Where to buy rental property in the US

[Stash Man]

Does anyone have suggestions for where to buy a rental property in the US?

I'm looking for a market with good long-term appreciation potential and a decent cap rate. Casually looked into Austin TX, but apparently prices there have run up a lot already. Also looked into Phoenix. I'm new to RE investing and would love to tap into the collective wisdom of Mustachians.

Thanks in advance!

[Valley of Plenty]

I'm going to give an answer that is very unpopular among real estate investing circles, probably also including here on this forum.

You should buy rental property in your own area, or not at all. Not because it is easier, but because it is the ethical thing to do.

I live in a semi-rural LCOL area where property is very cheap compared to most of the country. Because everything is so cheap, there are lots of out of state investors who buy up as many viable properties as they can get their hands on. As a result, locals struggle to buy any decent properties at a reasonable price because almost any good deal gets snatched up by an out of state investor with a cash offer within days of hitting the market. This goes for both multi-unit and single family homes, the latter of which often get chopped up and turned into awkward duplexes so the investors can make more money, so even regular homeowners who are just looking for a house for themselves struggle to find one.

If you're actually planning to relocate to an area with a good real estate market then you can safely disregard everything I just said, but usually whenever I see this question asked, it's in regards to someone looking to invest in properties out of state. I mean, I guess even if that is what you're looking to do, you can still disregard everything I said if you want, just my two cents :P

[clarkfan1979]

I'm going to give an answer that is very unpopular among real estate investing circles, probably also including here on this forum.

You should buy rental property in your own area, or not at all. Not because it is easier, but because it is the ethical thing to do.

I live in a semi-rural LCOL area where property is very cheap compared to most of the country. Because everything is so cheap, there are lots of out of state investors who buy up as many viable properties as they can get their hands on. As a result, locals struggle to buy any decent properties at a reasonable price because almost any good deal gets snatched up by an out of state investor with a cash offer within days of hitting the market. This goes for both multi-unit and single family homes, the latter of which often get chopped up and turned into awkward duplexes so the investors can make more money, so even regular homeowners who are just looking for a house for themselves struggle to find one.

If you're actually planning to relocate to an area with a good real estate market then you can safely disregard everything I just said, but usually whenever I see this question asked, it's in regards to someone looking to invest in properties out of state. I mean, I guess even if that is what you're looking to do, you can still disregard everything I said if you want, just my two cents :P

Never heard this ethical argument previously. To clarify, your argument is that it is ethical to buy rental property in your own area, but not out of state? It seems like you are suggesting that people who live locally treat their properties better than people who invest from out of state. Is that the foundation of your ethical argument?

As a counter-argument, I had the opposite experience with foreign investors. I lived in Fort Myers, FL from 2011 to 2015 during the housing market bust. It was a really bad recession for Fort Myers, FL. The town was hurting. They didn't have enough people employed at the clerks office to keep up with the paperwork for all of the foreclosures. They didn't have the money to hire more people. When I bought my primary residence, the closing was delayed by 3 months because my house didn't have a clear title (4.5 months total). They had to go back and fix the mistakes and foreclose on it again to get it a clear title, which took an additional 3 months. 

The town recovered quicker than expected because foreign investors bought second homes. It was mostly Canadians and Germans. Based on my personal experience, they are nicer people that the locals in my neighborhood. Instead of it being a 10-year housing market recession, it only lasted about 5 years.

[Paper Chaser]

General thoughts in no specific order:

Historically high prices have combined with higher interest rates to make affordability a problem for lots of people. If the plan is to finance an investment property the math may not work unless prices drop, interest rates drop, or both.

A lot of Western cities have historically been boom/bust as far as housing values are concerned. There are also very legitimate concerns about how much water some of these places may have access to moving forward.

Demographically, the US currently has the two largest generations in history buying most of the homes. Millenials have growing families, and Baby Boomers are into retirement age. As a result there's a lot of demand and competition for well priced homes. But as the number of Boomers declines, demand likely does too which would put downward pressure on prices (appreciation) and rents.

There's also been a pretty significant investment made into multifamily real estate in recent years as a result of the above demographic demand. In many places, tons of apartments, condos, townhouses, etc are still being built which should satisfy some of the demand in the short term and could lead to excess supply in some places as the demographic reality sets in over the next 10 years or so.

The US is huge and highly variable. Trends in one area can be polar opposite from trends in another area. Climate concerns, demography, local economies, natural resources, etc all come into play if you're betting solely on appreciation.

Historically, large cities have attracted the most people and seen strong appreciation. Regions with lots of high paying jobs see higher price appreciation. But the pandemic, work from home policies and AI incorporation may change that quite a bit. SF has seen something like a 70% drop in cell phone activity in their downtown core over the last couple of years. That's a ton less economic activity, vacant offices, fewer unique small businesses to bring character to an area, less tax revenue for infrastructure, etc.

[Stash Man]

I'm going to give an answer that is very unpopular among real estate investing circles, probably also including here on this forum.

You should buy rental property in your own area, or not at all. Not because it is easier, but because it is the ethical thing to do.

I live in a semi-rural LCOL area where property is very cheap compared to most of the country. Because everything is so cheap, there are lots of out of state investors who buy up as many viable properties as they can get their hands on. As a result, locals struggle to buy any decent properties at a reasonable price because almost any good deal gets snatched up by an out of state investor with a cash offer within days of hitting the market. This goes for both multi-unit and single family homes, the latter of which often get chopped up and turned into awkward duplexes so the investors can make more money, so even regular homeowners who are just looking for a house for themselves struggle to find one.

