I have been remiss lately with my interviews of successful real estate investors. I apologize. Today, however, we are interviewing “Another California Real Estate Investor”. This person is a reader of this blog though this real estate investor does not (yet?) invest in the Kansas City area. Still, their experience is something we can learn from. This person chooses to stay anonymous.
Q: How many rental properties do you own and (in general) where do you own them?
I own approximately 25 rental homes in the Phoenix area. I have been investing there for about 12 years.
Q: Why don’t you own any properties close to home?
I do not buy in California because the numbers do not make sense and have not made sense for years. That’s not to say you can’t make money in California real estate, because you can at times. However, it’s difficult for a buy and hold investor trying to create an income producing portfolio to do so here.
Q: What is your general rule of thumb when purchasing a good investment property?
I have several rules of thumb. I’m old fashioned, so I focus first on cash flow. In my experience, the biggest mistake new investors make is to focus solely on appreciation. Real estate has risk and it is not a passive investment. Leveraged real estate requires debt repayment, and it is much less risky to have the net income from the property make those payments. In addition, you can make mistakes early in your real estate investment career if your mistakes produce income!
I look for houses located near employment centers with a variety of jobs and in neighborhoods with good schools and other amenities. Proximity to a university and/or a major medical center increases the tenant pool substantially. In my target areas I look for three and four bedroom homes with family rooms and two car garages. I look for 0.75 percent of the purchase price per month as a minimum rent to value ratio. That’s extremely tough to find today.
Q: You’ve told me in emails that you prefer single family homes to duplexes. Would you like to elaborate on that?
Most investors out there are not full time investors. They have full time jobs and are seeking to diversify their investments and create retirement income. That’s where I was when I started.
Unless you want to be the property manager, I would stay away from units, at least in California and Arizona. Single family homes in stable, well-located neighborhoods are easy to rent, attract better tenants, turn over less often, and generally have lower maintenance costs. If you do not live within an hour’s drive of the properties, you will probably want to opt for property management. It’s easier to find decent property management for houses. In addition, my observation is two to four unit properties tend to be overpriced in today’s market, based on the net income these properties actually produce.
Q: As you examine the market today, what are your feelings about acquiring or liquidating property?
It’s a difficult market on both sides. There are opportunities out there if you shop carefully, but bargains for the cash flow investor are still hard to find. The Phoenix foreclosure market is very hot right now, with multiple offers on many properties, but the cash flow still does not meet my requirements. I would only sell if I needed to raise capital. If you bought right to begin with and your properties are producing income, you should probably adopt Warren Buffett’s attitude toward your investments. Pretend the market is closed and deposit the rent checks.
Q: Any closing thoughts?
I really like your investment approach for the 20 and 30 somethings. Buy that first owner-occupied property with a plan to convert it into a rental property within two or three years. When your life settles down and your income becomes more predictable, move up a little in house, and rent the first house. Rinse, repeat, and you will have a three property rental portfolio in six to eight years. Max out your retirement plans in the first few years, and between the houses and your other investments, you will be on your way to serious wealth.