Podcast 85 Finding Great Rental Markets with Dennis Cisterna from Investability

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Cisterna DennisOn this episode of the InvestFourMore Podcast I interview Dennis Cisterna who is the chief revenue officer of Investability. Dennis also helped found two of the largest rental property lending companies in the country, has flipped houses, owns rentals, has built new houses, and has a history in investment banking. Dennis knows a lot about real estate, and we talk about many subjects on this show. We go over what he thinks about the current housing market, and if there will be another crash. We talk about hedge funds and how their investment into single family rentals has worked out so far. We discuss how to find new markets for rental properties using Investability and much more.

How did Dennis get his start in real estate?

Dennis was thinking about going to law school, and working in the political arena when he saw many of the large donations came from people in real estate. He noticed a lot of people in the real estate industry made a lot of money! Dennis shifted his focus to real estate and got an internship that was allowed him to be a housing market analyst. He then went on to build new houses, flip houses, start lending companies, buy his own investments, and work at a real estate technology company: Investability.

Why does Dennis love real estate so much?

Dennis loves the money you can make with real estate, as well as all the different aspects and jobs you can have in the industry. One thing he really enjoys about real estate is you are dealing with a tangible asset. When you buy a house you have a real asset, not a piece of paper or an electronic receipt like you have with stocks and bonds. Dennis built a lot of houses in Southern California and he can go back and see what he created. He also loves meeting new people, and real estate is a people oriented business.

What does Dennis think about the housing market?

Dennis is quick to point out that the entire housing market is not on fire, just a few parts of the country. There are many parts of the country with stable prices or even prices that are still declining. You cannot view the housing market on a national level, you must view it locally to predict what may or may not happen. Dennis thinks some markets like the Miami condo market are starting to slow down, while other markets show no signs of stopping.

One very interesting fact is the U.S. is currently building homes at the same pace it did in 1961 (200 million people in the US in 1961 versus 340 million people in the US now). There are not enough houses being built to meet current demand in many markets. The low supply of homes has cause many markets to increase in value tremendously. I asked Dennis if he thinks we will see a market crash anytime soon and he does not think so. He feels the market dynamics are much different now than they were before the last crash. Lending guidelines are tougher, and there are fewer homes for sale. He also thinks that eventually affordability will come into play causing prices to stabilize, especially if interest rates rise.

Why are housing prices increasing so much?

How are the hedge funds doing with their single family investments?

After the housing crisis many hedge funds bought thousands of single family rental properties as investments. There have been numerous articles about the success of these investments, and some people think the hedge funds are in trouble with their investments. Dennis has a lot of inside knowledge about the hedge funds investments thanks to his background. He says that the properties are actually performing better than the hedge funds anticipated they would. The vacancies are lower, the returns are higher on the rents, and prices have increased more than they ever thought they would. He sees no reason why the hedge funds would start selling off their properties, and many new hedge funds are starting to invest in single family rentals.

How does Investability help investors find new markets to buy rental properties in?

I looked at many markets when trying to decide where to buy rental properties. I bought my first properties local in Colorado, but the market prices rose too much to make rentals a good investment here. I used Investability a lot when researching new paces to invest. I liked the Florida market, and although I never ended up buying out-of-state rentals, I still like that market a lot. Dennis talks about what markets he likes for rentals and how Investability can help find those markets.

Investability is like Zillow because it has homes listed for sale, but the site also includes numbers for rental properties. Investability includes the rent yield, cash flow, potential rent amounts, expenses and more on most properties for sale in the U.S. They also have their own exclusive listings that are not for sale anywhere else.

You can check out Investability here.

How do you invest in out-of-state rentals?

Finding a great market to invest in is just one part of buying out-of-state rentals. When I buy properties I want to make sure I am getting a great deal, have a great property management company, and have great contractors to fix up the houses. Investability can help with all of these issues, and I also discuss all of this in my book: Build a Rental Property Empire: the no-nonsense book on finding deals, financing the right way, and managing wisely. That book is available as a paperback and audio book now.

If you are looking for a more hands off investment, turn-key rentals may be a better option.

Transcript

[0:00:58.9] MF: Hey everyone, it’s Mark Ferguson with invest Four More. I’d like to welcome you to another episode of the Invest Four More real estate podcast. I have a really cool guest on this show today, someone who has been an economist, a housing market specialist, done a lot of different things with a lot of really great companies in his past.

 

He is now the Chief Financial Officer for Investability, which is a really cool company website that I have used before for rental property data. It kind of gives you listings like Zillow would, but then yield, and rents, and much more information than Zillow. Dennis Cisterna is who is on with us. Thank you so much for being on the show, Dennis. How are you doing?

 

[0:01:38.9] DC: Doing great, hey. Thanks for having me, Mark. Just a point of clarification. I’m actually the Chief Revenue Officer, not the Chief Financial Officer.

 

[0:01:46.4] MF: I just noticed that as I said it, so thank you for pointing that out. Glad to have you on the show, really interested to talk to you about our market, what Invest Ability is doing, and also your past. Can you give us kind of an overview of where you started out in the industry and how your career progressed?