If you're actually planning to relocate to an area with a good real estate market then you can safely disregard everything I just said, but usually whenever I see this question asked, it's in regards to someone looking to invest in properties out of state. I mean, I guess even if that is what you're looking to do, you can still disregard everything I said if you want, just my two cents :P

Buying rental properties where I live has the same effect on locals struggling to buy a home. The fact that I'm an in-state investor (rather than out-of-state) doesn't change the impact.

I've lived in several areas where out-of-state investors have driven up home prices. While it's true that the foreign money has made houses less affordable, it has also been a boost to the local economy creating jobs etc. When investing, unless it's a clear-cut case, I personally wouldn't overthink the ethical side of it.

[chicagomeg]

I visited Savannah, GA last fall and was intrigued. Apparently it's the 2nd or 3rd largest port in the US and the river was fairly recently dredged to allow for large cargo ships to traverse it 24 hours a day rather than just high tide. Given the never ending demand for goods from overseas, it seems to be a bet on a burgeoning economy. While the central historic region popular with tourists seems rather overpriced, the remainder of the metro was pretty reasonable.

[clifp]

I'm generally a fan of investing in Heartland or fly-over country. Right now that is primarily Kansas City for me.  But I've done some internet looking in Detroit, Omaha, and Oklahoma city.

Here is one list of the cheapest places to buy houses
https://www.biggerpockets.com/blog/most-affordable-housing-markets-in-the-world

They are similar charts that provide more detail as to how they arrived at the ranking and but the conclusion is pretty much the same, many places in the US have very inexpensive housing compared to the rest of the world.   The interest rate spike has significantly decreased affordability, but interest rates have increased pretty much worldwide.  All things being equally, I think it is better to invest close to where you live.  But my nearest rental property is in Vegas, 3000 miles from Honolulu

[clifp]

I'm going to give an answer that is very unpopular among real estate investing circles, probably also including here on this forum.

You should buy rental property in your own area, or not at all. Not because it is easier, but because it is the ethical thing to do.

I live in a semi-rural LCOL area where property is very cheap compared to most of the country. Because everything is so cheap, there are lots of out of state investors who buy up as many viable properties as they can get their hands on. As a result, locals struggle to buy any decent properties at a reasonable price because almost any good deal gets snatched up by an out of state investor with a cash offer within days of hitting the market. This goes for both multi-unit and single family homes, the latter of which often get chopped up and turned into awkward duplexes so the investors can make more money, so even regular homeowners who are just looking for a house for themselves struggle to find one.

If you're actually planning to relocate to an area with a good real estate market then you can safely disregard everything I just said, but usually whenever I see this question asked, it's in regards to someone looking to invest in properties out of state. I mean, I guess even if that is what you're looking to do, you can still disregard everything I said if you want, just my two cents :P

I think that is a strange argument.  Roughly 2/3 of American own their own homes and the number that's remained pretty constant for 50 years.   The percentage of home ownership is generally higher in LCOL places than in HCOL.  Local invester have numerous advantages over out-of-state investors, which is why I partner with local investors, and I recommend folks invest locally if they live in LCOL area.  Locals have access to deals before they get listed, have a better feel for neighborhoods, and better contacts with contractors/handyman etc.

The math is simple if buy houses in a city or town and slightly drive up prices, I am helping to increase the wealth of two homeowners for every renter I'm hurting.

Now it is true since the median income of homeowners is higher than renters, so I'm generally helping the haves and hurting the have-nots.  But, while many renters would buy a house if they could afford to rent there are still many people who prefer to rent rather than own a house.  In fact, up until the last couple of years, in every place I've bought or provided financing the mortgage payments were cheaper than the rent.

As Clarkfan points out, outside investment helps a region.  I'd argue that outside of investment in housing, specifically helps poor folks, and those without a college education, cause construction jobs are some of the best-paying jobs for low-skill workers.

[sonofsven]

I don't have any suggestions on location, but I do know a few people who already had a rental or two locally and ended up buying a few more in seemingly random places.

But in each case they were in the area visiting family, or for business, and they looked at the numbers and found them favorable when compared with their known local market, so they made contact with realtors and property managers and set up a few deals.

So maybe learn all you can about your local market and keep your eyes and ears open when you're traveling. It's much easier to manage locally, of course.

I would also say, very generally, that markets that have experienced a big upswing are harder to crack into if you're just starting out. Most of the real deals are inside deals (off market) and without many contacts you'll be locked out, unless you luck into one, which does happen, but it's hard to plan for.

[rothwem]

OP, where are you located right now? 

The reason I'm asking is that I've been noticing that for the last several years, I've noticed that healthy appreciation and healthy cashflow (after buying at market price) are more or less mutually exclusive.  However, if you can buy dramatically below market, you can make money in just about any market. 

For example, the market I'm in right now has the two negative forces of low wages and a large amount of rich people buying second homes.  The low wages for locals correlates to low rents, and the second home epidemic means tight supply and high purchase prices.  However, if you can find crap houses and renovate them cheaply then you can still make money here.  One of my co-workers does exactly that--his wife is a realtor and whenever she sees a house that has major problems (roof/foundation/mold) he jumps in, pays half of market, fixes the issues, and rents it out.

So, first step is to not buy off the MLS.  There are people called "wholesalers" whose entire business is to find people willing to sell their house under market.  Once they get someone under contract, they frantically try to find someone to pay cash for it, picking up $5-10k in the process.  As you might imagine, most wholesalers (not all, obviously) are sketchballs, and you'll want to wash your hands after talking to them, but they're the ones you want to be talking to.    You can usually meet a wholesaler or two at an REI meetup, they're the ones with the poorly fitting suit, bluetooth headset and sunglasses inside.  These guys (almost exclusively men for some reason) are really the people that keep the buy and hold investors working. 

