In this module we’ll view some different resources for determining rental properties to purchase. We’ll see county records online, HomeSteps, and the Multi-List System (MLS). There are actually 400 multi-list systems in the Continental United States, and you will have access to those through your real estate agent.
If you’ve been taking other classes, and you should, you know we train the real estate agents we want you to work with. You don’t have to use them—it’s your choice—but I will tell you, the agent you choose can make the difference between you prospering today, and languishing in frustration for a long time.
There are many agents out there who will tell you they want to help you,and they do. But let’s face it, if they don’t buy or own rental properties, and they haven’t worked with a number of investors, there’s no way they’re going to be able to help you without you investing a significant amount of time and energy to train them on your needs. We cover that in another class, but here I’ll show you what data you should be expecting from real estate agents, and how to use it.
So, in any case, hopefully you did your homework, and you’ve narrowed down your target areas. In other words: municipalities,cities, towns, boroughs, townships, whatever the case may be. You should have narrowed that down even to the zip code level. Right now, we’re going to focus on choosing the right neighborhoods, and a little later we’ll zoom in on choosing the right properties.
I’m sure you have questions and concerns. I know people want to be told what they want to hear, but I’m here to tell you what you need to hear. Okay? For most of you, this is going to be common sense. But the bottom line is, there are three different types of neighborhoods: high-priced, middle-priced, and low-priced areas.
The bottom line is, when you’re in the multi-unit rental business, your primary objective should be return on investment—cash flow. You need to have cash flow. The banks want you to see cash flow.Out of the four C’s, there’s four C’s of lending (Cash, Credit, Collateral and Character), cash is king. Banks certainly prefer to lend in the A-grade areas, and not to lend in the below C-grade areas.
However they’re required by law to lend in some of the below-C areas, in what they call the red zone. The law was a reaction to what banks called red lining. Banks would say, “We won’t lend
money to properties in these areas, beyond this red line.” Well, it’s illegal to do that now. But regardless, the number one characteristic that banks look for in rental properties is cash flow.
They want cash flow. They look at your character, of course, and they look at your collateral, but they want to see cash flow. Never forget that. Cash flow is number one. Cash is king, always has been, always will.
So if you’re in these A-grade areas, you may only be getting $1000 per month for a $100,000 unit. There’s bunches of them out there. But that’s essentially a 1% gross monthly rent multiplier. In other words, every month you’re making $1000, 1% of your purchase price, which is $100,000. So, if that’s what your game is, more power to you. But I can tell you, you will not cash flow very much with a situation like that.
I know people who invest in areas like that and sometimes, they’ll plunk out all cash. As a matter of fact, they’re just looking for a parking place for their cash. Cash flow is not king to them. They don’t care about the lenders. They’re in a different situation than most people. Usually, people getting into rental real estate need cash flow because they’re looking to build wealth and income—in order to grow to the levels of the other guys we’ve just described up there. Okay?
In any case, I have seen rental properties in California that run for $75,000 a month. And guess what? People there will pay it. But that’s not the case in most areas of the country.
Middle-class areas are generally best for flipping real estate. Throughout most parts of the country right now, it’s not a good time to be flipping high-end properties. People took a bath on that in the last couple of years. But middle and upper-middle class? You better believe there are areas of the country where the bidding war’s going on already.
But when it comes to rentals, you won’t cash flow very much in those either. You want to be on the very low rung of the middle-class, or the middle-upper rungs of the lower-end neighborhoods. If you look at the monthly gross rent multiplier, and your cash on cash return versus the cost basis of your property, you’re going to see that in those areas I just described (the lower-end areas, not poor, not blighted, not war zone), you’ll find the best cash flow.
They may be lower income areas but they still have good people. Those folks just happen to have lower incomes than you or me. It doesn’t mean they’re bad people in fact they’re often very good people. And they’re very responsible. But those are the neighborhoods where you’re going to find the greatest rents compared to the cost basis of the property.
I know a lot of people will say, “I never want to go in those areas,” and I know plenty of investors who say, “I had kind of a hard time in there.” But that’s because they were probably not buying the right property, and probably not renting to the right people. Now I will remind you, we’re looking in the upper rungs of these lower-income areas, not the lowest end. Not areas where there are multiple houses boarded up and cars up on blocks. You all
know those signs mean trouble. You don’t want that. You want neighborhoods where people are cutting the grass. They have shrubbery. They have decent cars out front. Those are the areas I’m talking about.
It doesn’t mean you have to live there. You probably don’t have to live there, but you should be renting there. What I’ve discovered is when I buy the right property in the right neighborhood I can rent to the right people. Generally yes, they’re lower income, but they’re good people.
I’ve discovered in my life, and I’m sure a lot of you will too, that there are plenty of good rich people and plenty of bad rich people. In the same way, there are plenty of good poor people, and plenty of bad poor people. You have to use tools for screening that I teach in Turning Rental Problems into Profits.
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