South Central Pennsylvania is the third-largest region in the state by both population and number of businesses, consisting of eight counties along Pennsylvania’s southern border.
In this Market Spotlight, we talk about the best features of Harrisburg and the reasons why so many people working in Baltimore, Pittsburg, Washington DC, and other nearby cities choose to live there. Join host, Marco Santarelli, and our market specialists as they discuss why Harrisburg, PA is a lucrative market for those who want to invest in real estate.
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Market Spotlight – Harrisburg, Pennsylvania
Harrisburg, Pennsylvania is a medium-sized city located in the State of Pennsylvania. It has a population of roughly 50,000 people, 36 constituent neighborhoods, and it’s the 11th largest community in Pennsylvania. Harrisburg has a large stock of pre-World War II architecture making it one of the older and more historic cities in the county there. Unlike some cities, Harrisburg isn’t mainly just white or blue-collar, instead most prevalent is occupations that are a mix of white and blue-collar jobs. Overall, Harrisburg is a city of sales and office workers, service providers professionals, and there are especially a lot of people living in Harrisburg who work in office and administrative support. Many of them commute to a nearby city such as Baltimore because it’s not that far away. Real estate is certainly less expensive in these outlying areas.
It’s what we refer to as a tertiary market. It doesn’t have the size or population big enough to make it what we call a tier-two market. It’s more of what we refer to as a tier-three or tertiary market. Nonetheless, it is a stable and linear market. Nothing overly exciting. It is one of those markets that provide stability. I refer to it loosely like a blue-chip stock. With me are some of the team members that we work with out there. It’s overdue but we want to talk about this market because there have been a lot of opportunities there. The properties that we have been moving in that market have been moving quickly. We have these guys perpetually out of stock. Demand is high from where we sit.
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It is my pleasure to welcome Eric and Liz to the show. They are one of our superstar property providers in Pennsylvania, specifically the Harrisburg area. We have been doing a lot of business with them. They produce fantastic products, they’re in great areas and it’s been an exciting opportunity for us and our clients. Having said that, Eric and Liz, welcome to the show.
Thanks.
Thanks for having us.
It’s an honor to have both of you on the show because you are awesome to work with. My team is constantly complimenting and bragging about how wonderful it is to work with you and our clients are happy. I’m excited to have you on. Let’s talk about your local market because a lot of people are not only not familiar with the Pennsylvania market being way up there in the northeast but Harrisburg, where in the heck is Harrisburg? Tell us about your local market there.
We consider it South Central Pennsylvania. Four of our counties border the Maryland, Pennsylvania line. Harrisburg is a little bit north of York where our office is located. We’re about one hour and twenty minutes from Philadelphia, one hour from Baltimore, four hours from Pittsburgh and four hours from New York. It’s a great location to get to a lot of exciting places quickly for day trips, vacations, East Coast beaches and things like that.
You are not considered a bedroom community or a suburb of Baltimore or Pittsburgh. You are your own MSA, Metropolitan Statistical Area. From a high level, if someone asks you, “Why should I invest in Harrisburg or York, Pennsylvania?” What would you tell them?
I would say it’s a strong community for a lot of different reasons, both family-oriented and tight-knit community and strong job force. Our unemployment is traditionally lower than the national average, which is good. We have our cities, but there’s also still a lot of open space, beautiful countryside, a lot of farming and things like that. It’s not as rural like it’s not in the middle of nowhere, but it’s not a super huge city either.
This is a smaller market, maybe a tertiary market, because it’s just not as big as Baltimore or Pittsburgh. The question becomes, what is driving the local economy? Who are the major employers there if any? There are a lot of employers but if we’re talking about the big companies, are any of those stationed there? Give us a sense of what makes up your economy.
We can tag team that a little bit. One of the things about our physical location is a considerable amount of people live here because of the price of real estate and then commute to Baltimore. The southern portion of the counties that Liz had mentioned border on Maryland. From our office, it’s virtually a 30-minute ride to Downtown Baltimore. We have a tremendous amount of people that have moved from the Maryland market to Pennsylvania where they earn a slightly higher wage commuting to Maryland. They’re able to purchase and rent property in Pennsylvania at a considerably reduced price.
We see a tremendous number of people that reside here but commute to Maryland, the DC area and places of that sort for work. They choose to live here because they like a little bit of the rural feel that we have, but still have immediate access to the bigger city jobs and the incomes that come with it. Hershey Foods, if you like chocolate and roller coasters, you should know about Hershey. Their home base here is in Harrisburg, Dauphin and Cumberland County market. They are a huge employer. They have a large private school there that employs several hundred people.