[ChpBstrd]

The only place to buy RE is in your own city, and only IF monthly rent is 1% or more of the purchase price.

As a multi-state landlord you have to pay a contractor a few hundred dollars for every little task - even gutter clean outs or mowing between tenants. You have no idea if your property is being used as a party house or a drug house or if your tenant has sublet the place to a dozen felons. Smoking? Pets? No recourse. You either pay a few hundred dollars per year to visit a couple of times, or else you've never met the people occupying your property. In terms of Porter's 5 Forces, you are utterly dependent on your local property manager (supplier) and tenants (clients), which means they don't have to do much of anything.

I know some folks make it work, but this is playing the game on the hard setting. I suspect the trend will end as tenants and property managers take advantage of information asymmetries with owners who treat a property like they've bought an REIT.

[clifp]

So basically if you live on the coast, or mosts large cities in the country, don't buy rental properties.

You realized that millions of people have made millions of dollars doing the exact opposite right?

[Valley of Plenty]

You should buy rental property in your own area, or not at all. Not because it is easier, but because it is the ethical thing to do.

I live in a semi-rural LCOL area where property is very cheap compared to most of the country. Because everything is so cheap, there are lots of out of state investors who buy up as many viable properties as they can get their hands on. As a result, locals struggle to buy any decent properties at a reasonable price because almost any good deal gets snatched up by an out of state investor with a cash offer within days of hitting the market. This goes for both multi-unit and single family homes, the latter of which often get chopped up and turned into awkward duplexes so the investors can make more money, so even regular homeowners who are just looking for a house for themselves struggle to find one.

Never heard this ethical argument previously. To clarify, your argument is that it is ethical to buy rental property in your own area, but not out of state? It seems like you are suggesting that people who live locally treat their properties better than people who invest from out of state. Is that the foundation of your ethical argument?

As a counter-argument, I had the opposite experience with foreign investors. I lived in Fort Myers, FL from 2011 to 2015 during the housing market bust. It was a really bad recession for Fort Myers, FL. The town was hurting. They didn't have enough people employed at the clerks office to keep up with the paperwork for all of the foreclosures. They didn't have the money to hire more people. When I bought my primary residence, the closing was delayed by 3 months because my house didn't have a clear title (4.5 months total). They had to go back and fix the mistakes and foreclose on it again to get it a clear title, which took an additional 3 months. 

The town recovered quicker than expected because foreign investors bought second homes. It was mostly Canadians and Germans. Based on my personal experience, they are nicer people that the locals in my neighborhood. Instead of it being a 10-year housing market recession, it only lasted about 5 years.

The issue is the property cost to income level disparity. I live in a county where the average household income is about $35,000. There are probably fewer than 100 people with six figure incomes. As a result, property is cheap. So over the course of any given week there might be a dozen properties that get listed, and most of them will get snatched up immediately by cash offers from out of state investors.

There are a lot of people locally who want to buy houses, but they have to compete with wealthy out of state investors who can afford to make cash offers at 110% of asking price within 24 hours of a property hitting the market.

And yes, those investors generally don't take great care of their properties. At least not in my experience. They put the same bland, minimum cost furnishings into all of their units and don't care at all for the fact that they're creating slums, because they never actually drive past the properties they own.

[clifp]

What type of furnishing do local investors, who make $35K, put in?

[Paper Chaser]

What type of furnishing do local investors, who make $35K, put in?

Nobody making $35k is a real estate investor. Wealthy investors from outside a given location buying up remote properties increases real estate prices in those locations and eventually prices out locals that would be buying a primary home.

[clifp]

What type of furnishing do local investors, who make $35K, put in?

Nobody making $35k is a real estate investor. Wealthy investors from outside a given location buying up remote properties increases real estate prices in those locations and eventually prices out locals that would be buying a primary home.

Ya, that's what I figured also which was why I was confused about his first post on the subject.  So yes out of state do make it harder for new home buyers to afford a place, but they also increase the wealth of existing homeowners who are least twice as numerous.

[Valley of Plenty]

What type of furnishing do local investors, who make $35K, put in?

I am a local investor who makes $70k from my day job (which puts me in the top 10% for my county in regards to income), and my rental units are considerably nicer than any of the units I've been inside of belonging to multi-millionaire out of state investors, and I've been in several. I lived in a couple, back before I became a property owner.

It's pretty common knowledge (at least around these parts) that the local landlords take far better care of their properties than the ones who live out of state. We live here, it's our area, so we have more skin in the game. Unlike the last landlord I lived under, who lives in California and owns some 30 or 40 units in my town, all full of the cheapest fixtures his crew can get their hands on. I also never saw the guy once, in four years of renting. He was just a faceless slumlord, which seems to be the status quo.

Nobody making $35k is a real estate investor. Wealthy investors from outside a given location buying up remote properties increases real estate prices in those locations and eventually prices out locals that would be buying a primary home.

Ya, that's what I figured also which was why I was confused about his first post on the subject.  So yes out of state do make it harder for new home buyers to afford a place, but they also increase the wealth of existing homeowners who are least twice as numerous.

I'm not sure what the housing market is like where you live, but in my county current homeowners are absolutely not the majority. Not even close. I'd estimate maybe 20% of the homes in my town are owner occupied. And those are mainly people like me, who are high income earners by local standards. Nice as it is having my wealth increase, I don't think increasing the wealth of the already wealthy at the expense of the less wealthy is the greatest system for a society

[clifp]

What type of furnishing do local investors, who make $35K, put in?

