There are a lot of decisions to make before you ever purchase your first OKC real estate investment.
Picking the right house in the right neighborhood is going to make the difference between investing in winning cash-flow properties versus buying money losers.
When I first started out, I made the mistake of buying properties that had in many cases plumbing and electrical that were 70 years old. And few, if any, updates On top of that, my plan was to patch that up to try to make it work instead of going in and completely replacing those. The end result was a big maintenance headache. The tenants didn’t like it either because their plumbing and electrical were lousy.
The lesson was that if I was going to buy houses that were that old, I’d better be prepared to go in and do a major overhaul of those systems.
What McDonalds can Teach Us About a Good Real Estate Investment Strategy
McDonalds has a fairly basic menu. I don’t eat there, but my daughter used to crave their french fries.
So why doesn’t McDonalds serve steak? Why does it have such a simple menu? Doesn’t it stand to reason that by offering a wider selection of foods to its customers, especially a very popular item like steak, they would attract more customers and therefore be more profitable?
The reason that offering a McSteak wouldn’t make sense from a business perspective because adding it to the menu would create all sorts of operational problems. McDonalds has become a dominant player in the fast food business because they have become outstanding in delivering a few food products the same way every single time. They don’t make the promise of offering the best hamburger in the world, but they do deliver a consistent product the way the market has come to expect it.
If you have visited a McDonalds at least once, you know that McDonalds offers more than just burgers and fries.
The food products that it carries on its menu are ones that it can deliver to its customers at a high enough margin to make a certain amount of profit. It also must be a food product their market has enough of an appetite for in order to sell enough volume.
McDonalds doesn’t carry the McSteak on its menu even though many of its customers love steak.
One of the reasons is that the raw product is too expensive for the overall McDonalds market. Who is that market? It includes families on a budget that want to take their kids out for a happy meal after soccer (or whatever). A McSteak would have to be offered at price significantly above the $1 to $2 you might pay for one of those burgers.
In addition, you would have a big challenge preparing a steak so that it would be ready for the customer to take as soon as they placed their order. A customer at McDonalds doesn’t have to wait while the burger flipping crew prepares what he has just ordered. The burger, fries, and soft drinks are already prepared for the customer before he makes his order. I doubt you could prepare steak in advance using this type of delivery model (i.e., preparation in advance of the order) in a way in which the steak would be appetizing. There are other problems, but I’ll stop there.
What does that have to do with OKC real estate investment properties you could potentially buy? Actually, quite a bit.
It makes more sense to think about the end user of the properties you are considering purchasing than just how pretty the houses are. And, what type of margin there is for you should you invest in that property.
Your Market – What Types of Properties to Purchase and Who will be Leasing your Properties
The types of OKC rental properties you purchase are closely linked to the type of customer you will attract. Blue collar workers will want to live in a blue collar neighborhood in which they can afford, for example, and where they will feel comfortable living with other blue collar workers with similar values.
Helicopter moms will want their kids in the neighborhoods with the best possible schools for their kids.
Property Management – Why Make it hard on Yourself?
Ideally, you want OKC real estate investment properties you can almost forget about because they run like clockwork for years. One trap to watch for is buying the lowest priced properties. Those properties may be very difficult to manage. And even if you hire a property management company that will still be a problem because it will be difficult for them also.
Be very careful about the Oklahoma City neighborhoods in you invest. There is really nothing you can do to fix a neighborhood problem. In those cases, you can either bite the bullet and do your best to manage the property or sell the property.
Some types of problems are fixable if it has to do with the house. For example, if the drain plumbing is a problem and the toilet is always getting clogged, a plumber can certainly fix that problem for you. If the attic is not well insulated causing the heating and cooling bills of the tenant to be too high, you can blow in insulation.
Invest in Low Maintenance Rental Properties.
Buy OKC rental properties that are durable and not prone to on-going maintenance problems. For example, brick houses are preferable to wood sided houses because you have to scrape and paint wood sided houses perhaps every 5 years. Certain types of properties are difficult to maintain, such as properties with an old water well, two story houses with upstairs plumbing, and houses with very old plumbing, heat and air, and/or electrical. There are a number of other particular things to look for when inspecting a house that will be covered in the unit on repairs and renovations.
