Author Topic: Finding a good place to become a landlord  (Read 7829 times)

MJP

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Finding a good place to become a landlord
« on: July 18, 2013, 05:02:24 PM »
I'm interested in the idea of owning a rental property and getting some steady income from it. As I start to learn more about the topic(I'm just starting out) the biggest factor to consider seems to the rent/purchase cost ratio. I've seen various ways people have of computing this, sometimes adding in an renovation/improvement costs, accounting for some vacancy, paying a PM company, etc. However, the end game of how to make money seems to be to find a property to buy cheap enough that the rent/buy ratio makes sense.

These ratios seem to be different for different types of properties(SFH/Apts/Condos/etc) as well as where they are located(rural/city/burbs/NSEW/etc). In order to try and get a lay of the land I'm thinking of doing some data collection and analysis to get some more information. What I would try to collect at a basic level is what a place is renting for and what it was purchased for. Right now my plan would be to grab a bunch(1000s) of these examples from all across the country and see if I can find some patterns of certain areas or types of properties where the ratios are good.

Before I start fiddling around on my own I thought I'd reach out to this community to see if anyone knows of any resources out there that already accomplish this. It would be great to take a look at what data has already been gathered. Also, what do folks think about this idea in general, would it even help? Let me know what you think or what related resources you know of that may help.

Thanks

arebelspy

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Re: Finding a good place to become a landlord
« Reply #1 on: July 18, 2013, 05:05:20 PM »
Sounds like a good business idea.
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TLV

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Re: Finding a good place to become a landlord
« Reply #2 on: July 18, 2013, 05:33:00 PM »
I know I've seen some infographics with this type of information from Trulia/Zillow, though they only covered a handful of major cities.

You might look into their APIS (Trulia, Zillow) to see if you could get your data that way.

honobob

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Re: Finding a good place to become a landlord
« Reply #3 on: July 18, 2013, 06:42:50 PM »
I'm interested in the idea of owning a rental property and getting some steady income from it. As I start to learn more about the topic(I'm just starting out) the biggest factor to consider seems to the rent/purchase cost ratio. I've seen various ways people have of computing this, sometimes adding in an renovation/improvement costs, accounting for some vacancy, paying a PM company, etc. However, the end game of how to make money seems to be to find a property to buy cheap enough that the rent/buy ratio makes sense.

These ratios seem to be different for different types of properties(SFH/Apts/Condos/etc) as well as where they are located(rural/city/burbs/NSEW/etc). In order to try and get a lay of the land I'm thinking of doing some data collection and analysis to get some more information. What I would try to collect at a basic level is what a place is renting for and what it was purchased for. Right now my plan would be to grab a bunch(1000s) of these examples from all across the country and see if I can find some patterns of certain areas or types of properties where the ratios are good.

Before I start fiddling around on my own I thought I'd reach out to this community to see if anyone knows of any resources out there that already accomplish this. It would be great to take a look at what data has already been gathered. Also, what do folks think about this idea in general, would it even help? Let me know what you think or what related resources you know of that may help.

Thanks
Huge undertaking.  I'm not sure the results would be reliable or worth it. 
1.  What are you trying to accomplish?  a. "steady income" or b. "make money" 
2.  "rent/purchase cost ratio."   From when?  2013, 2000, 1970?  An average of the last 10 years or the median of the last 10 years?  How would you compute it?  How would you know if it was moving up or down?  How would you differentiate between the different expense ratios for different properties in different locations? 
3.  How many target areas?  How big would they be, neighborhood, city, metropolitan area?

Even with a source for this information I think you'd have to have area knowledge to make any sense of it.
I invest for appreciation and rent growth.  I use neighborhoodscout.com for general information but would not make an investment decision based solely on their reports. 

Good luck, I'd like to see your results.

 

MJP

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Re: Finding a good place to become a landlord
« Reply #4 on: July 19, 2013, 03:52:25 PM »
Thanks for the responses, I'm going to try to get something going this weekend and see where I get. I'll post back here with preliminary results once I have them.


1.  What are you trying to accomplish?  a. "steady income" or b. "make money" 
2.  "rent/purchase cost ratio."   From when?  2013, 2000, 1970?  An average of the last 10 years or the median of the last 10 years?  How would you compute it?  How would you know if it was moving up or down?  How would you differentiate between the different expense ratios for different properties in different locations? 
3.  How many target areas?  How big would they be, neighborhood, city, metropolitan area?
 