I am a local investor who makes $70k from my day job (which puts me in the top 10% for my county in regards to income), and my rental units are considerably nicer than any of the units I've been inside of belonging to multi-millionaire out of state investors, and I've been in several. I lived in a couple, back before I became a property owner.

It's pretty common knowledge (at least around these parts) that the local landlords take far better care of their properties than the ones who live out of state. We live here, it's our area, so we have more skin in the game. Unlike the last landlord I lived under, who lives in California and owns some 30 or 40 units in my town, all full of the cheapest fixtures his crew can get their hands on. I also never saw the guy once, in four years of renting. He was just a faceless slumlord, which seems to be the status quo.

Fair enough, thanks for the clarification.  As an absentee landlord, who only visits my Las Vegas properties every year or two, and who has never seen my Missouri property (partnered with a local) I understand where you are coming from.  It is true, I'm not very concerned about the appearance of my properties and my appliances are pretty much what the property manager recommends On the other hand, since I do have capital, when the HOA says, everyone needs to paint their units by the end of the year, I'm not going fight them, I'll hire a professional painter.  Instead of DIY it, like a local property owner might be tempted.

So while we'll just agree to disagree about the ethics involved, I do appreciate you providing an unpopular opinion.

[ChpBstrd]

So basically if you live on the coast, or mosts large cities in the country, don't buy rental properties.

You realized that millions of people have made millions of dollars doing the exact opposite right?

Yes, and they're about to lose billions on their negative cash flowing investments unless the 2020-2022 levels of appreciation continue forever.

[Stash Man]

OP, where are you located right now? 

The reason I'm asking is that I've been noticing that for the last several years, I've noticed that healthy appreciation and healthy cashflow (after buying at market price) are more or less mutually exclusive.  However, if you can buy dramatically below market, you can make money in just about any market. 

For example, the market I'm in right now has the two negative forces of low wages and a large amount of rich people buying second homes.  The low wages for locals correlates to low rents, and the second home epidemic means tight supply and high purchase prices.  However, if you can find crap houses and renovate them cheaply then you can still make money here.  One of my co-workers does exactly that--his wife is a realtor and whenever she sees a house that has major problems (roof/foundation/mold) he jumps in, pays half of market, fixes the issues, and rents it out.

So, first step is to not buy off the MLS.  There are people called "wholesalers" whose entire business is to find people willing to sell their house under market.  Once they get someone under contract, they frantically try to find someone to pay cash for it, picking up $5-10k in the process.  As you might imagine, most wholesalers (not all, obviously) are sketchballs, and you'll want to wash your hands after talking to them, but they're the ones you want to be talking to.    You can usually meet a wholesaler or two at an REI meetup, they're the ones with the poorly fitting suit, bluetooth headset and sunglasses inside.  These guys (almost exclusively men for some reason) are really the people that keep the buy and hold investors working.

I live in Cali, where prices are elevated even after the correction. I believe prices are headed up over the long term, but I want to get a healthy cash flow without having to down 50%. This got me started looking out-of-state.

I'm not exactly a handy person, and I'm not good at spotting sketchballs :) Your suggestion of talking to wholesalers sounds good. I'll just have to learn more about the RE business before feeling comfortable enough to take the less conventional route.

Curious, what incentives do wholesalers offer to get homeowners to sell under market?

[Jon Bon]

Curious, what incentives do wholesalers offer to get homeowners to sell under market?

Whoa boy, if your hearing buying out of state is unethical....

Wholesalers entire business model hinges on them being scumbags. All those wonderful people offering to buy your house at 50% of its actual value? Those are the wholesalers. And when they find Korean War Vet Joe who bought his house in 1965, they offer him double of what he paid for it. Now Joe is 90 years old and does not have family to help him in such matters, and doubling your money is always good right? So he takes the offer.

Wholesaler turns around and likely sells to a flipper and make a quick 20% on the deal. They created zero value and basically just stole money from Joe.

So yeah, those people suck. I would love to hear a wholesaler who has a non-shirtbird strategy on how they "get deals". If they can do it in a slightly more ethical manner It would restore a bit of my faith in that side of the industry.

[clifp]

There is a fair amount of truth in your comments wholesaler, but like many things not as black and white as you portray.

My business partner is in Missouri, and has been a real estate wholesaler for many years, mostly in Vegas and Kansas City.
https://www.homevestors.com/getmedia/3fe01f64-083f-4de6-98df-d7bc3d2ea99d/Legacy_Outdoor_2019.png

These billboards are pretty common in the US, and they belong to a company called homevestor which is the largest homebuyer in America.  They tell me they are the most ethical but I have no way of verifying.  What I do know is that most of their leads are from people seeing their billboards and calling them, rather than the daily email, text, phone calls, and snail mail postcards, from buyers wanting to buy my properties "fast for cash"


Their business model absolutely does rely on buying houses at bargain process typically $.30-.$.70 on the dollar.  Most of the time they flip the houses themselves, other homevestor franchises, buy house renovate them and then rent them.  But for a variety of reasons they do wholesale them.  My partner was part of 30-50 person operation that would routinely flip 300-500 houses a year Sometimes, they'd have more renovation work than they could handle so they'd sell a house they just bought, other times the renovation team would have enough work so they buy from other flippers.  It is all about keeping your staff busy.

