Rental Basics in San Diego>Question Details

John & Janis…, Real Estate Pro in Encinitas, CA

What Makes The Best Rental Investment?

Asked by John & Janis Arendsen, Encinitas, CA Sun Feb 3, 2013

What do RE professionals think make the best rental investments and what do you base your investment decisions on?

Some are obvious i.e. location, # of bedrooms and baths, parking, deferred & ongoing maintenance issues, etc.

But others i.e. ROI, interest rates, capital outlay, tax benefits are a little more dubious.

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Hi John,

This is a question that I could spend hours writing a response to, but I will do my best to keep it as brief as possible. Being a CPA/CFP and having worked on Wall Street for over 10 years, it goes without saying that I am a numbers guy. Thus, when looking at rental investments, it is good to go in with the mindset that "the numbers don't lie". Of course, that is assuming that the numbers used are actually accurate. I can't stress enough how important it is to support what appears to be a good investment by looking at the hard numbers. Too many people out there simply say, "that appears to be a good investment." Thus, I tend to look at gross rent multipliers and cap rates. Also, I want to look at the potential for capital appreciation.

I would like to stress how important it is to do your due diligence up front when buying an investment property. You must understand that the seller is going to do their best to present their property and may even finagle/massage some of the numbers. It is best to see "actual" results, while also gaining an understanding of what the results can be once you take over. Also, be very realistic when it comes to capital improvements/maintenance and don't forget to factor in how much time will have to be spent in the event you elect to manage the property yourself. Once again, do your due diligence on any prospective tenants as one bad apple can create all kinds of headaches.

Having said all this, I can tell you that when I was an active financial planner, all of the "well to do" clients had real estate in their portfolio. Yes, it is merely one asset class, but with money market rates hovering around 0% and treasury yields under 2%, 6-8% cash on cash returns appear pretty attractive.

That is my two cents for now.

Chad Basinger, REALTOR®, CPA, CFP®
858-997-3704
chad@chadbasinger.com
0 votes Thank Flag Link Mon Feb 4, 2013
May I suggest you visit RentSenseBlog.com to educate yourself on investment strategies to establish your paramenters. You will also obtain valuable advice on common issues that arise during the ownership and/or operation of local rental properties. We provide Rent Sense as a published column in numerous publications along with this website as an ongoing service to independent rental owners and their renters. For more than four decades we have provided quality rental housing while specializing in the investment strategies and management practices that deliver results consistently and constanly. We currently operate rental properties in 69 zip codes throughout the region. Neil
1 vote Thank Flag Link Mon Feb 4, 2013
2-4 Unit properties - capital outlay, tax, ROI
1 vote Thank Flag Link Sun Feb 3, 2013
John
This is interesting because I have a couple of clients looking for rental properties right now. One is a cash buyer up to 350 and the other is open for something up to the 600 range.
I like to look first at the ROI/Cap Rate. Then take into consideration the probability for long term appreciation. I think as a rule a 3 bedroom unit is more desirable than a studio or one bedroom. The larger units tend to attract longer term tenants.
I also prefer 2-4 units because if one goes vacant then only a portion of the income is reduced as opposed to a SFR where you would lose 100% of the rent for a period of time.
Obviously if someone is limited to 350 then a SFR if most likely going to be the best choice.
Another thing to take into consideration is the amount of work the property needs. If someone is handy and can do some repairs that will expand the choices available. If someone needs a pure turn key property then once again the choices are limited.
I like properties that can stand on their own without considering tax benefits. Any tax benefit is icing on the cake. Many beach community properties won't cash flow with 25% down but have excellent probability for appreciation.
All of these things need to be taken into consideration and tailored to the needs of the client/investor.
Good question!

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1 vote Thank Flag Link Sun Feb 3, 2013
The only factor that matters is cash flow. Other factors are icing on the cake and perks.
1 vote Thank Flag Link Sun Feb 3, 2013
I have all cash investors, so cash-flow is not exactly the best measure, since everything cash flows! Cash on cash return gives a nice normalization, but doesn't take into account things over the long term, where properties might appreciate at different rates, or rents might change at different rates.
Flag Sun Feb 3, 2013
Your investment property ownership experience is going to largely be determined by the management method used. Are you planning on using a management company to handle the tenant screening, maintenance and turn-overs? Finding a capable manger who works well with your goals (while not allowing you to become a slumb-lord) is just as important as finding the correct property.

Just FYI - I do not offer property management services but own a few rentals and assist my family member with the management of 5 others.

If you are going to manage them yourself, I suggest becoming a member of the California Apartment Owner's Association. The landlord learning curve can be rather steep and they are a worthwhile resource.

In our experience, upper-end properties do not cash-flow as well as low-end units. But, low end units typically require more attention and have higher turn-over rates.

If you are going to be financing your investment properties, I would suggest talking to a mortgage broker before you start your property search. There are limits on the number of financed properties you may own. If you already own a house or two and want to finance half a dozen small condo rentals, you may run into problems. Some lenders only allow a borrower to own four financed properties.

Feel free to contact me with any questions. I enjoy working in real estate and am happy to share what I have learned through our investment property experiences - both good and bad.

Robert Boerner
Gecko Realty
(619) 977-2262
rboerner@geckofinancial.com
1 vote Thank Flag Link Sun Feb 3, 2013
Thanks Sheryl, I'm going to copy and paste this entire thread and forward it to my daughter to really study. You've all given us a tremendous amount of valuable info. No matter how many years you spend in your respective profession you can always learn something whence networking with other professionals.
0 votes Thank Flag Link Tue Feb 5, 2013
Wish I could give you all a best answer but you all get a thumbs up for your very astute and informative information. The reason I asked this questions is because I have a daughter who is interested in purchasing a 2-4 unit plex or small apartment building in the North County Coastal area from Oceanside to Solona Beach East of El Cam Real.

We're looking for an existing property and/or an infill, scraper/derelict, distressed and/or even raw land properly zoned for such development. I'm a RE broker and general contractor myself and own and manage some rental property, however, when it comes to offering up advice on something as important as this for my daughter I must pull out all the stops and reach out to those who know much more than I.

My daughter and her family (husband and 3 young children) want to live in one unit, at least a 3/2, and rent/lease and manage the others. As contractors we can deal with most any maintenance issues as long as they're not too rediculous and costly and negatively impact Cap Rates, NOI and overall ROI potential both short and long term.

We're also a Modular/Manufactured Home dealer and developer and would be very interested in developing a multi-family MOD complex if we could find the right property. We have cash and can leverage additional capital if necessary.

We also have a hard money lender who will fund the build out and/or rehab/rebuild. I'm pretty sure we'd be able to obtain a take out loan as well but would certainly entertain any offers from lenders on this forum as well.

All we need is the right property/deal and some thoughtful guidance on positioning my daughter for a prudent and positive investment .
0 votes Thank Flag Link Mon Feb 4, 2013
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