1. Right now just trying to gather information, in the long term both A or B sound great :)
2. My initial thought was current rent information and last sold purchase cost. Expanding out it would be interesting to see this change over time, but for a starter I'll shoot for just a current snapshot. The rent costs will be what is posted - which may or may not be exactly equal to what they actually rent for but should be close. I'll look at the expense ratios grouped by dwelling type - starting with SFH, which should be the easiest to compute. I would expect to see certain parts of the country or of cities with better ratios than others. Each ratio will be on a per property basis, so I'll probably average in some way for each local area.
3. I'll test it out in a couple of city sized areas and hope to expand from there. Once the data collection infrastructure is set up it won't be too hard to search other areas. To start out I'll only collect data from 1-2 sources, which will limit the amount gathered.

The_Dude

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Re: Finding a good place to become a landlord
« Reply #5 on: July 19, 2013, 04:08:48 PM »
finestexpert.com used to do something like that for major areas around the country however, they closed the site and used to have a page indicating it was closed due to lack of interest.

It modeled various popular metrics such as cap rate, cash on cash return, etc. of current mls listings.  I found that it had some inaccuracies but was good enough to help you narrow your search focus to specific areas that were most favorable to cash flow RE investors. 

MJP

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Re: Finding a good place to become a landlord
« Reply #6 on: July 21, 2013, 09:30:13 AM »
Finished the first part of the experiment - collecting posted rent prices for a bunch of SFHs across the country. I've attached a PDF summary showing average rent prices in each city and how many homes in each city.

All of the counts and averages are just for the houses in my sample and all were SFH. I haven't scrubbed the data yet, so there may be some inconsistencies.

Next step will be to look up the last sale price for as many of these properties as possible and start computing the ratios.


Nate R

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Re: Finding a good place to become a landlord
« Reply #7 on: July 21, 2013, 10:23:54 AM »
Finished the first part of the experiment - collecting posted rent prices for a bunch of SFHs across the country. I've attached a PDF summary showing average rent prices in each city and how many homes in each city.

All of the counts and averages are just for the houses in my sample and all were SFH. I haven't scrubbed the data yet, so there may be some inconsistencies.

Next step will be to look up the last sale price for as many of these properties as possible and start computing the ratios.

Still need at least property taxes, I would say. 165K house where I live has taxes of $4800/year. Other parts of the country, a 400K house has taxes of 2500/yr. Big variable there.

Katnina

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Re: Finding a good place to become a landlord
« Reply #8 on: July 21, 2013, 10:26:39 AM »
Awesome! Definitely take property taxes into consideration if you can.

Fwiw I own in the detroit metro area. A lot of the really cheap properties require substantial upgrades-so purchase price is often not all-in cost.  Example: my 25k 1br house needed $7k of repairs (roof, appliances, water heater, flooring, etc).

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MJP

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Re: Finding a good place to become a landlord
« Reply #10 on: July 21, 2013, 01:30:16 PM »
Reasonably recent:
http://blogs.wsj.com/developments/2013/04/04/bang-for-the-buck-where-investing-in-rental-homes-is-most-profitable/

Cool, thx for the link. I wonder if those will match up with what I find.

Still need at least property taxes, I would say. 165K house where I live has taxes of $4800/year. Other parts of the country, a 400K house has taxes of 2500/yr. Big variable there.

I'll insert property taxes when available.

Fwiw I own in the detroit metro area. A lot of the really cheap properties require substantial upgrades-so purchase price is often not all-in cost.  Example: my 25k 1br house needed $7k of repairs (roof, appliances, water heater, flooring, etc).

Hmmm, not sure how easy this information would be to grab - maybe a rough estimate would be age of home. Hard to tell as it really depends on how the current owners are keeping it up.

arebelspy

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Re: Finding a good place to become a landlord
« Reply #11 on: July 22, 2013, 09:36:08 AM »
Reasonably recent:
http://blogs.wsj.com/developments/2013/04/04/bang-for-the-buck-where-investing-in-rental-homes-is-most-profitable/

Those things are usually wrong.

Vegas, for example, it lists as #5, yet all the hedge funds have stopped buying here except for one, and discussion at our REIAs for the last two months have been on selling, rather than buying.

I have several of my properties up for sale here.
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KingCoin

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Re: Finding a good place to become a landlord
« Reply #12 on: July 22, 2013, 11:55:40 AM »
Reasonably recent:
http://blogs.wsj.com/developments/2013/04/04/bang-for-the-buck-where-investing-in-rental-homes-is-most-profitable/

Those things are usually wrong.

Vegas, for example, it lists as #5, yet all the hedge funds have stopped buying here except for one, and discussion at our REIAs for the last two months have been on selling, rather than buying.

I have several of my properties up for sale here.