As for the ethics, it is hard to judge. Certainly, the scenario you describe happens.  On the other hand,  I know one of the houses I financed, was an estate sale.  The lady was a hoarder, and the place was uninhabitable, and couldn't be financed. The lady had no kids, so it was left to nephews and nieces, who lived on the coasts, and one of whom was the executor.  Did we get a deal buying a 3 bedroom/1 bath 900 sq foot house for $20,000 you bet.   On the other hand, it took $35,000 almost a year to get the place cleaned out, renovated and sold for about $110k.  We saved the family a lot of time and hassle.  Another franchisee told me of buying a guys property in SoCal.  The guy owned small defense contractor, they had $10 million contract, but he didn't have money to make payroll on Friday. The guy said I know you are only going to give me $.50 on the $, but better lose $300K on the house sell than lose a 10 million contract.

[rothwem]

OP, where are you located right now? 

The reason I'm asking is that I've been noticing that for the last several years, I've noticed that healthy appreciation and healthy cashflow (after buying at market price) are more or less mutually exclusive.  However, if you can buy dramatically below market, you can make money in just about any market. 

For example, the market I'm in right now has the two negative forces of low wages and a large amount of rich people buying second homes.  The low wages for locals correlates to low rents, and the second home epidemic means tight supply and high purchase prices.  However, if you can find crap houses and renovate them cheaply then you can still make money here.  One of my co-workers does exactly that--his wife is a realtor and whenever she sees a house that has major problems (roof/foundation/mold) he jumps in, pays half of market, fixes the issues, and rents it out.

So, first step is to not buy off the MLS.  There are people called "wholesalers" whose entire business is to find people willing to sell their house under market.  Once they get someone under contract, they frantically try to find someone to pay cash for it, picking up $5-10k in the process.  As you might imagine, most wholesalers (not all, obviously) are sketchballs, and you'll want to wash your hands after talking to them, but they're the ones you want to be talking to.    You can usually meet a wholesaler or two at an REI meetup, they're the ones with the poorly fitting suit, bluetooth headset and sunglasses inside.  These guys (almost exclusively men for some reason) are really the people that keep the buy and hold investors working.

I live in Cali, where prices are elevated even after the correction. I believe prices are headed up over the long term, but I want to get a healthy cash flow without having to down 50%. This got me started looking out-of-state.

I'm not exactly a handy person, and I'm not good at spotting sketchballs :) Your suggestion of talking to wholesalers sounds good. I'll just have to learn more about the RE business before feeling comfortable enough to take the less conventional route.

Curious, what incentives do wholesalers offer to get homeowners to sell under market?

The incentive is usually that the house they're buying is in such poor shape that nobody can finance it and it can only be purchased with cash.  And the wholesalers have cash, or know people that have cash.  Oh and old people.  Wholesalers love to prey on almost or actually senile older people, or people that have inherited property in an unfamiliar market. 

Honestly, I think you're barking up the wrong tree if you're bad at spotting scumbags and you're not particularly handy.  RE has really changed in the last several years, and like I said in my earlier post, its mostly impossible to buy a turn key house off the MLS and actually make money from cashflow AND appreciation.

Curious, what incentives do wholesalers offer to get homeowners to sell under market?

Whoa boy, if your hearing buying out of state is unethical....

Wholesalers entire business model hinges on them being scumbags. All those wonderful people offering to buy your house at 50% of its actual value? Those are the wholesalers. And when they find Korean War Vet Joe who bought his house in 1965, they offer him double of what he paid for it. Now Joe is 90 years old and does not have family to help him in such matters, and doubling your money is always good right? So he takes the offer.

Wholesaler turns around and likely sells to a flipper and make a quick 20% on the deal. They created zero value and basically just stole money from Joe.

So yeah, those people suck. I would love to hear a wholesaler who has a non-shirtbird strategy on how they "get deals". If they can do it in a slightly more ethical manner It would restore a bit of my faith in that side of the industry.

And yeah, @Jon Bon is dead on.  The vast majority of wholesalers are sketchballs, and the number 1 rule of dealing with sketchballs is that they try to screw everyone equally, they're not just screwing Korean War Joe, they're probably going to try to get some off of you too. 

[ChpBstrd]

...its mostly impossible to buy a turn key house off the MLS and actually make money from cashflow AND appreciation.

Maybe this is all we need to know about buying a rental property in the US right now. The deal on offer is a 6.5% or 7% mortgage at best, to finance a house selling for way more than the median wage earner in the area can afford, AFTER a bubble-resembling 18% increase in home prices in 2021, which was followed by another 5.6% in 2022, with a cap rate in the low single digits, and failing the 1% rule. For all this you get an illiquid, physically depreciating, and risky asset that is less affordable than it was prior to the 2008 housing correction.

It's THE investment everyone is talking about in the media / social media because it recently got expensive. But why do we want expensive investments with low returns? Why join the herds of dumb money at the bidding wars, when that kind of behavior has historically meant you should run for cover? We can't go back in time to capture the gains of 2021-2022, so why get involved in something that screams "bubble" and seems to all but promise low returns?

Hey, maybe it'll work out and houses will continue to appreciate at twice the rate of inflation for the next decade. But that's the speculative bet you'd be making in a world where 5% returns are risk-free and hands-off. I've lived through the dot-com bubble, the original real estate bubble, and the crypto bubble. I can tell you this one looks exactly the same.

[PMJL34]

@ Valley of Plenty,

A lot of what you are saying appears to be anecdotal. I need hard evidence and published figures before I can agree w you.  I can’t imagine a bunch multi millionaires lining up to buy 45k triplexes in a rural area or the owner occupancy being 20%. Obviously I could be wrong, but my point is that real estate prices are what they are for a reason.

