer and trash is as well.  I'll have to figure these out when I get to my computer, but at first glance I think I would bring that price down more.  Have you walked each of these yet?  In this range you need to view the property with a microscope to make sure someone isn't dumping trash on you with major repairs required.  If you can't get there, pay a GOOD contractor or pm that is honest and trustworthy to check them out.

  • New York City, NY · Member since 2013 · 110 posts · 15 votes
    11y

    @Kyle PenlandThx for responding, I need to double check this, but I'm pretty certain that the landlord is paying trash and sewer. Perhaps to avoid liens or for some other reason?

    I did a brief walk with a GC, and the properties are all rent ready and maintained. As they are all older I should expect a little higher capital exp, but likely nothing major for at least a year, in which I could begin to build a reserve 

  • Pasadena, CA · Member since 2015 · 7 posts · 1 vote
    11y

    my 2 cents from a macro perspective is the deal looks good...if I had that locally I'd pull the trigger, however, I can't stress enough what a few others have said about having someone on the ground to watch these properties.  I have a few in a small town 3 hours from LA that I would never have bought if it wasn't for "Cousin Jimmy"...Cousin Jimmy manages, repairs, renovates for me and without him no way would I touch those properties.  By the way, having just one property manager on my list wouldn't do it for me...I'm only looking at areas where there are multiple resources just in case something goes wrong with that manager...my parents learned the hard way, their property manager embezzled nearly $10,000 by collecting rent and then leaving town....good times.   With such a small town you're going to have to be a manager for your property manager, don't ever take anything for granted

  • Investor · Dyersburg, TN · Member since 2015 · 320 posts · 100 votes
    11y

    These properties are a lot like my properties I own.  For example, I just closed two properties for 25k (combined).  I get 775 a month combined in rent for them.  i don't pay any trash, water, sewer etc...I pay my mortgage, my PM, Taxes, insurance.  Also Cap Maintenance won't be big.  My properties do not have Central Heat and air, if the roof leaks I patch it, if they don't pay the water bill, I pay it for them and serve them a late rent penalty.  You will get calls for heat etc.  I wouldn't put 15% away for capex unless you plan to use that money for clean out...Thats a bit overkill imo.  I am trying to get an apt building and I will use 15% for CapEX there but I plan to use that money to do major upgrades to the units and get them in much better shape for an equity cash out play.  I think these properties are a lot like mine and I personally wouldn't be interested at a 12...These properties are not for the faint of heart...Occasionally you will get a meth lab etc, they require lots to get in rent ready form.  Be selective about who you let in.  For the trouble these can cause, you should shoot for a 17 Cap and maybe a bit less.  Since you are starting out, you may have to pay a bit more to play if the investor isn't motivated to sell.  I do think there is more wiggle room though, because you are paying 16750 for a property...Tell him/her after more thought you think you will sign if you can get them for 15k a property or something like that...Find out what recent sales on the streets are and figure the $sq ft and offer highest.  I am going under contract on a home now where the guy was asking 22k, I got it for 15400 and would have gotten it for less (comps said 13,700 was highest I should offer), but that is what he owed the bank and the taxes for 2014.  It will rent for 450-500 a month and very little repairs to get it going.  There are sweet deals to be had everywhere so really push until you think you've pushed enough to get the best deal.  Good luck, let me know if you have any questions.  I do think you are on a good deal though...Just try to make it great!

  • New York City, NY · Member since 2013 · 110 posts · 15 votes
    11y

    @Kyle Penland thanks for the response! what are you finding your cost per month per property for capex? have you held any of these properties for a longer period of time, where one major capex (roof, etc) could wipe out A LOT of rent? What are your thoughts on this article? (thanks for sharing @Frank B. !)

    http://www.biggerpockets.com/renewsblog/2015/03/03...

  • Investor · Park ridge, IL · Member since 2014 · 84 posts · 33 votes
    11y

    Really have no idea why anyone would want to own properties like this. Your level of renters will be so low and its nothing but a problem. Endless calls for B.S. repairs and goodluck trying to collect rent. Not worth it. Find properties in good areas with excellent schools. Get premium rent and good tenants. When you live near big cities like i do Condo's are by far the best investment. They are virtually hassle free and can make you money if you can get them for the right price. These homes will cost you money and keep you up at night. You can do all the analysis you want but in the long run the problems won't be worth it. Just my opinion.

  • Rental Property Investor · Leucadia, CA · Member since 2015 · 153 posts · 53 votes
    11y

    Brice-

    I started with low-income housing in Milwaukee while living in Florida, and it is all about having the right team. We did not get off to a good start. I had to evict everyone in a fourplex. Two days later, it was being ran by drug dealers and prostitutes. That's no joke. (Note: not all low-income areas are rough. This one just happened to be in a rougher area that I am getting out of now).

    My first property management company was larger, and they didn't put the required focus needed. I ended up working with a guy who I was able to turn it around with. Things are much better now. That guy above's "Cousin Jimmy" is what you will eventually develop. When you get to that point, you can be bringing in some great returns.

    From my experience, I think 10% CapEx, 10% maintenance, and 7.5% vacancy are probably a little low. These are older homes. If the 7.5% takes into account money not collected, it will definitely be more. If you purchase one and it goes vacant immediately, you will have to pay for the turnaround.

    With that said, I like my rentals in low-income area. I have good tenants that are good people. I offer them a bit nicer than average place to live and have seen good results from that. However, they are always just one thing happening in their life from not being able to pay rent.

    This property price point also offers a higher rate of growth as you can reinvest quicker. I really like that part of it.

    Good luck, man. Let me know if you have any questions. Working on these on a day to day basis so would love to spit ideas back and forth.

    Thanks,

    Steven

  • Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
    11y

    @Brice Hall what it boils down to is how you manage your maintenance/capex costs. Secondly it matters what kinds of tenants you are dealing with and how much it costs you for turnover. We can't determine these things here. Like it has been said before if you are close by on hand to keep close control of things it will be different than having layers of people you are paying to collect wages without a tight reign on them.

  • New York City, NY · Member since 2013 · 110 posts · 15 votes
    11y

    @Steven Segal thank you for the feedback! you mention:

    "From my experience, I think 10% CapEx, 10% maintenance, and 7.5% vacancy are probably a little low. These are older homes. If the 7.5% takes into account money not collected, it will definitely be more. If you purchase one and it goes vacant immediately, you will have to pay for the turnaround."

    What would you estimate them to be? what have you found your capex and maintenance to be over the long haul? For these types of properties, what is the average $ amount of maintenance/cap ex per 5 years? 10 years? 15 years? Anywhere to find these numbers? thanks again!

  • New York City, NY · Member since 2013 · 110 posts · 15 votes
    11y

    @Steve Kachniewicz you make valid points! But have you ever actually experienced these type of properties?

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