 

[0:02:05.4] DC: Yeah, absolutely. I’ve spent my entire career, nearly 18 years, all within real estate investment and finance. I started my career as a housing market analyst, went on from there and worked in the home building industry as a land acquisition director and project manager, went from there into consulting work, and advisory work, and investment banking, all within the realm of real estate, commercial real estate, residential real estate, development.

 

Then transitioned to work for a large hedge fund, helped run one of the largest single-family rental lenders in the space, called First key Lending, and then I’ve been at investability for about a year. I run all of our sales and marketing and business development and strategic planning. I probably have about as diverse of a background as someone could have within the realm of real estate investing, and I’ve done stuff on the side as well, like flipping houses and owning rental properties, and just about everything in between.

 

Happy to be on the show and share my experiences in the sector.

 

[0:03:10.4] MF: Cool, great to hear. What first got you interested in real estate? Did you kind of fall in to it as a career choice, or was it something you always wanted to do?

 

[0:03:19.6] DC: Yeah, it was actually a very real career choice. I was actually planning on going to law school when I was a senior in college, and I was working on a political campaign at the time, and I noticed all the donations were coming from real estate developers and investors in my municipality, which was in San Diego.

 

I didn’t really want to go to law school, and I’d always had a fascination with real estate, and luckily, I was able to leverage some existing relationships at my university to get an internship when I was still in school. Once I started working in that consulting, advisory, kind of housing marketing analyst role, I fell in love with it. It really gave me a lot more desire to basically fill in the knowledge gap, which is one of the reasons I’ve had so many kind of different roles as I continue to evolve in my career is I’m never satisfied with knowing one thing.

 

Once I kind of figured out how to become a good market analyst, I didn’t know how to build a house, or how to develop a lot, or how to entitle land, and that’s kind of the next thing I went. I’ve kind of had this process over time, and now I’m helping run a real estate technology company, where I’m using a lot of those previous skills to help the every day investor.

 

[0:04:27.1] MF: Very cool. I don’t know if you can answer this, or I’m sure it constantly changes, but was there kind of a favorite thing about real estate that you like, or is it just learning new things and trying out new ideas?

 

[0:04:37.4] DC: I think what I like about real estate overall is the very tangible asset class. You can touch it, you can feel it, I have a lot of friends, especially when I worked on Wall Street, that were bond traders, or stock brokers, or things like that. You’re basically just shuffling paper around. When I was a home builder, I could go back into southern California, where I was working at the time, and I can see thousands of homes that families live in that I was responsible for either acquiring or developing, you name it.

 

I just like to change the aspect. I think real estate is very much a people business, whether you’re a high-powered executive, or just a real estate broker with some shop, you’re always dealing with people and trying to help them in some regard. Whether it’s a residential property or a commercial property, and I just like that aspect about it.

 

[0:05:25.3] MF: Very cool, yeah. I’m the same way. I love being able to — we do a lot of flips ourselves, I have rental properties, I’m a real estate agent broker. Yeah, seeing the houses and seeing what you’re doing is so cool, compared to what you said, where you’re just on the computer, trading unknown commodities that you’d never see yourself. Very cool.

 

You mentioned the housing market expert, and your expertise in that, that’s something that’s really interested me. I know it interests a lot of people in the country right now, especially real estate investors. I saw an article from Zillow the other day that said they thought we were going to turn into a buyer’s market soon, and I was pretty confused by the article, because their only reasoning was they interviewed some people and they thought was going to turn to a buyer’s market, I was hoping for a little more data.

 

What are your thoughts on this current market we’re in right now?

 

[0:06:12.3] DC: I think the first thing you really always need to look at are what are the supply and demand factors, and you can look at that on a national level, but I think what is — I think it’s rather lazy of a economist or housing analyst to paint the entire housing market with one broad brush. Real estate is always local. The main mantra people always talk about is the number one thing about real estate is location, location, location.

 

Then why would we take that asset class and view it as a national sector, when clearly, although there are some larger national drivers of this, it’s very localized. So right now, for sure, I could tell you there are certain markets that could be pivoting more into a buyer’s market than a seller’s market, because of local dynamic.

 

Take for example the Miami condo market. That market imploded, just like the rest of the housing market previous to the recession, but now, when the market is rebounded, what happened was they started overbuilding and overbuilding in downtown Miami with these high-rise condos. They were doing that because the dollar was relatively weak compared to a bunch of other foreign currencies.

 

Miami’s a big international city, and they were marketing to foreign buyers. They were getting these huge projects presold in places like Venezuela, and Columbia, and Uruguay. Once the dollar got stronger, and the prices got so high, there’s a finite number of people in any country that could afford a thousand dollar a square foot unit.

 

Now they have this supply overhang in that market for those types of unit. Sales started to slow down, and obviously, once sales started to slow down and there’s more inventory, then pricing goes down, because some people have the necessity to sell. That’s what’s happening in that market, that’s a great example of one market and one product type where that’s happening, but to say that it’s pivoting across the country, there’s nothing indicating we’re moving in that direction at all.