Also, every city has slumlords and/or individuals that own a large portion of the rental market.  This is true in my VHCOL city and I’m sure many are familiar with Donald Sterling’s portfolio in LA. It sucks and I’ve already argued about the ethics of owning rentals on here so it is what it is. I instead believe in a hard cap number regardless of location but not 100% sold on that idea either.

With that said, I don’t know how I feel about your viewpoint that only locals should buy rentals because outsiders drive prices up. At surface level it makes sense, but by that logic, someone poorer than you in your own town can argue that you shouldn’t own rentals cause now you have too many houses/doors/power and you also drove house prices up by buying.

No easy answer here.

Edit: to muddy the water more for fun: how do you define a local? Lol

[clifp]

...its mostly impossible to buy a turn key house off the MLS and actually make money from cashflow AND appreciation.

Maybe this is all we need to know about buying a rental property in the US right now. The deal on offer is a 6.5% or 7% mortgage at best, to finance a house selling for way more than the median wage earner in the area can afford, AFTER a bubble-resembling 18% increase in home prices in 2021, which was followed by another 5.6% in 2022, with a cap rate in the low single digits, and failing the 1% rule. For all this you get an illiquid, physically depreciating, and risky asset that is less affordable than it was prior to the 2008 housing correction.

It's THE investment everyone is talking about in the media / social media because it recently got expensive. But why do we want expensive investments with low returns? Why join the herds of dumb money at the bidding wars, when that kind of behavior has historically meant you should run for cover? We can't go back in time to capture the gains of 2021-2022, so why get involved in something that screams "bubble" and seems to all but promise low returns?

Hey, maybe it'll work out and houses will continue to appreciate at twice the rate of inflation for the next decade. But that's the speculative bet you'd be making in a world where 5% returns are risk-free and hands-off. I've lived through the dot-com bubble, the original real estate bubble, and the crypto bubble. I can tell you this one looks exactly the same.

No argument that RE is a less attractive investment now than it was before the Fed raised rates.  Bonds and fixed-income nominal yields are more attractive, but remember it is the real yields that matter and that right now it is 0% 5% yield -5% inflation, and if you have the bonds in a taxable account your fed+state marginal rate is likely is 30%, making your effective return -1.5%, hardly a path to FIRE.

Now if you believe that fed will get inflation under control, and interest will start to decrease then by all means go heavy in fixed income, maybe even go for longer duration bonds.

If on the other hand you think that 5%+ inflation is here to stay then real estate actually be your best choice (Or perhaps more accurately least worst) of still overpriced assets.

My crystal ball is rather cloudy, so that's why I advocated diversification; some stocks, some bonds, some real estate.  I think diversification is especially valuable for those in or near the withdrawal phase.

If you own your home then maybe you don't need any additional real estate.  Your home is almost certainly the best real estate investment.   If you don't or RE is say under 20% of your net worth, I think buying more RE make sense.

Which gets us back to OPs original question, where to buy?

IMHO, single-family homes in LCOLarea , offer the best risk-adjusted returns. That doesn't mean you can't make money in HCOL like California, or New York.  I literally have been hearing that CA RE is  due for a crash for over 50 years, and I've believed it and even posted about a few times in the last 25 years.   The pundits have been wrong, and by not buying any real estate in CA or Hawaii other than my house,  I've left a lot of money on the table.


On the other hand, if I wanted to buy a rental property here in Honolulu it is a $1 million dollars. That's obviously a big chunk of change and even if you are doing a fat FIRE at $3 million, 1/3 of your asset in RE, which is probably not prudent.   I can get 3 properties in Vegas for $1 million or 5 houses in Kansas City for $1 million.  The house in Honolulu will be negative cash flow for many years, in Vegas pretty much break even, and slightly positive for Kansas City.   So while there are definitely negatives for buying out of state. In my opinion, the positives outweigh the negatives.

[Valley of Plenty]

@ Valley of Plenty,

A lot of what you are saying appears to be anecdotal. I need hard evidence and published figures before I can agree w you.  I can’t imagine a bunch multi millionaires lining up to buy 45k triplexes in a rural area or the owner occupancy being 20%. Obviously I could be wrong, but my point is that real estate prices are what they are for a reason.

Also, every city has slumlords and/or individuals that own a large portion of the rental market.  This is true in my VHCOL city and I’m sure many are familiar with Donald Sterling’s portfolio in LA. It sucks and I’ve already argued about the ethics of owning rentals on here so it is what it is. I instead believe in a hard cap number regardless of location but not 100% sold on that idea either.

With that said, I don’t know how I feel about your viewpoint that only locals should buy rentals because outsiders drive prices up. At surface level it makes sense, but by that logic, someone poorer than you in your own town can argue that you shouldn’t own rentals cause now you have too many houses/doors/power and you also drove house prices up by buying.

No easy answer here.

Edit: to muddy the water more for fun: how do you define a local? Lol

At minimum, my definition of "local" would be living in the same state as the property that you're buying. Ideally, I think properties should be owned by people who live within that county. I can understand this not being entirely feasible, but it would be ideal if you ask me. It would result in a lot more people taking an interest in the wellbeing of their neighborhoods, sitting in on town hall meetings, driving local legislation, etc. It would also make it harder for deadbeat tenants to take advantage of unsuspecting landlords if the landlords were all local and in communication with one another.