Harley Davidson is another big nationally recognized company. They have a massive manufacturing plant here in York about 2 miles from our office, and then also military bases. There’s a tremendous amount of military bases about one-hour drive of here. Fort Detrick and Fort Meade in Maryland. There’s a National Guard facility in Pennsylvania as well, about one hour from here. We see tremendous amount of people that are military that choose our market as a place to call home and then commute for their daily drive to work. Did I miss anything, Liz?
We have Johnson Controls, which is a big one. Den-Pro Supply, they make dental equipment for all over the world. We have a lot of healthcare workers and a lot of education employees too. In our market alone, there are 22 colleges and universities, as well as some teaching hospitals. It’s a good mix of different jobs and things like that. We have a lot of manufacturing, distribution and shipping.
You have a lot of diversity. That’s great. Have you noticed any kind of trends in terms of growth or demand in real estate? I know a lot of markets have been experiencing that because they’ve been short on inventory. Demand has been high and supply has been low, relatively speaking. It’s has been creating pressure in the rental market and in the sales market. Demand for housing has been increasing and that’s common around the US. What about in Harrisburg and being a smaller, more of a tertiary market? What are you seeing there?
We typically follow suit. We see not the highest highs that we do in some of these primary markets. When you see these big spikes in values and a huge demand, we follow but we typically follow at a slightly reduced rate. As our values increase, we don’t see that significant spike. We were in this business in 2004. We saw the market for 2006, 2007 and declined in 2008. Our area was probably, across the nation, one of the few that had not a monumental collapse of our values. We also didn’t experience that drastic spike in values as well. We did see increases quicker than what we had seen over the previous ten years, but not that skyrocketing of values that a lot of what people are seeing across the country.
When the market is going crazy and values are skyrocketing, we’re not the place where you’re going to see that rapid appreciation. On the other side, when there’s a correction, we also don’t experience it that much. Our markets have been for what we can consider to be hot. When we put renovated properties on the market, they’re selling quickly, whether that’s to a tenant, resident or one of our turnkey buyers. We cut our teeth in this business and the fix and flip business. We’re doing over 250 fix and flips for many years. We were watching those properties sell overnight with multiple offers the way that everybody’s seeing it across the country. Our highs aren’t as high and our lows aren’t as low. We move in accordance with the rest of the market across the country, just not as drastic.
We would refer to your market as a linear market, which is the polar opposite of what would be cyclical markets. For a lot of people, that’s the boring market. It’s smooth, slow and steady, but that’s great. It’s got consistency. You could almost look at it like a blue-chip stock. It stable and predictable. It’s great for cashflow. That’s okay. If you’re not swinging for the fences and trying to get huge appreciation gains and you want to have a stable place to park your investment capital and just have consistent cashflow. Those “boring markets” like Harrisburg and York are places to seriously look at. That gives us an overview and a feel for the market.
Let’s get a little more granular and focus on the types of neighborhoods. We believe neighborhoods are important. Neighborhoods can range from low-income to higher-end premium neighborhoods. A lot of what we typically provide our clientele are B-class neighborhoods. Bs, B-pluses and sometimes A-minuses. We touch on the C-plus neighborhood. There’s no formal industry definition of what those mean, but typically they’re tied quite heavily into the demographics and the income level of the properties in those neighborhoods. Give us a feel for the types of neighborhoods that you are focused on. What types of neighborhoods are they? Give us an overview.
When we transitioned from a model of fix and flip a few years ago to being a primary focus turnkey provider, what we found was we were identifying the same properties as opportunities for turnkeys as we were previously for fix and flips with the elimination of the higher end stuff. Quite often, in our market, the average sales price is around $170,000. When you talk about some of the bigger markets, that’s the entry-level. It’s nearly impossible, but that’s our median price.
When we shifted, we targeted the same inventory that we were previously identifying as an opportunity for fix and flip. It’s all relative because if you go to certain markets, it’s hard to tell. For our definition, we operate in the B-minus to C, all the way up to the B-plus to A. The bigger problem is with the A inventory, it’s sometimes difficult to make the numbers work. There’s a bigger demand from homeowners that drive the prices up but the rent doesn’t correlate with the pricing. I’ve been buying rentals since 2004. Our sweet spot and what we found with the big shift and the anticipation of rents being due, is a good portion, 25% to 35% of our business historically was voucher-based.
When I say urban, it means that it’s a townhouse. Our bread and butter here have been the 1,400 to 1,500 square foot townhouse that rents for $1,000 to $1,100 a month. There is a huge demand for that inventory. There is a massive shortage of renovated and professionally managed inventory at that price point. We’re seeing people that are leasing our properties at that $1,000 to $1,100 mark or comparing it to properties of similar size that are 25 and 30 years outdated and maybe managed by the owner. They haven’t had the best experience.