Many times the construction of houses in a particular neighborhood is very similar. When you find a house that matches your criteria, concentrate on finding more of those same types of houses in that neighborhood.
Single family homes versus multi-family dwellings.
I recommend that you invest in single-family homes. People will choose to live in a house rather than an apartment if they can afford it. That makes managing a house easier than managing a multi-family properties in general.
It’s generally a little easier to sell a single-family home than an apartment property. There are more buyers for the single family home than, for example, apartment buildings or commercial properties.
Depending upon the situation, multi-family properties can have a better cash flow than single-family homes. For example, many times the rent from one side of a duplex will cover the entire mortgage payment. The downside of the duplex is you will have higher maintenance (i.e., two of just about everything instead of one), and higher vacancy.
Other Consideration about Neighborhood and Property Selection
You will find that certain types of OKC rental houses are more desirable to your customers than others in the same neighborhoods. For example, there are always more people looking for three-bedroom houses than for one- or two-bedroom houses. You will still have a market for one- and two-bedroom houses, but you will usually find that single people instead of families will be looking for those. Other desirable attributes to have are second bathrooms, a fourth bedroom, a garage, a dish washer, and central heat and air.
Houses on busy streets are usually more difficult to lease than those located within neighborhoods. People have more “stuff” than they did 50 years ago, so houses need more storage per person. This also includes outside storage; your house should have at least have a small outbuilding for storing a mower and other basic yard tools. But a garage is best.
How Much Renovation?
One way to get OKC real estate investment properties at a great price is buy fixer properties. For the beginning investor, it’s better to have properties that need fewer repairs; properties that need just carpet and paint are a good start. The main thing is to buy the right property that the market wants, such as three beds, an extra bath, etc., one that is easy to maintain, and located in a neighborhood in which you want to own and manage properties.
Goldie Locks Real Estate Investing
Imagine that Goldie Locks is looking for a rental property to investing in.
The first rental property she saw was very nice house located in neighborhood where she herself lived.
It was a 4 bedroom 3 bath house in one of the better neighborhoods in the city. The house was almost brand new. It had gorgeous new carpet and a kitchen with granite counter tops. It was a house that she would definitely buy to live in, but the same types of houses were leasing for $1,500 per month at the most versus the $2,200 per month she expected her expenses and mortgage payment would run. She said, “This house is too expensive.”
The second rental property she saw was on a tip from her realtor.
It was a twenty unit boarding house on the other side of the tracks. It was frame construction, built in 1910; the plumbing and electrical had not been replaced. The roof was sagging and in need of replacement.
She met the manager who was one of the tenants who lived in the property. Goldie Locks soon learned that three of the units were vacant and needed extensive repairs. Four of the other tenants were also at least one month behind on their rent, seemingly on their way out. Goldie Locks suspected that drugs and prostitution may be an issue. Even though the property was cheep and would cash flow, Goldie Lokcs said, “This property would be too much of a management and maintenance headache.”
The third rental property she saw was also a tip from her realtor, and was also located on the other side of the tracks.
It was a three bed, one and half bath brick house. It was built in the early 1970’s, so the electrical and plumbing were fairly up to date. The roof was not new, but did not need replacement. It was built on a slab foundation. It needed some cosmetic work (e.g., new carpet, paint, and some minor repairs).
It was located in a neighborhood in which she would not live, but she knew the area, and knew that the rental demand was good because the schools were good. And, it was close to good shopping. She figured that she could easily cover both the mortgage payment, which would pay off in 15 years, and all the operating expenses of the property with the rental income. In addition, she expected some positive cash flow. She said to herself, “This house is just right.
She phoned her realtor to make an offer, and lived happily ever after.
Let’s review. Did Goldie Locks reach her objective? Yes. The third property she found was a construction that lent itself to few maintenance headaches. There was also enough rental demand for that type of property so she expected it to stay occupied. Lastly, she could buy the house cheap enough for it to cash flow.