You're right though, this is all anecdotal and just my experience. From what I've seen and heard online though it certainly seems like most of the animosity directed towards real estate investors by tenants is due to bad experiences with big out of state investors. It rarely seems to be the people with only a handful of self-managed rentals that earn reputations as slumlords. Rather, it's the people who own a dozen plus out of state properties that they themselves don't actually manage. For the most part, it seems that the latter view real estate as merely a way to make as much money as possible, rather than providing a valuable service to their tenants.

[Archipelago]

OP, where are you located right now? 
So, first step is to not buy off the MLS.  There are people called "wholesalers" whose entire business is to find people willing to sell their house under market.  Once they get someone under contract, they frantically try to find someone to pay cash for it, picking up $5-10k in the process.  As you might imagine, most wholesalers (not all, obviously) are sketchballs, and you'll want to wash your hands after talking to them, but they're the ones you want to be talking to.    You can usually meet a wholesaler or two at an REI meetup, they're the ones with the poorly fitting suit, bluetooth headset and sunglasses inside.  These guys (almost exclusively men for some reason) are really the people that keep the buy and hold investors working.

Not to derail the topic...but hard disagree. No one should be working with wholesalers, perpetuating keeping them in business. Wholesaling needs to be stamped out and eradicated from existence. The act of wholesaling real estate is an ethical breach, as is participating in wholesaling indirectly by purchasing property from a wholesaler.

There are other ways to make lots of money in real estate that aren't dependent on shady tactics and screwing people over.

[Archipelago]

There is a fair amount of truth in your comments wholesaler, but like many things not as black and white as you portray.

My business partner is in Missouri, and has been a real estate wholesaler for many years, mostly in Vegas and Kansas City.
https://www.homevestors.com/getmedia/3fe01f64-083f-4de6-98df-d7bc3d2ea99d/Legacy_Outdoor_2019.png

These billboards are pretty common in the US, and they belong to a company called homevestor which is the largest homebuyer in America.  They tell me they are the most ethical but I have no way of verifying.  What I do know is that most of their leads are from people seeing their billboards and calling them, rather than the daily email, text, phone calls, and snail mail postcards, from buyers wanting to buy my properties "fast for cash"


Their business model absolutely does rely on buying houses at bargain process typically $.30-.$.70 on the dollar.  Most of the time they flip the houses themselves, other homevestor franchises, buy house renovate them and then rent them.  But for a variety of reasons they do wholesale them.  My partner was part of 30-50 person operation that would routinely flip 300-500 houses a year Sometimes, they'd have more renovation work than they could handle so they'd sell a house they just bought, other times the renovation team would have enough work so they buy from other flippers.  It is all about keeping your staff busy.

As for the ethics, it is hard to judge. Certainly, the scenario you describe happens.  On the other hand,  I know one of the houses I financed, was an estate sale.  The lady was a hoarder, and the place was uninhabitable, and couldn't be financed. The lady had no kids, so it was left to nephews and nieces, who lived on the coasts, and one of whom was the executor.  Did we get a deal buying a 3 bedroom/1 bath 900 sq foot house for $20,000 you bet.   On the other hand, it took $35,000 almost a year to get the place cleaned out, renovated and sold for about $110k.  We saved the family a lot of time and hassle.  Another franchisee told me of buying a guys property in SoCal.  The guy owned small defense contractor, they had $10 million contract, but he didn't have money to make payroll on Friday. The guy said I know you are only going to give me $.50 on the $, but better lose $300K on the house sell than lose a 10 million contract.

This is fundamentally different than wholesaling. Sure, that's buying houses at 'wholesale' prices, flipping them and reselling/renting them. But that's different than the unscrupulous scumbags lying about their intent to buy a property, deceptively striking up a deal to 'buy' the property (they don't actually have the money), then assigning the contract to another person without actually taking ownership of the property. Often times it involves taking advantage of people in dire life situations, unsuspecting people, or those who are senile.

The former is a legitimate business where ethics are clearer cut. The latter is a farce 'business' that should be made illegal altogether.

The get-rich-quick internet attention-grabbing economy and platforms like BiggerPockets have glorified wholesaling for years. It's disgusting.

[Jon Bon]

Bonus sucmbag points: I would assume they use the same call centers as the "Nigerian Prince" scam. So they are perpetuating fraudulent businesses on multiple continents!

Sorry to derail your thread, back to the topic. I would wait a while. I always feel like I am gate keeping people. "Yes I have real-estate but you cant buy any!" But At the same time I barely even look for properties anymore. Every now and then I see something that peeks my interest but it always ends up being on railroad tracks or superfund site.

The 1% rule is your friend. Anything else your banking on appreciation to bail your ass out, and we know how that ended the last time......

[rothwem]

There is a fair amount of truth in your comments wholesaler, but like many things not as black and white as you portray.

My business partner is in Missouri, and has been a real estate wholesaler for many years, mostly in Vegas and Kansas City.
https://www.homevestors.com/getmedia/3fe01f64-083f-4de6-98df-d7bc3d2ea99d/Legacy_Outdoor_2019.png

These billboards are pretty common in the US, and they belong to a company called homevestor which is the largest homebuyer in America.  They tell me they are the most ethical but I have no way of verifying.  What I do know is that most of their leads are from people seeing their billboards and calling them, rather than the daily email, text, phone calls, and snail mail postcards, from buyers wanting to buy my properties "fast for cash"


Their business model absolutely does rely on buying houses at bargain process typically $.30-.$.70 on the dollar.  Most of the time they flip the houses themselves, other homevestor franchises, buy house renovate them and then rent them.  But for a variety of reasons they do wholesale them.  My partner was part of 30-50 person operation that would routinely flip 300-500 houses a year Sometimes, they'd have more renovation work than they could handle so they'd sell a house they just bought, other times the renovation team would have enough work so they buy from other flippers.  It is all about keeping your staff busy.

