Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
As you know if you’ve read much of my stuff, I’m primarily a rentals guy. Rather than contribute to a 401k at my day job, I focus on buying long-term assets with leverage and let my tenants pay down the debt.
The challenge with buying rentals right now is that the market is still red hot. So, where I could cherry-pick prime properties in my target area right off the MLS in 2008 and 2009, now I’m buying only when I find a discounted property via my wholesale business.
When I started buying rentals, I bought in an area that had what I thought were reasonable prices. I picked one city and focused on it and bought several properties there.
When prices started dropping, rather than continue to pay less in the area I was focusing on, I looked around to see what I could buy at the prices I was paying before.
And that was a huge eye-opener.
Why?
Because I realized that buying in that first city was a mistake to the extent that I wish I had never bought anything there.
‘The Big Lesson’ that I learned was that choosing a city based on price was a fatal mistake. I should have been focusing on other factors like school district.
In this hot market, I see a lot of new investors making the same mistake that I did – buying based on price rather than based on the area.
So, I was pleased when I saw an article in Forbes recently that spelled out 8 key factors for being successful with rentals. I want to share them with you, along with my comments…
1. Automate Your Property Management
The biggest mental hurdle for new investors is dealing with the unknowns that come with owning and managing property. There has never been a better time to automate those tasks and truly run your business from anywhere.
My comments: This is a great suggestion if you manage your rentals yourself because you need to be organized, and with all the tools out there right now, there’s no excuse not to be.
2. Give Yourself a Safety Margin
We've been in a bull market for the past 7-8 years, and I would be extremely worried about getting into luxury housing. The key to succeeding in 2017 is to buy defensible assets that allow you a margin of safety, all the while preserving your operations throughout the downturn. I experienced 2008 firsthand and our assessment of risk changed forever.
My comments: I agree with this recommendation. I buy standard-issue first-time homebuyer properties. And because I shifted to buying in the best school district in my state, I was able to ride out the last downturn with my great properties carrying the ones I had bought in my first area. No matter how bad things get, people are always going to gravitate toward great school districts.
3. Find the Right Locations
Get in front of sellers in the best locations. This is the key to everything and is what our business is built on.
My comments: Again, I agree. People with families always want to live in nice areas. And while I don’t buy for appreciation at all since I plan to hold them forever, it’s nice to see the values increasing now, and I expect them to fall in value less than houses in other areas.
4. Get in on the Rental Market
Consider investing in the rental industry for yield, not necessarily capital returns. There is a huge generational shift toward renting among millennials.
My comments: I consider buying for appreciation more of a speculative investment rather than a way to build long-term wealth. You can’t spend equity. But you can spend cash flow.
5. Educate Yourself on Local Market Nuances
Don't buy in a "new to you" market based on what you know back home. Real estate is local, and local knowledge is critical with regional nuances. Find someone who not only has worked your target area for 10 years or more full time, but also charts personal experience as an investor. The best guesses of those who have personally ridden the local waves of victories and defeats are worth 100 non-local pundits.
My comments: This was my biggest mistake. While I bought in a nearby suburb here locally, I didn’t research the city. So I had no clue that they hated rental properties. And landlords. It’s the gift that keeps giving, unfortunately.
6. Watch Your Cash Flow
Focus on monthly cash flow, not equity gains. To become a real estate investor is to become a business owner. And as a business owner, it is your task to create distance between the money flowing into your business every month, and the expenses necessary to keep that business sustainable and growing.
My comments: Yes, yes, yes. Cash flow is king. Aggressively manage late payers and be savage in reducing vacancy time.
7. Consider Experience, Connection and Community
There's never been a better time for small real estate investors to compete with the big guys because the concept of "location, location, location" is being replaced with "experience, connection and community." With some creativity and love, class-C assets can be converted into ideal properties for millennial-minded companies and hipsters who appreciate buildings with history and character.
My comments: This is more of a multi-family recommendation. Regarding single-family houses, I target families with kids and not millennials because I like the stability that families provide.
8. Study Your Geography
Thoroughly understand the geography of the market(s) you decide to target, down to the street addresses. Every neighborhood has a cusp; although a comparable unit/property may look close on a map, you could be stepping into a completely new territory.
My comments: I couldn’t agree more. For example, my target area is 5 blocks long by 4 blocks wide. But there’s one street in that square that I won’t touch because of the layout of the houses. The layout is terrible and renters hate it. And I wouldn’t have known that unless I thoroughly understood my area.
Final Note
I think this is a great list to keep in mind when you’re looking to jump into rental properties.
I only wish that I had known all of this when I was getting started!
Thoughts
How do you feel about these 8 tips – as a newbie or as an experienced rental investor?