 

In fact, one of the things I like to highlight is the fact that we’re building houses today at the exact same rate we were in 1961 when JFK was president. That probably sounds a little alarming, because you would think that we kind of have figured out how to build for today’s population, but we are literally building at the same rate as when our population was only 200 million people, not 340 million people.

 

[0:08:42.2] MF: Yeah, I completely agree with you on that side. I think a lot of people assume we’re going to come to another housing crash just because prices are higher, and I think that’s just crazy to think that, but I’m in Colorado. I know you’re in Colorado as well, and we are in one of the hottest markets in the country with prices going crazy. At least — I know I’m north of you a little bit in Greeley, but they’re not building here. You would think if they were going to build in any market, single-family homes, this is where they would do it.

 

They are not doing it, and I think it’s a mix of banks that want to finance builders, builders are scared, so many went bankrupt, water costs are so high, land costs are so high, city fees are so high, and the builders that are going to build five houses, they’re going to build big expensive houses with a higher margin than five lower income houses. I’ve heard that from across the country over and over.

 

[0:09:31.9] DC: That’s right. Even when we talk about the houses that are being built at a level in 1961, the vast majority of that housing is built as move-up housing. It’s not built for the entry level buyer, and so when you talk about the supply and demand, as we have job growth and we have these continued searches in household growth. The country is going to continue to get larger, period.

 

If we’re going to continue to undersupply that house, we’re going to continue to see upward pressure in rent and home prices, and a downward pressure in vacancy and days on market. Now, of course, there’s always a limit to that. When you look at things like interest rates, okay, interest rates went up 25 bits, that’s not a big deal. That’s not going to exactly curve demand for the housing market.

 

If interest rates are, a year from now, 250 bits higher, yeah, then you’re probably going to see some flattening in pricing, because it’s all about the monthly payments people can afford. Even then, a flattening of pricing is not a housing market crash, that is just a stabilization. So when we still have cheap money on the table, of course you’re going to still see that.

 

You also got to keep in mind that in a place like Colorado, for example, where is most of this in migration coming from? I can tell you, I moved from California. I lived in Beverly Hills before I lived in Denver. Denver is damn cheap to me. I know it’s not cheap to everybody, but when I came here, I had 50% more buying power than I could have imagined.

 

Interests rates do not impact a discretionary buyer like me, they do impact a wide swath in the market that are entry level buyers, but as you probably have figured out, we’re not building for the entry level buyer anyway, so all they’re doing is seeing increases in rent. At some point, again, we’ll hit a cap on rent, where places will not lease out quick enough for folks, and then they’ll start to either flatten their rents or start to offer slight incentives.

 

But there is not a singular thing in the market today, like millions upon millions of bad loans, that would signal a housing market crash. There’s nothing on the edge of society right now that would push towards default.

 

[0:11:40.0] MF: Right. I would agree with that too, and one thing I think, like you mentioned, interest rates, and then a little bit too is affordability, where I think affordability will become an issue, but that’s not going to cause a crash. Like you said, that will cause the stabilization, the flattening out of the market.

 

[0:11:54.0] DC: Yeah, that’s right. You know, the way that the market kind of pushed through this high appreciation that kind of occurred from 2002 to 2006 was with exotic mortgage products. Okay, well, you want to buy a million-dollar house, but you can’t really afford it under a traditional 30-year mortgage? Let me give you a negative amortization with 3% down.

 

[0:12:15.5] MF: Right.

 

[0:12:18.2] DC: Those products do not exist in the market today because there are no buyers, there are no ultimate buyers of those type of mortgages right now. The most aggressive jumbo loan that I’ve seen form anybody is a 90% loan to value jumbo loan, and let me tell you, you need to be an absolute rock star to get that mortgage if you want it today.

 

You got to have a 740 Fico, your total debt to income ratio, including the mortgage, can’t be more than 25%, and you’ve got to have a year in reserves in the bank to get that mortgage. Before, that kind of mortgage was available and then some, for a guy that didn’t even have to show his income.

 

[0:12:56.8] MF: Right. Yeah, it’s completely different than what it was before, and I remember they were doing 120% loans back then.

 

[0:13:03.7] DC: Absolutely.

 

[0:13:04.9] MF: It was crazy.

 

[0:13:07.0] DC: Let me roll your car payments into this mortgage, what do we care?

 

[0:13:09.4] MF: Yeah. One question I just thought about in the last few weeks, and I don’t know if you can help on this at all, being from California, maybe you’re more familiar with it, but as affordability goes down and more and more people spend their money on housing, do you think that hurts the economy because they don’t have as much money to spend on other things?

 

[0:13:28.1] DC: Well, it’s certainly a good question. I think in certain markets, that is absolutely the case, because they’re not spending that money on consumer goods or a lot of other sectors that are aligned on that. What I can tell you is what’s already happening now is people are just saving less as a byproduct of that. If you look at the personal savings rate in the country — I would have thought that after the recession, everyone was going to be a lot more conservative with their capital the way it was.

 

That’s not the case, and so even though people weren’t using it on housing to the same percentage they are today, maybe three or four years ago, they were just spending it on other crap. Now instead of spending on that crap, those consumer goods, and things like that, it’s going towards housing. So you can certainly see where that could have an impact in certain markets.