As for the ethics, it is hard to judge. Certainly, the scenario you describe happens.  On the other hand,  I know one of the houses I financed, was an estate sale.  The lady was a hoarder, and the place was uninhabitable, and couldn't be financed. The lady had no kids, so it was left to nephews and nieces, who lived on the coasts, and one of whom was the executor.  Did we get a deal buying a 3 bedroom/1 bath 900 sq foot house for $20,000 you bet.   On the other hand, it took $35,000 almost a year to get the place cleaned out, renovated and sold for about $110k.  We saved the family a lot of time and hassle.  Another franchisee told me of buying a guys property in SoCal.  The guy owned small defense contractor, they had $10 million contract, but he didn't have money to make payroll on Friday. The guy said I know you are only going to give me $.50 on the $, but better lose $300K on the house sell than lose a 10 million contract.

This is fundamentally different than wholesaling. Sure, that's buying houses at 'wholesale' prices, flipping them and reselling/renting them. But that's different than the unscrupulous scumbags lying about their intent to buy a property, deceptively striking up a deal to 'buy' the property (they don't actually have the money), then assigning the contract to another person without actually taking ownership of the property. Often times it involves taking advantage of people in dire life situations, unsuspecting people, or those who are senile.

The former is a legitimate business where ethics are clearer cut. The latter is a farce 'business' that should be made illegal altogether.

The get-rich-quick internet attention-grabbing economy and platforms like BiggerPockets have glorified wholesaling for years. It's disgusting.

I hate to say it, but its all wholesaling, some wholesalers are just sketchier than others.  I do think they serve a purpose though, kinda like those suckerfish that you see in aquariums that eat the algae off the walls.  Wholesalers convert unused or underused homes into inventory more efficiently than any other method. 

It would be nice if there was a way to prevent the assignment of contracts though, maybe with a contract assignment tax of $X,XXX amount or something to cut back the profit margin and make it less attractive.

[Jon Bon]

In my opinion there is a huge gulf between Wholesalers(middlemen), and a house flipper/buyer of last resort etc.

Wholesalers add no value, and they try to rip people off, so I put them down there with payday lenders and bail bondsmen.

Hell those two guys scummy as they are DO provide an actual service as overpriced as it may be. Wholesalers just pray on old people.

[clifp]

[
I hate to say it, but its all wholesaling, some wholesalers are just sketchier than others.  I do think they serve a purpose though, kinda like those suckerfish that you see in aquariums that eat the algae off the walls.  Wholesalers convert unused or underused homes into inventory more efficiently than any other method. 

It would be nice if there was a way to prevent the assignment of contracts though, maybe with a contract assignment tax of $X,XXX amount or something to cut back the profit margin and make it less attractive.

I agree they are all wholesalers. Like all middlemen, they inject liquidity into the system.  You can cut out the middleman, but you can't cut out the function of the middleman. When, I was an avid aquarist, six tanks at one point, the plecostomus was my favorite critter in the tank.

[Jon Bon]

[
I hate to say it, but its all wholesaling, some wholesalers are just sketchier than others.  I do think they serve a purpose though, kinda like those suckerfish that you see in aquariums that eat the algae off the walls.  Wholesalers convert unused or underused homes into inventory more efficiently than any other method. 

It would be nice if there was a way to prevent the assignment of contracts though, maybe with a contract assignment tax of $X,XXX amount or something to cut back the profit margin and make it less attractive.

I agree they are all wholesalers. Like all middlemen, they inject liquidity into the system.  You can cut out the middleman, but you can't cut out the function of the middleman. When, I was an avid aquarist, six tanks at one point, the plecostomus was my favorite critter in the tank.

See I always had the understanding that wholesalers did a specific thing depending on local laws of course.

That they basically generated the leads (through shady practices mentioned above) and would get a purchase contract signed with the home owner, they then would sell the purchase contract to legitimate flippers, renovators, etc.

They really did not do much, often they were able to do it with no/low cash out of pocket. Depending on the state, but getting an old person to sign a piece of paper, then immediately selling that piece of paper to someone else is much different then buying a dump and renovating it back to a condition where a regular bank will make a loan on it.

But maybe I am just splitting hairs. Or is that a subset of wholesaling? Does that have type of business have a specific name?

[clifp]

See I always had the understanding that wholesalers did a specific thing depending on local laws of course.

That they basically generated the leads (through shady practices mentioned above) and would get a purchase contract signed with the home owner, they then would sell the purchase contract to legitimate flippers, renovators, etc.

They really did not do much, often they were able to do it with no/low cash out of pocket. Depending on the state, but getting an old person to sign a piece of paper, then immediately selling that piece of paper to someone else is much different then buying a dump and renovating it back to a condition where a regular bank will make a loan on it.

But maybe I am just splitting hairs. Or is that a subset of wholesaling? Does that have type of business have a specific name?

I wuldn't say they do nothing.  The group I work with spends between $20-$50K on advertising per month. They have a phone team to qualify leads, the principals typically close the deals, they have a contractor or two who inspect the property to figure out how much repairs they  need and then a  renovation team to fix up the properties and broker to sell them to homeowners/investors.  In talking to Homevestor investors, I think very few are purely wholesalers most are flippers who occasionally buy or sell to other flippers.

To me, they remind me of "Jimmy/Saul" in the Breaking Bad spinoff Better Call Saul.  Does Jimmy do shady stuff?, you bet.  Do I think he is lazy or does nothing absolutely not.