Any idea what makes it wrong? Inaccurate data, ignoring things like property taxes, etc?

arebelspy

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Re: Finding a good place to become a landlord
« Reply #13 on: July 22, 2013, 12:05:54 PM »
I can't speak to the rest of the list, but for here: inaccurate data based on lack of knowledge of the local market: what prices are actually doing in terms of sales, and what rents are doing in SFRs.  Their rent number is quite a bit off, for example.

I only skimmed the article for Vegas info, but did they cite where they got their numbers?
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honobob

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Re: Finding a good place to become a landlord
« Reply #14 on: July 22, 2013, 12:43:35 PM »


Any idea what makes it wrong? Inaccurate data, ignoring things like property taxes, etc?
Median sales price, then take average rent and subtract some made up expense number =????????????
AND they go out on a limb and call the higher crap rate means that the area is MORE profitable.  That is NOT true!

MJP

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Re: Finding a good place to become a landlord
« Reply #15 on: July 23, 2013, 10:00:46 PM »
Finished up grabbing the information I wanted. In the end, I have data for ~15k SFH across the country. I'm just starting to look into it and haven't drawn any conclusions yet.

For my 'Ratio' I used (Last Purchase Price / ((12 * Rent/mo) - Property Tax/yr). Hopefully an ok estimate of whether or not a place is a money maker. Obviously there are other things that could be factored in, but I decided to start there and use those three pieces of information to give each SFH a Ratio score. The lower the Ratio the more profitable(in theory) a house is, and the higher the Ratio is the less profitable(in theory) a house is. I mostly bounded the Ratio between 0-30 as that is where pretty much everything fell.

I've attached a few things to this post for anyone who is interested to check out. A few graphs about the Ratios of all of the houses and how they related to the house's purchase price and the monthly rent. Also, a .html file that is a google map of the united states with all of the houses plotted on it. The html file is pretty big, and it will likely run somewhat sluggishly depending on your machine. Once it loads, you can zoom it to different cities and see all of the houses there and what there Ratios are. Clicking on one of them will bring up links to Zillow/Trulia and tell you what the exact Ratio is.

I'll probably look more at this stuff later this week to see what I can make of it. Maybe something, maybe nothing, but a fun project at the very least.

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Re: Finding a good place to become a landlord
« Reply #16 on: July 23, 2013, 11:25:02 PM »
Ummmm, Arebelspy, what are you going to do with the money?

In your shoes, I would be looking at an easily managed, cash flowing portfolio, and treating it as part of the retirement plan.  I would probably pay those puppies off and deposit the rent checks.  Can you leverage the net proceeds into something even better? 

MJP

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Re: Finding a good place to become a landlord
« Reply #17 on: July 23, 2013, 11:29:29 PM »
Also attaching a file with averages for the cities.

Deff some suspect data in there - looking at the houses in Gary, IN and some were posted as having sold for $50. Example: http://www.zillow.com/homedetails/3784-Harrison-St-Gary-IN-46408/73345947_zpid/


arebelspy

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Re: Finding a good place to become a landlord
« Reply #18 on: July 24, 2013, 08:43:44 AM »
Ummmm, Arebelspy, what are you going to do with the money?

In your shoes, I would be looking at an easily managed, cash flowing portfolio, and treating it as part of the retirement plan.  I would probably pay those puppies off and deposit the rent checks.  Can you leverage the net proceeds into something even better?

Blow and hookers.

Yes, I'm essentially looking to increase my yield.  Due to Vegas's crazy appreciation in the last year my return on equity has dropped by about 2/3 (from 12% based on initial investment to 5% based on equity I could cash out after all selling fees and taxes).  5% leveraged is fairly mediocre, so I'm looking to reposition that into other properties that can beat that, especially if I can upgrade to better areas/cities (Vegas is sort of a one horse town in terms of the economy/jobs).  Got great deals on these properties in 2009-2013, now looking to see if I can move that to something better (into the eventual properties I'll be holding for ER income).

It may still end up be these, but exploring options.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Re: Finding a good place to become a landlord
« Reply #19 on: July 24, 2013, 11:02:49 AM »
In your shoes I might not sell a lot of properties until I had found the next market and had some experience there.  An experiment to prove your hypothesis is in order, but I would be cautious about liquidating until the net proceeds had a place to go. 

With real estate, your calculated yield will vary over time.  Rents and property values do not necessarily correlate.  Making decisions based on a yield calculation at a single point in time is not always the wisest approach.  In my experience, the bias in real estate (except for flips) should be to hold.  Transaction costs are high, as are the risks of entering a new market.   

