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...
I guess they never get tired of being wrong over there at Zillow. Maybe they actually enjoy it since it happens so often?
Who knows?
This time, they decided to use their vast stores of hyper-accurate market data to determine a list of "the metro areas where a small-time investor can count on making the most profit every month."
Their words. Not mine.
And they did it in an article titled: "Being a Landlord Is Most Profitable in These 10 Areas”
So, being a buy and hold guy myself, I was curious as to what the top areas in the country are tops in terms of “profit.”
It’s cash flow, not profit.
That’s the first rub that I have with their piece.
I’ve owned rentals now since 2004. Houses and apartments. And not once have I ever referred to the money I make as “profit.”
It’s cash flow. Or net cash flow. Or it’s ROI.
But profit? Nope. And it’s not just me. Nobody I know uses the term “profit” when it comes to their rentals. And there’s a reason for that.
Because (take it from a former finance guy) when you say “profit,” real business people (take note Zillowians) take that to mean profit after taxes are deducted.
And that’s not an easy number to get to per house, especially if you hold them in LLCs like I do. Because all of the receipts and expenses are passed through to your personal tax return, and it’s all commingled with your day job salary and anything else you have going on that impacts your tax return.
So it would take many, many hours to figure out your “profit per house.” And after all that time, effort, and energy, you wouldn’t know any more than you did before you started.
So Zillow – here’s tip #1 – real estate investors with rental properties don’t speak in terms of “profit.” It’s meaningless. It’s called cash flow.
You got any support for that?
Rub #2 that I have with the piece is that it contains a bunch of non-specific nonsense all dressed up to make it look like it means something.
As I look though the list, I see a lot of the usual suspects – Memphis, Indy, Miami and Cincinnati.
But what I don’t see is any specific information for most of these areas to support their conclusion that they’re among the most “profitable” areas to own rentals.
In order to make that designation, I would need to know how much each unit rented for, and the amount of expense each one consumed.
It’s not rocket science.
But out of their top 10, they only listed the rents for three of the properties.
Just three!
Zillow – here’s tip #2 – you need to back up what you claim. If you don’t include the relevant data as support for what you’re asserting then you might as well label your pieces as editorials.
I’ll take “Buy a Clue for $500,” Alex.
Rub #3 is that they clearly demonstrate in the piece that they don’t have any clue as to how to evaluate rental properties.
Take a look at their #1 most “profitable” market in the country and you’ll see what I mean.
They state:
"This 3-bedroom home in Oklahoma City is rented for $650 a month…..and rents for about $250 a month more than a mortgage payment at its $65,000 asking price."
This is such a rookie mistake that it would be funny if it wasn’t so completely wrong and misleading.
It’s so bad that anyone who has owned a rental property for 30 days knows how wrong it is.
Net cash flow is NOT simply rent less the mortgage payment. It’s rent less the mortgage payment, less insurance, less taxes, less repairs and maintenance and less vacancy expense.
HUGE difference, wouldn’t you say?
Which means that the “profit” (ahem) for the OKC property is $250 less taxes, insurance, repairs and maintenance expense and vacancy expense.
So tip #3 for Zillow is do yourself a favor and go read up on how rental houses work BEFORE you write about them – and spread bad information.
I mean, do you really believe that in the "best market in the country" they only make $250 per month in “profit” from rental houses?
That’s RIDICULOUS.
In my market alone I’m buying 3/2 brick houses for between $65,000 and $70,000 and renting them for $1,100 – $1,200. And my net is WAY higher than $250 per month.
Big Data = Warm Spit
Really Zillow – the bottom line is that all you’re paying attention to is “big data,. As usual.
And you’re taking all of your big bad data, throwing it all into a big black box, shaking it up, and then using what spills out of the box to write stories like this one…
When you have no clue what’s happening in the actual places you’re writing about.
As we have discussed in this space before, big data isn’t worth a bucket of warm spit when it comes to real estate.
Because OKC is not a “market.” Cincy and Indy are not “markets.” And Miami is not a “market."
In fact none of the places you wrote about is a “market.”
In reality, each is a collection of neighborhoods, or micro markets, where renters and landlords get together and transact business.
Some in good areas and some in bad. And most of the micro-markets don’t have anything to do with each other…
Which means that when all you’re doing is rolling up the data and spitting it out – you’re doing it wrong.
Perhaps someday you’ll actually care about that.
Whatch think?
How do you feel about Zillow’s articles? What about big data? I wanna hear from you in the comments section below.