 

Again, if we’re going to look at the larger economy and the Gross Domestic Product, we’re talking about a handful of markets where that’s really an issue. The vast majority of the US is still very affordable. In fact, there are a number of markets that are still cheaper today than they were at the peak of the market in 2006. When you factor that in, along with still extremely low interest rates, people have a lot of buying power. People have a lot of renting power right now compared to where they have historically.

 

[0:14:48.5] MF: Yes, that’s definitely true, especially in the Midwest. I was thinking of buying some rentals in Florida because the market got so crazy here in Colorado, and depending on where you look, there’s still a lot of areas in Florida that are way below their peaks.

 

[0:15:03.0] DC: Absolutely. You know, the other thing is, especially for the investors listening here, even though this markets are relatively affordable, a lot of people still could not obtain mortgages because the credit standards are still very difficult to get through.

 

That bodes very well for the investor that’s going to own long-term rentals in a market in the Midwest, because there’s always going to be a Florida rent. Most rental properties that pencil in most markets are really built for the entry-level or the blue-collar person.

 

There’s no availability of mortgages, or there’s not a great availability of mortgages or houses that kind of fit in with this sector of society. You are filling that demand, and that’s why when you look at this big onslaught of Wall Street investors, sure they got in, because they were buying below replacement cost in a lot of these markets, but they created a sustainable business because these suckers actually cash flow.

 

You could own a single-family house, you can get decent financing on it, and you can be cash positive right off the bat in a ton of markets. Now that the capital markets have evolved and there’s more and more lending solutions out there, it allows the guy that maybe was capped with one or two properties through his Fannie or Freddie investment loan can now go to one of these private lenders and get an acquisition line for a million bucks, and actually go out and become a real commercial real estate investor. Even if it’s commercial assets or a single-family property.

 

[0:16:35.6] MF: Yeah, that’s so true. I was at the IMN Conference, and that’s where — I don’t think we talked, but I talked to some of the people at invest ability, and then there were also probably 10 lenders there lending to long-term rental property owners, which you know, three or four years ago, there might have been one or maybe two.

 

[0:16:52.6] DC: Yeah, look. I was a cofounder of one of them called B2R Finance, and I was the managing director for another one called FirstKey Lending. I personally have done over 600 million dollars’ worth of loans in this space. The issue for the lenders is not that the capital isn’t there to put out, the problem is educating enough investors to understand that it’s there, because it’s such a fragmented industry, you know?

 

We’ve got almost 16 million single-family rental properties in the US, and they’re owned by over 10 million people. It’s a challenge for a lender. All these lenders, they want to do things in scale. They want to do billions upon billions of dollars, it’s a challenge when the vast majority of the market doesn’t even know you exist.

 

[0:17:35.8] MF: Right, because if that small-time investor goes to their bank, they’re going to say, “We don’t lend on investment properties,” or “We can’t do more than four properties,” and they believe them. They don’t realize there’s other options.

 

[0:17:46.7] DC: Yeah, that’s right.

 

[0:17:48.4] MF: Speaking on hedge funds. You mentioned you know, the big institutional buyers, and that’s another thing I’ve heard, too, is people are afraid that these hedge funds that bought thousands and thousands of properties are going to also dump them on the market and cause a crash, and I saw some article about how horrible the hedge funds are doing, which I have not heard. What are your thoughts on the hedge funds buying these thousands of properties? It sounds like they’re doing pretty good.

 

[0:18:12.0] DC: Yeah, look. I think that it is very easy to look at a company that is mid-acquisition and assume they’re doing bad, because they always have a piece of their inventory that’s getting renovated or resubbed. If I own 40,000 houses, and I bought 4,000 of them last month, I can assure you that at least 10% of them are going to be vacant, because I haven’t even fixed them up to try to lease them yet.

 

Some of the financial reporting on these institutions is laughable. It’s just really people that don’t understand how a business is operated. Most of the institutional guys are doing very well here, but remember, this is a long-term business. They always have new inventory coming into their system, so if you’re looking at everything, of course it’s not going to look good, because they have a lot of non-performing assets because they just acquired them.

 

What’s really interesting is when you start to look at the properties that they are putting in to this securitization that are fully stabilized, they’re performing above and beyond what they wer expected to do. For example, most of the institutional guys say, “Okay, well we assume we’re going to have a 8% to 10% vacancy on the whole portfolio, and our units are going to turn-” meaning that the tenant’s going to leave — “within 18 months.”

 

What we’ve seen so far is, the vacancy rate has been closer to 5% for most of these things, so we’re talking about a 95% occupancy rate on tens of thousands of properties. That’s amazing as an investor, and also you have a longer tenure in single-family properties than you typically have in apartments, which is kind of what the base line of all this analysis was.

 

The average person stays in an apartment for about 18 months. The average person stays in a single-family rental nearly three years. You can imagine, as an investor, that if you don’t have to worry about re-leasing that property or providing significant capital expenditures on that, your bottom line gets better the longer and longer that kind of stays in there each year.