Our average tenants, we have over 85% renewal rate. We put a lot of time and energy into taking care of our residents to make sure that they’re looking forward to renewing because vacant properties don’t make anybody any money. We try and keep them leased up and take care of the people that are paying. When we looked at the voucher programs and we’ve been doing it for fifteen years, we have a tremendous relationship with the local entity that manages that program. There were deposits immediately. There was no conversation about that, so there was zero interruption there.
There’s been a huge renewal of interest in the redevelopment of our city, both in Harrisburg and York. A few years ago, they built a Minor League baseball stadium in the center of York City. There’s been a huge redevelopment effort by the local administration here to bring businesses back to the city. The best restaurants are in the city. A few years ago, that was not the case. It’s like if you feed them, they will come. We have shy of a dozen private boutique-style restaurants in our city and craft beer places where there are all these micro-breweries that popped up. There’s a ton of entertainment.
Now that that’s been around for a few years, there’s starting to be this huge demand for housing down there because people can walk. They want to walk to where they can eat. They’d like to walk to where they can have a beverage. There are tons of shopping stuff that has happened. We’ve enjoyed a great revival of our cities. There’s been a tremendous pushback. I’m sure as you watch the national data. That’s happening on a national level as well. There’s this big movement of people that don’t want to be out of town 25 minutes away from everything living in an apartment anymore. There’s been a big pivot away from a lot of that multifamily investment to the single-family. The people that want to buy those single-family homes want to rent a house like they would buy, but they prefer to run it.
That’s a good point. That is certainly a trend. There was a trend several decades ago towards the suburbs where people were moving out further away to bigger lots, bigger houses, more of a suburban feel. It’s probably because of the newer generations coming out, the Millennials and whatnot. They like to be in close proximity to the downtown core. They like to have a lifestyle culture. They like to be mobile. They don’t want to be tied to a property. They like that trendy restaurant, bar, boutique, brewery, IPAs and all that stuff. They like that walkability. There’s this movement back to these inner cores and these districts where they are undergoing revitalization.
The restaurants come in and things start to get hip and trendy. All of a sudden, you have all kinds of multi-unit properties being renovated or built and all these younger generations are coming in and living there because that’s a cool place to live. Where that goes from here? I don’t know but that’s interesting. You gave us a great description of where you’re at in terms of neighborhoods and the types of properties. Touch upon the price ranges of the turnkey rentals that you are producing and the relative rents to those prices. Give us an idea of the price-to-rent ratio on those things.
We’ve done properties anywhere from $80,000 to $270,000. Typically, our sweet spot is between $80,000 to $100,000 and $120,000, around that $100,000 mark. Throughout the price ranges, we typically get the 1% rent-to-value ratio if not a little bit higher than that.
Are you having an issue finding inventory? I know some markets are pretty tight. Are you experiencing that or do you have a fair amount of liquidity in terms of inventory?
The short answer is we have no problems finding inventory. The long answer is one of the things that as a fix and flipper, we’ve been fighting for inventory for years. It’s always been a struggle at that volume to be able to do 250 deals. We are extremely active on social media. We do north of 50,000 direct mail pieces a month. We’re strategically targeting inventory that fits the model of what we’re buying, renovating and renting. We do about 400 television commercials a month. We’re active on local network and cable television. We generate about 500 seller leads a month. We bought 26 properties off-market and 14 properties on-market.
We have a deal analyst. His technical title is a deal analyst. If you ever meet Dave, he fits that. He looks like a deal analyst. He’s a super-smart guy. Each time we make a deal, he’s able to source where that deal came from, the values, the rents, and all of that good stuff. He’s constantly monitoring the model so that we can go back out and find more of that inventory. We have no shortage of inventory. We have over 50 active renovation projects now. We have over 100 homes total in our inventory, including pending acquisition, homes under renovation. We have over 30-some odd properties that are under contract to go to settlement for sale.
That’s a big focus of ours. It’s where I spend most of my time, in the marketing and acquisition areas. We do not struggle to find inventory and we’re constantly pushing. We’ve expanded our goals to over 30%. Each time, we pick a lane and go with it, whether it’s television, which has been new for us, it’s been extraordinary. The results have not been what we projected, they’ve exceeded our expectations.
We have a great reputation after being around for many years. Local real estate agents bring us deals constantly. Particularly through these last couple weeks where in Pennsylvania, real estate agents are restricted in their ability to do any business. We’ve bought a handful of properties from deals that unfortunately fell apart that was under contract to go to settlement. We put a lot of time, energy and focus behind acquisitions and finding quality inventory. It’s one of the things we do a good job of.