Caveat:  I'm your parents' age, so any mistakes I make are more difficult to overcome and I'm therefore more cautious.

arebelspy

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Re: Finding a good place to become a landlord
« Reply #20 on: July 24, 2013, 07:20:41 PM »
That's probably good advie; I already have too much capital looking for opportunities right now, unfortunately.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
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Another Reader

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Re: Finding a good place to become a landlord
« Reply #21 on: July 24, 2013, 11:22:21 PM »
Sometimes the opportunities are just not there.  It may be better in the long run to accept lower yield short term paper investments for your cash while you wait.  Or maybe you can find short or medium term opportunities in private lending.  Real estate is different than paper assets.  Mistakes are costly.  You can't turn on a dime.  You have done very well so far.  Just keep depositing the rent checks and building up capital until the right deal comes along.  Be patient, and you will find it.  In your shoes, that's what I would do.

honobob

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Re: Finding a good place to become a landlord
« Reply #22 on: July 24, 2013, 11:47:03 PM »
Ummmm, Arebelspy, what are you going to do with the money?

In your shoes, I would be looking at an easily managed, cash flowing portfolio, and treating it as part of the retirement plan.  I would probably pay those puppies off and deposit the rent checks.  Can you leverage the net proceeds into something even better?

Blow and hookers.

Yes, I'm essentially looking to increase my yield.  Due to Vegas's crazy appreciation in the last year my return on equity has dropped by about 2/3 (from 12% based on initial investment to 5% based on equity I could cash out after all selling fees and taxes).  5% leveraged is fairly mediocre, so I'm looking to reposition that into other properties that can beat that, especially if I can upgrade to better areas/cities (Vegas is sort of a one horse town in terms of the economy/jobs).  Got great deals on these properties in 2009-2013, now looking to see if I can move that to something better (into the eventual properties I'll be holding for ER income).

It may still end up be these, but exploring options.

But, but, but I thought you only bought for CASH FLOW (2% err 50% 45% expenses fake NOI) I can't keep track of the RULES!  Has the cash flow that you based your purchase on changed?  And now you want to sell because your ROE has changed!?  "Dang, if this property appreciates another $100,000 I'll be losing money!"  I don't see the fundamentals in your investment strategy.

arebelspy

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Re: Finding a good place to become a landlord
« Reply #23 on: July 25, 2013, 10:06:17 AM »
But, but, but I thought you only bought for CASH FLOW (2% err 50% 45% expenses fake NOI) I can't keep track of the RULES!  Has the cash flow that you based your purchase on changed?  And now you want to sell because your ROE has changed!?  "Dang, if this property appreciates another $100,000 I'll be losing money!"  I don't see the fundamentals in your investment strategy.

It's amazing how little you understand about real estate given how long you've been involved with it.  Then again, there is a difference between investing and speculating, so I shouldn't be surprised.

I absolutely did invest for cash flow.  And if I can sell and then purchase more cash flow for the same dollars, I'll do that.  What part of that don't you understand?

AR, very true.  Thanks.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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Dicey

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Re: Finding a good place to become a landlord
« Reply #24 on: July 25, 2013, 01:16:26 PM »
OMG MJP, can it be that you are making this wa-a-a-a-ay too complicated?

I live in Northern California. John Madden lives not far from my town. He owns a shitload of rental property. In an interview he said he doesn't own anything he can't walk to. While this may not be strictly true, it is outstanding beginner's advice.

When I bought my first rental property, I was living in Los Angeles, where I could afford exactly nothing. Since I couldn't buy a home in LA, but had a relatively cheap apartment, I decided to make my first home a rental property in the town 60 miles east, where I grew up. Much lower cost of entry and most importantly, it was a town I knew and understood, which is basically what Madden is saying. Or to quote Harold Hill in The Music Man: "You gotta know the territory."

My suggestion is you start with that.

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Re: Finding a good place to become a landlord
« Reply #25 on: July 25, 2013, 02:12:15 PM »
OMG MJP, can it be that you are making this wa-a-a-a-ay too complicated?

I think understanding the scope of your investment opportunities is a great first step. Yes, investing locally is ideal all things equal, but things are rarely equal.

I live in Manhattan where cap rates are typically 2.5-4.5%. Even expanding my radius a bit doesn't get me much better. I'm almost certainly better off investing at 9-11%+ elsewhere in the country than praying that prices keep going up on the island, even if I'm able to opine at length on each neighborhood.

That doesn't mean you don't have to do your homework, but it boils down to a question of risk and reward (the risk of knowing a neighborhood less intimately vs the reward of potentially much higher returns).