 

That’s what these guys are experiencing, right? I think going forward, you know, what they’re trying to do now is get more and more efficient, and basically trim the fat from their portfolios and only buy things that are in line with their best-performing assets to date.

 

[0:20:34.5] MF: That’s great information. I think we saw the same article, because I saw that same thing, complaining about how the big hedge funds vacancy rates are higher than other vacancy rates, and yeah, you hit it right on with well, they’re buying nonperforming assets, or foreclosures, or maybe it wasn’t the — it was the eviction percentage was higher, was the article I saw. If you’re buying distressed properties, you’re going to have eviction rates higher than someone who has owned properties for 10 or 20 years.  Not very good articles from what I saw.

 

[0:21:04.0] DC: Yeah. I thought they were missing the mark. It’s a very well-respected publication, but they completely missed the mark on really what’s going on. No investor, I don’t’ care if you’re big, I don’t care if you’re small, no investor wants to actually evict their tenants. That’s the last straw, that’s the last line of defense somebody has.

 

Because as this journalist kind of missed, there are costs associated with eviction. There are costs associated with fixing up that property again, and then there’s costs associated with re-leasing that property. Again, unfortunately, someone that wrote about us is not an operator in the space, and it was very clear when I read this that they just kind of missed the mark in terms of what the goal of every investor should be. My perfect scenario would be to have a tenant live in my house for 40 years.

 

[0:21:54.9] MF: I bought a rental house with my parents when I was in college, and that tenant has been in there for 16 years or something crazy. Yeah, I love single-family, personally. A question I always get too, we’re in Colorado, a lot of people are in California and New York. If you’re living in one of those markets with really high prices, do you think it’s wise to invest in that market? Or go somewhere else to one of these other markets where there’s cash flow, more affordability, what’s your opinion on that?

 

[0:22:28.4] DC: Yeah, Mark, that’s a really good question. That’s really why we created invest ability. You know, I told you I’m not too much into promoting our company or anything, or pitching it, but that’s really why we created it. I think you know that our original company was called RentRange, and RentRange is the largest data provider in the single-family rental sector.

 

A lot of our clients are banks and hedge funds, and also medium sized and small investors, and they use that RentRange data to determine what they should charge in rent for their properties. We took that to the next step and said, “How can we help people understand and get access to this information on properties they don’t own, and be able to make good investment decisions going forward?”

 

Because to your point, historically, 70% of the average investors invest in a 10-mile radius outside of their primary residence, which you know, if you live in LA or San Diego, that kind of sucks, because you’re lucky if you can find a property that cash flows at all.

 

A lot of investors don’t like to invest purely on a speculative basis for the appreciation, so then what other alternatives do you have? We created invest ability, which has a Zillow-like functionality where you can search via location, there’s a map. What’s cool about this is we’ll take a million properties form the MLS’s all over the country, and then our own exclusive listing as well, and we’ll start to layer our rental data on top of that, and put these assumptions in place so you kind of know what you’re getting into if you want to buy a potential property as a flip, or in particular as a long-term rental.

 

We’ll say, “Okay, this property is 100,000 bucks, the taxes are X, the insurance is Y, the property management fees are Z,” and you’ll start to understand what the cost basis is in terms of operating that. Then we’ll also give you what the rental assumptions are. We’ll actually pull our own RentRange data on all of these properties and say that $100,000 property should be renting for $1000 a month, and so then you know that you’re buying that property in a 12% gross yield.

 

Then you can back into the net yield number using all of our assumptions. The cool thing is, we’re not — we have all this data input everywhere, but we also give you the ability to manipulate those figures yourself. For example, if you say, well, this house clearly needs $20,000 of renovation, that will be factored in to the assumption that you can update.

 

If your property management fees are higher or lower, or maybe even self-managed, you can zero that number out to really get to a good kind of pro-forma P&L that you can have confidence in to make that decision going forward, and you could buy the property through our site. We hook you up with all the different service writers. We’re kind of a one-stop shop for the average investors.

 

So you go into the site, let’s say you’re in Colorado with me, let’s say we’re buddies, we want to buy a property in Atlanta. We find one we like using the numbers, we can make an offer on that property through the site, invest ability can hook you up with property management, the insurance, lender, renovator, a general contractor, like every single piece of it that you need to complete a transaction, our transaction coordinators manage that process for you and set you up.

 

If you are entering a new market for the first time, or even the second time, or it’s your own market and you just want some other options, we have that availability. That’s really kind of what I highlight to the average investor, what is the value proposition of investability.com? We give you three things. We give you access to properties all over the place, we give you access to information you can’t find anywhere else, and then we give you access to resources to be able to invest anywhere.

 

[0:26:15.4] MF: That’s fantastic, and I can tell you from personal experience, when I was looking at different markets like Florida, I was looking at Investability to give me a picture of the rents versus the purchase prices, because that’s really the first thing I wanted to know. Is there a possibility of cash flowing? I don’t want to start researching a market where I’m going to pay $200,000 for a house that rents for a $1,000 a month. That doesn’t make any sense.

 

[0:26:38.3] DC: Absolutely.