Your Target Area
Your target area is an geographic area in which you intend to buy and lease OKC real estate investment properties. Why would you want to concentrate your efforts on certain neighborhoods at the exclusion of others? One of the major reasons is so you can learn your market very well. When you do business over and over in certain areas, you learn what properties are worth. You learn what your leasing customers in those areas are looking for, and what they are willing to pay.
Another advantage is operational. When your properties are concentrated within a small area, it is easier to manage than if you have properties scattered all over your city. Making trips to properties becomes easier. Hopefully, your neighborhoods will be within a manageable distance from your home. I recommend that distance be less than 10 miles.
How large should your Target Operating Area be? An area of 1 to 10 square miles will contain more houses than you can buy in a lifetime. Your Target Operating Area does not necessarily need to be within one contiguous area with neat boundaries. You may have many islands within one main area.
What to look for.
A good rule of thumb is that the rents should be 1.5% to 2% of the total price of the property. Once the rent gets lower than 1%, its cash flow potential is dubious. If you can find a number of properties in a neighborhood that meet that criteria, you have found a good candidate.
Look for rental properties in neighborhoods where average, blue-collar families want to live. I stress families, because you want long term tenants. Turn over is expensive. That is why I don’t like student rentals, room mate situations, or other arrangements nearly as much as average, blue-collar families.
A good rule of thumb is that the rents should be about 1% of the total price of the property.
Learn the Market
You want to find out the rental demand and how much the monthly rental is for a particular property. If you buy a property in a neighborhood with low rental demand, your monthly rental payment will be lower, your property will be vacant more often, and you will sustain more make ready and repair expenses.
In many U.S. cities, the location in which a family is located determines the school in which that child will attend if they plan on sending their children to public school. The quality of education in one school systems versus another can dramatically vary. Therefore, some families will do whatever it takes to live within the school district of their choice. It’s a good idea to do some research about the school systems. You may not end up buying houses in the best school district locations, but you do need to have that information because your customers will ask you when you start leasing out your homes.
Three Top Mistakes Real Estate Investors Makes When Picking A Neighborhood
#1 Not Picking a Target Operating Area.
Use the guidelines above to identify a Target Operating Area. I feel like I’m beating a dead horse, but if you fail to do this you just won’t learn your market well enough to make good decisions. Focus in, don’t try buy every type of property in every neighborhood in your city. You can have several TOAs (TOAs, not toes), just be very specific when it comes to identifying which neighborhoods in which to try to find deals.
#2 Buying houses in war zones just because they are cheap.
You don’t want to manage properties in which you don’t feel safe at night. These neighborhoods attract the least responsible people, which can add substantial stress to your life. If you have any question, drive through the neighborhood at several different times of the day and most importantly nights. Check it out on a Friday or Saturday night. Don’t rely on crime statistics; it’s difficult to judge a particular block based on statistics compiled for larger areas.
#3 Wandering Aimlessly.
It’s very easy to spend hours just driving down one street after another. This is a mistake. Use your time wisely. Have certain properties identified that you will go to look at. Spend a concentrated period of time not much more than a few hours when you go out. Move through the area, collect the information you need to collect, and decide if this neighborhood and these properties meet your criteria.
The detailed information to look at are:
- What is the rental pricing? It’s best to determine rent per square foot for houses of a certain age / build. There is a good article on establishing a rental pricing here.
- How strong is the rental demand for properties in the neighborhood? If you see bunches of properties for rent in the neighborhood, that’s not a good sign. If the area has some of the best schools in the city, that’s a good
- What are comparable prices for houses that have sold? You want to determine if you can get your rental to cash flow. There is a good article on doing that calculation here.
In conclusion, decide what type of OKC real estate investment property you want to own and lease. Then, pick a neighborhood with those types of properties and learn that neighborhood. That is, pick a neighborhood so you can focus in and learn the real estate market for that neighborhood very well.
If you’d like some help in picking out a neighborhood, give us a call or fill in the information on the contact form below.