I started my investing career by reading every investment article I could find, talking to other people, and writing software to determine the best properties to buy. Based on my research, I believe Class C (D?) multifamily is the best option. Here’s why:
- The cost per door is relatively low.
- The (book) cash flow is very good.
- If one of the units is vacant, I can still get enough rent from the other three units to cover my mortgage.
- The property price is within my affordability range.
- It’s close enough to where I live that I can get most of my work done.
- The rent for both houses is subsidized by the city, so I think the income is guaranteed.
So, I bought my first house with my friends.
how is the progress?
This is a nightmare. I made the mistake of purchasing a property assuming the tenants would perform well. they do not. I quickly learned:
- The city guaranteed payment of part of the rent (approximately 80%), but the tenant never paid 20%. I spoke with an experienced investor who told me this is common for most subsidized tenants. He suggested that it would be better for me to retain poorly performing tenants rather than evict them because replacement tenants would likely behave similarly.
- Tenants live a cash-based life. They get paid every Friday, cash their checks, and party. They often say they don’t have money to pay rent. From talking to experienced investors, I know this is common among cash tenants. Evicting them costs money and time, and the next tenant may not be much better off. So, this is not an option.
- I found that the previous owner offered a great discount if the rent was paid in cash. So on Saturday mornings I went door to door collecting rent and offering similar discounts. The area was unsafe and I was always worried about getting mugged.
- Almost every other month, a tenant escapes. After they left, the units were in poor condition and required a lot of time and money to rent out. The tenants are not worried about damaging the unit because even if I get a judgment against them, there is no way to recover it.
I learned that no matter how cheap or nice a property looks on paper, as a landlord you are dependent on how your tenants perform. Therefore, the type of property does not matter; what matters is having reliable tenants: people who stay for a long time, pay rent on time and take good care of the property.
What my research revealed
When I started my investor services business in 2005, I spent most of my first few months studying the tenant base. Based on my research, I found several subdivisions where the average tenant stay was over five years. I then identified the common characteristics of these properties.
However, as an engineer, I need to validate my findings because my future business will depend on the performance of my tenants. To corroborate my findings, I asked several property managers this question: “If your goal was to have tenants who would stay there long-term, pay rent on time, and take good care of the property, what property would you buy?”
Most property managers would recommend the same type of properties to me as my research. I made sure I had the right niche.
Tenant defines property to be purchased
Over the years, we have studied our target tenant group: families with elementary school-aged children and a combined household income (currently) between $60,000 and $85,000 per year.
A general description of properties that appeal to this segment is:
- type: one-parent family
- Configuration: 2+ bedrooms, 2+ bathrooms, 2+ garages, 1,100 to 2,400 sq. ft., one or two stories, lot sizes 3,000 sq. ft. to 6,000 sq. ft.
- Rental range: US$1,900/month to US$2,400/month
- Place: The map shows the general area.
Our shift from a property-focused search to finding properties that fit the housing requirements of our target tenant group has been very effective. Our tenants have been here for an average of over five years; we have had seven evictions in over 16 years.
learned knowledge
If your goal is financial independence, property type is irrelevant. What matters is the tenant occupying the property. So find a tenant group with a high concentration of reliable people, determine what and where they rent today, and then purchase similar properties. Forget about the guru’s dogma.
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Notes on BiggerPockets: These are the opinions written by the author and do not necessarily represent the views of BiggerPockets.