 

[0:26:39.2] MF: And then I used RentRange as well, and I actually wrote an article on RentRange last year and compared what your rents were to what I was getting, and it was really accurate. So I was surprised at how accurate those rents were from a computer generated model. It says, you know sometimes Zillow is not the most accurate with their values and different things they come up with, so I was pretty happy with that.

 

[0:27:02.4] DC: Yeah. Look, Zillow is really made for the average consumer, and their estimates are made for the average consumer. You know, banks and larger financial institutions don’t use Zillow for their estimates, they use RentRange. In fact, of the all of these securitizations that had been done on Wall Street for the single-family bonds, we’ve done the rental estimate on every one of them. We are talking about tens of thousands of properties.

 

We have been, on average, on this entire portfolio of tens and thousands of properties, we’ve only been off less than 1.5%, from the entire portfolio’s rental estimate versus what we estimated, or versus what they were actually performing at. So we feel like we have a very high confidence score in our data.

 

In fact, when you order a RentRange report, we give you a confidence score that’s from 50 to 100. Anything that we don’t have at least a 50 on, we don’t even try to sell that data, because there’s not enough information to come up with a good estimate. But you can take that estimate and that confidence number with a grain of salt, so if I am putting a confident score of 99 on that rental estimate, you should feel pretty good about that, because I am using a lot of existing data in that market to drive that number.

 

We even try to take it a step further on the Investability side, where we have actual brokers on the ground now. So we have opened our first two physical brokerage locations in Dallas and Miami, and we’ll have 13 more markets up in key areas like Atlanta, and Chicago, and Indianapolis, and Nashville, and a bunch of other markets where there are great opportunities if you don’t live in those markets, and we like to have some boots on the ground to give you that extra level of confidence that we’re working in your interest.

 

[0:28:47.6] MF: Very cool, I did not know that. Speaking of that, do you have maybe a list of a few properties or areas of the country you think are really good for rental properties right now?

 

[0:28:57.9] DC: Yeah, it depends on what you are looking for as an investor, but in terms of — I always start my analysis in looking at the local economy and the strength in that economy itself. As you’re probably not surprised, Dallas leads a lot of lists in that category because they just had tremendous job growth. The state of Texas has been a very pro-business state, and has drawn a lot of major corporations into the fold there, and Dallas has been a major beneficiary of that, and it’s still relatively affordable. So you can get decent in-place yields on properties.

 

Because Dallas is an older more mature city, there’s a lot of older housing stock as well, which is good for flippers. I like Chicago in certain suburbs as well. Obviously, Chicago has gotten a bad rap for some of the southern suburbs that have been high in crime, but there’s a lot of other markets there that have a great in-place cash flow. Rents continue to appreciate.

 

In terms of some undervalued markets right now, I think there are some opportunities in Tampa and Orlando. They’ve had tremendous job growth as well. The rent appreciation has been pretty strong in those markets. Home price depreciation is still pretty reasonable in those places as well, so you can get good yields.

 

A place that’s overlooked. In my opinion, that’s nice and steady and stable, two markets that come to mind are Pittsburgh and Indianapolis, where you can generally buy a property between $80,00 and a $125,000, and be able to have a cap rate that’s somewhere around 7% – 9% if you are buying right. So those are some of the places that come to the forefront. Atlanta is a great market as well, it’s on fire.

 

Some of these places are more competitive than others. What I tell most, I don’t want to call it entry level investors, but more investors that own less than 10 units. I try to get them to focus on properties that are generally below $125,000, because number one, you’re not competing with any of the hedge funds in certain markets. Number two, the yields are generally better. If you look at all of the properties in a market, and you compare what the return is versus what the purchase price is, you’re going to see a very naturally occurring slope. So the best yields are generally with the cheaper properties.

 

Now the problem is when you get to a $40,000 – $60,000 property, you have other issues operationally. You tend to have a lot of collection losses. People are not actually paying their rent. You have to deal with evictions on a more consistent basis, and so for most investors, sometimes going to that low, low price range is not worth the extra potential return, because of the brain damage of managing it. I think there’s a very nice sweet spot in a lot of the markets that I just mentioned between $80,000 and $125,000.

 

[0:31:47.2] MF: That’s exactly where I think the sweet spot for rental properties are too, and where I bought most of mine in Colorado. That’s where I bought them, which was really nice, but not realistic anymore. But yeah, the same thing with those cheap rentals. The yields look amazing, but a lot of times they’re older house, they need more maintenance, the tenants aren’t as good, the actual maintenance based on the rent is higher, because even though the rent — maybe you get $700 in rent, the maintenance is going to be higher, because it’s not like the house is 50% smaller than the house for $100,000 and the furnace is going to be 50% cheaper. it’s just the costs are so much higher than you think they are on those cheap houses.

 

[0:32:26.5] DC: That’s right, and when most people look at what renovation, or capital expenditures, or deferred maintenance, a kitchen costs essentially the same to fix. Furnace and electrical cost the same to fix. Your roofing is cheaper, because it’s less per square foot, but the big problem for houses are the same throughout. It’s plumbing, it’s electrical, it’s kitchen, it’s bathroom, it’s flooring. It’s not because the house is twice as big that the maintenance is going to be twice as much, or conversely, if it’s half the size, it’s going to be half as much. You’re spot on there, Mark.

