20 Properties by 2020

Can Our Landlord Score
20 Properties By 2020?
By JANE HODGES


Jeff Jones says he is on a mission. The Microsoft Corp. sales executive and Seattle-area landlord plans to own 20 investment properties by the year 2020. In the short-term, he expects that he'll lose money on his first two home purchases, but says he's passionate about watching his investments cross the line from red to black one day.

Mr. Jones, 33, already owns two Seattle-area rental homes and is considering buying out-of-state. He knows his plans fly in the face of conventional real-estate investment advice that you buy only within a short radius of home. But for Mr. Jones, focusing just on Seattle's high-priced housing market contradicts another piece of property-investor philosophy: If you can't generate cash flow from a property immediately, why buy it?

So now, he is researching real-estate markets across the country. "I'm looking [anywhere] in the U.S," he says. "I don't want to be automatically tied to a particular area. If the numbers are positive, I'll look."

To rate cities, he's using socioeconomic factors like income and population growth and vacancy and crime rates, while keeping an eye on land-use and development issues. Sprawl -- widespread, low-density suburban growth -- is a turnoff for him in markets like Atlanta (where he once lived) and Las Vegas, he says. However, he believes local governments' efforts to cap sprawl with "growth management" and zoning laws can only help investors. When such cities create tighter boundaries and tougher zoning laws, that makes the housing inside city limits more attractive to investors, he says.

For instance, Mr. Jones says he has learned in his research that the Raleigh, N.C., area has agricultural zoning restrictions that curb developers from converting large tracts of farmland into residential developments. Raleigh is also part of a triad of cities known as the "Research Triangle" that hosts North Carolina's technology sector and several universities -- which, paired with generally declining apartment vacancy rates (the apartment vacancy rate for the Triangle area was at 9.8 % in March according to The Triangle Apartment Association and Karnes Research Company) -- creates potential continued demand for rentals among upwardly-mobile tenants.

Mr. Jones's priority is to find markets where he can put 10% down and get a cash flow that exceeds the costs of mortgage, taxes and other expenses. In addition to Raleigh, he's interested in a few other small cities, including Tulsa, Okla.; Oklahoma City; Cheyenne, Wyo.; and Manchester, N.H.

Assembling a Portfolio

Mr. Jones says he wants to build a portfolio of properties that contains a range of risk levels -- some aggressive choices tempered by moderate- or slower-growth investments. He says he considers his Seattle home purchases, which will be in the red until at least 2007, to be "high risk" because he currently can't demand a rent higher than the cost of each property's mortgage, taxes and related expenses.

Like many investors, he says he has struggled with the question of how to make money from his properties. For example, he says, should he put a small down payment on an expensive property in a hot market, taking a loss on cash flow initially but hopefully making a profit at resale, or should he invest in less-risky property in a slower-growth market to get positive cash flow and a smaller profit at resale?

While Mr. Jones predicts that eventually he will have a healthy cash flow from his first investment-home purchase in Seattle's Lakeridge area and that he will garner a hefty profit on his rental home in Seattle's Leschi neighborhood at resale, he doesn't want to buy new properties unless they generate immediate positive cash flow. So, he wants to invest his money in multifamily properties, which he says could make money from the outset.

Mr. Jones says that based on his research, a Raleigh four-plex in good repair costs about $239,000, with each unit renting for $376 to $625 per month. Meanwhile, he says, in Seattle, a fixer-upper triplex can be purchased for $375,000 and fetches about $600 to $800 per unit per month. If he put 10% down on a Raleigh multifamily and employed a resident property manager, he'd make positive cash flow, he says. If he put 10% down on a Seattle property, he'd lose money for years, he says.

Based on his research, he says a "half decent" four-plex in Tulsa goes for $150,000, and that the city's residential real-estate prices have appreciated 4% yearly. That's modest compared to the minimum 10.5% annual increases he says Seattle has shown since 2003. But a property in Tulsa -- or in slightly less expensive Oklahoma City -- can be an immediate moneymaker, he says. Perhaps the property won't sell at five times its original purchase price, but if the rental income outpaces mortgage costs from the outset, he can still profit, he says.

Unknowns Aplenty for Out-of-State Investors

Mr. Jones says the most difficult aspect of researching an out-of-state market is calculating associated property expenses. While mortgage, tax and rent prices are predictable, utility costs, for instance, are not -- especially in an out-of-state market where pricing structures are different and climate variations can have an impact on rates, he says.

"The expenses piece is the biggest mystery we face," he says.

Out-of-state properties also require another cost that he would have to consider. "I'd have a resident property manager," he explains. "I'd have to have someone there." He doesn't have cost estimates for that piece of the puzzle, but expects he'd offer a rental discount in exchange for on-site management.

Though he has specific strategies for his current properties -- holding the Lakeridge rental until the end of its 30-year mortgage and holding his Leschi rental in an adjustable mortgage that makes a refinance or sale easy in seven years -- he wants to remain flexible so he can capitalize on any profitable out-of-state markets he uncovers. For now, however, he doesn't want to pull equity from his primary residence through a second mortgage. "As much as I don't want to sell anything, I may end up trading the (Leschi) property in within the next seven years," he says.