 

[0:33:03.2] MF: Right, very cool, and those markets I’ve heard good things about them. The one thing about Dallas and Chicago is you have to watch out for taxes, because taxes can be a little higher there, and I heard one thing from someone who said the eviction process in Chicago is a nightmare. Have you heard that too? There’s only one person I heard that from.

 

[0:33:23.4] DC: Yeah, well there are a number of issues with investing in Chicago, and that’s where again, this goes back to the same point of, if we’re going to invest outside of your market, that’s why you use a best-in-class service right away like a property manager, because they navigate those obstacles for a living. So most of Chicago and Miami are pretty ominous places to be a landlord. Anytime you have any kind of violation in the city of Chicago or some of the surrounding suburbs, it’s a process. It’s like you’re guilty until proven innocent in those situations.

 

So you need to have someone who’s diligently working on your behalf to solve those problems. Eviction is a state-by-state or sometimes a city-by-city issue, so it’s something that I always encourage people to do due diligence on before they enter a market if that might be a challenge for them going forward, especially if they’re going to self-manage.

 

[0:34:16.0] MF: Right. What are your thoughts on self-managing, speaking of that? Especially for people who are, I’ve heard quite a few people saying that they can self-manage out of state now with all the technology, and different property management software, and different things going on. Is it worth it to you?

 

[0:34:29.8] DC: It is really a case-by-case basis, and I think what you’re trying to accomplish. Personally, I think trying to self-manage out of state is a nightmare, and I will say that because of some of the advances in technology, we are, as I like to say, I think it’s the easiest time ever to be a landlord because of all the different services and applications that are available to folks. There’s cool online property management software like Cozy or Rentalutions that can help make your life easier in terms of rent collection of things like that.

 

But look, at least the last thing I’ve ever wanted to deal with when I was a landlord is getting a call at three in the morning because the basement was flooded. There’s no extra savings I can get per month to make me want to answer that phone call. So for me, it depends. If I own a duplex and I’m living in half the duplex, yeah, self-managing makes sense, or if it’s a property down the street.

 

It also depends on my level of experience. Being a landlord and not having any experience in, let’s say renovations or repairs, what is the upside for you? You don’t know how to do half the stuff you need to do anyway. So if I was general contractor, I had construction experience, and I could manage that process myself, and I knew how to buy materials at Home Depot? I’m much more open to people that have the sophistication to do what’s necessary to be a real property manager. Those folks, no issues with. I have a lot of friends that have created their own property management companies to manage their properties as they have grown overtime.

 

If you’re getting into this, and you are trying to make it something that you can scale overtime, I personally would focus on just continuing to buy good properties that make money, and leave the property management up to somebody else that does it for a living, because they’re going to be more effective in terms of being able to retain tenants, being able to handle any larger maintenance or tenant issues as well, and they are going to focus on the rent collection.

 

Rent collection is going to be a lot easier with people being able to pay online, but your conversion of getting people to pay rent online when you having an $80,000 – $120,000 property isn’t the same as if you’re leasing out a quarter of a million dollar property. So then, you have to get into the efforts of rent collections, and let me tell you, if it’s something, again, that if it’s out of state, are you going to fly to Cleveland from Colorado to collect that $800 rent check? I don’t think so.

 

Are you going to go down the street and knock on that guy’s door? Probably, but those are things that you need to weigh on an individual basis. Ultimately, if you are buying right, most property managers charge you somewhere between 5% to 10% of the rent collected. It’s not a big number to deal with peace of mind, in my opinion.

 

[0:37:18.0] MF: Yeah, I completely agree with you. Ironically, I own one property out of state, and it is in Cleveland, so that is a good selection there.

 

[0:37:27.1] DC: Well, I wasn’t stalking you Mark, I promise.

 

[0:37:30.1] MF: I self-managed my properties, they were all local, up until I had seven. At that point, I switched it over to someone on my real estate team who’s an agent, had him manage them, and it was the best decision I ever made. I made more money, because they were better at screening tenants, they were better at collecting rent, they are better at charging late fees, and it was so nice to not have to deal with it at the same time. So yeah, I completely agree with you on the self-managing side.

 

[0:37:56.3] DC: Yep.

 

[0:37:57.5] MF: Awesome, so a ton of great information, Dennis. I really appreciate it. Before we head out of here, do you have any advice for someone? There’s a lot of people who are trying to buy rental properties, get started, maybe they have never bought one before, do you have any advice for them on just one tip or one thing they should think about to help them make that first purchase?

 

[0:38:17.1] DC: Well, I think what any smart investor should do, regardless of what they’re investing in, is to try to understand what they’re trying to accomplish. I’ve personally dealt with a lot of investors who said, “Real estate is so hot right now, I’ve got to get into it.” Okay, why? Because it’s hot, or because you like real estate? What about it do you like? What is it you’re hoping to accomplish? Do you want to make triple your money in one year, or do you want something that’s going to serve as an annuity that you’re going to hold on to forever?

 

I think a lot of people aren’t thoughtful in their approach of what they are trying to accomplish with real estate as an investment. There’s a lot of great benefits, whether you are looking at the tax benefits, whether you’re looking at the income benefits, the appreciation benefits, but I think it is really important to self-evaluate what you’re looking to accomplish, and that should drive you to a more focused search.

 

That’s the real interesting part about investing in real estate and being focused on what you’re doing, because it’s easy to go on to a place like Investability, and start searching everywhere in the country, and say, “This was good, and this was good, and this what’s good.” What you really need to do is funnel that down and harness that. Harness whatever your goals are, so that leads you in the right direction.

 

So if you know that you could put your money somewhere else and earn 5%, and you want to achieve something more than that on an annual basis with your real estate holdings, then that should drive you to a certain area. If you are looking for a place that could potentially appreciate more, that’s probably going to take you away from certain areas or certain property types. Then it’s really just doing due diligence to understand what it is you are hoping to accomplish, and then using tools that are available to marketplaces like Investability to help you refine that search and start to get into things that really are applicable to your investing objectives.

 

[0:40:06.8] MF: Oh, that’s great information, and you’ve brought up another question I have to ask, too. If you’re in one of these states, you can’t cash flow, you want to buy out of state, do you have a tip for how to start looking for a market? Like is there something, the country’s big, so how can you narrow down where you want to start your search?

 

[0:40:25.8] DC: That’s a great question. I didn’t mention it at the beginning of the show, but I write for U.S. News & World Report, and I have a real estate column, and one of most recent columns was what are some of the different kind of metrics you can use to help refine what markets you should invest in. So there’s a ton of great information out there that’s available to the public.

 

So for example, if you go to the Bureau of Labor Statistics, which is just blf.gov, you can learn about where job growth is occurring the fastest, where the lowest unemployment rate is. If you go to the National Association of Realtors website, you can learn about which places, what the median home price is in markets all across the country. How those have appreciated overtime, you can go to HUD and see how many building permits they are issuing in different places. You can go to the Census Bureau and see how quickly places are growing from a population perspective, as well as are people moving in or out of that market. There’s just a ton of great information available out there for free that you can get on a metro level or a county level to help start guide the decision-making process.

 

And then once you have an idea of what markets might be interesting to you, then you start to go onto a platform like ours and say, “Yeah, okay. I’ve decided, you know, I really like what’s going on in Columbus, Ohio right now. Let’s go see what’s available on the market there and see what makes sense for me and what my cash flow might best match.”

 

[0:41:58.4] MF: Awesome information, and yeah, that’s what I did too. One reason why I liked Florida is it was growing so much. Just incredible population growth, and the prices weren’t crazy like they are in some areas of the country that are having that growth.

 

[0:42:11.3] DC: Yeah, absolutely, and again, once you define what that criteria is of what you want to accomplish with your investments, you can start to refine what factors might be most important to you, and I mention the age of the housing class. For the flippers that are listening on this show, take, for example, a place like Los Angeles.

 

Well, Los Angeles is expensive, for sure, but 72% of the houses in LA were built before 1970, meaning there’s a lot of opportunities for value-add investing, where you can go and renovate a property, and you compare that with a place, let’s say a place like Reno. In Reno, although the market there is doing well, 60% of the houses have been built in the last 25 years. So there’s not going to be much opportunity to flip in that market, because most of the houses are either newer, or have been renovated recently.

 

[0:43:03.6] MF: Well, that’s great information as well, and depending on how involved of a flipper you are, it can be either way, you want newer houses or older houses, but yeah, typically the good deals are on the older houses. Dennis, awesome information, thank you so much for being on the show.

 

Before we head out of here, obviously Investability.com is an awesome resource. We’ve talked about that. You also write quite a bit, and you have your own podcast as well. So tell us a little bit about your podcast.

 

[0:43:29.6] DC: I do, thank you for mentioning that. I appreciate it. Yeah, it’s called The Real Investor Podcast, and so I try to give as much of my knowledge — I basically am trying to translate everything I’ve learned as a housing market analyst, working on Wall Street, being an everyday investor, and bringing that all together to give salient advice on a bunch of topics.

 

Financing, renovations, market analysis, you name it. This market, real estate in general, I think it’s something that has a very low-barrier range rate. So much like you, I want to make sure people have the tools to succeed. I don’t want to see people make bad decisions, and that’s the genesis for creating the podcast. You can download The Real Investor on iTunes, or Stitcher, or our website, or Google Play. I don’t know, pretty much it’s everywhere, according to my marketing team.

 

[0:44:25.6] MF: Nice, great. Well Dennis, again, thank you for being on the show. A lot of awesome information. I really enjoyed your insight into the markets, on investing out of state, rental properties, thank you so much. Hopefully, a lot of people can find value in the show as well, and check out Investability and your podcast, and yeah, I hope we can keep in touch.

 

[0:44:45.5] DC: Great, thanks a lot Mark. I really appreciate the opportunity. It was fun chatting with you.

 

[0:44:49.6] MF: Yeah, same here. Alright, take care.

 

[0:44:51.7] DC: Take care.

 

[END]

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