Before we get to the property management piece of it, one more question, which is an important question about properties. What is a typical scope of work? How would you describe a typical renovation on a turnkey rental that you are producing out there?
We’ll start with the average budget. A 1,500 square foot house for us, the typical renovation budget is around $35,000. We have what I call a top-down mentality. We look first at major mechanicals. Our primary focus is looking at things like roof, electrical systems, plumbing systems, HVAC and things of that sort, and the structural integrity of the property. We build out a scope beyond that cosmetically to make the property as appealing as possible. It’s one of the things that’s overlooked. When you look at the class of inventory, there are varying classes of demographics inside of that. You can have an A property with a D resident. What do you have? Are you more interested in the value or the quality of the property or the quality of the resident?
Quite frankly, you can have a great property and if you don’t have a resident that’s paying, it’s not productive. What we found with our inventory, we renovate for the long-term. We like durability. We want to make sure that we can check the boxes of all the major mechanical. As maintenance pops up, which it certainly will, it’s one of the things that we’re transparent about. These properties will need some level of maintenance for certain. What we try and do is eliminate the possibility of any of those big-ticket items because that can chip away at your cashflow.
We start with the major mechanicals, then cosmetically we’re typically renovating kitchens. We use durable flooring products. We’re normally using some form of an engineered wood product or a luxury vinyl plank. It’s durable and waterproof. If a piece of it gets damaged, you can patch that piece. We’re strategic about how we renovate. If you look at our properties, it’s one of the things that we’ve carried over from the fix and flip world, is we renovate our properties. A lot of the feedback we’ve got from both your sales staff and the clients is that they look like flips. Our renovations on our turnkeys looked like flip.
Which is a good thing. That’s a positive thing when you mentioned that.
Some people have encouraged us and said, “Why do you do so many renovations?” It’s all that we know. We’ve found that we attract a higher quality resident. We never have problems getting our properties rented. We have a phenomenal leasing staff. We’ll have people fighting, not physically, over our properties. On any one given property when it’s renovated and goes active, we’ll have multiple applications and people stay. When we lose a tenant, 90% of the time it’s because they’ve chosen to buy a home. Not because they’re moving to another rental that’s in better shape or it’s better managed. That’s one of the things that we put a lot of time, energy and focus in. It’s the quality of our renovations. Making sure that we have a robust scope for those two reasons, durability and we want to attract the highest quality resident possible.
I can back what you said because we’re getting feedback from our clients. We survey every single client after they close escrow. Regardless of whether it’s their first property or their twentieth property, they get the same survey every single time. They rate us, rate our provider, rate the lender and rate everything. They describe how the transaction was, give us some feedback, any suggestions for improvement, all that kind of stuff. What we’re hearing is all positive and that speaks volumes. I assume you warranty your work for a period of time being a newly renovated property. What is that? How does that work?
We have a one-year workmanship warranty. The workmanship warranty covers anything that’s done during the renovation, which each property comes with the full renovation list. A buyer can see interior/exterior room by room exactly what’s being done on each property. Everything that’s done during the renovation is covered, as well as anything that would be covered under the inspection repairs.
Let’s wrap it up with property management. I know that you took over management services and are now providing full-service property management. Describe the property management services that you are offering and including with the turnkey rentals. Touch on the terms under that management, whatever the management agreement that you have.
Probably the most frequently asked question I get when people have seen that we’ve transitioned to property management is, “Why?” I think that’s important to cover. Liz can attest because she’s at the front lines communicating with your clients even beyond the sale. If there’s an issue with whether it’s a resident, some form of property management, if it’s maintenance or whatever the case might be. We have multiple clients that have been with us for a few years. There are turnovers and stuff. There’s ongoing communication probably far more after the sale than there is during the sale. The closing process of purchasing a property takes 30 days versus 30 years of owning it and managing it responsibly. Liz, why don’t you start with why we made the decision to get into property management and take on that massive responsibility?
A short answer would be the control of it to be able to make sure that we have the most control over the services that are provided, not only to the owners of the properties but also to the residents as well. Making sure maintenance calls are answered as quickly as possible. If somebody calls, they’re getting a callback. It’s providing the customer service level that we expect for our sales side and transitioned it over to property management.
The consistency that we saw in dealing with your team, we’ve seen the same level of excellence. The way that they’re being positioned and educated when they’re introduced to us. Your team’s interaction throughout the process, the quality of the property that we’re bringing to the table. We wanted to make sure that that remained consistent beyond and past the settlement date. We’ve seen the possibility for inconsistency. We’ve had a great relationship with property managers and companies in the past, but we decided to put our foot on the pedal and make this our focus.
Our goal was we should exceed the 200-unit number. Every sign that our market has the ability to produce over 300 quality units. We just went through our last quarter, and then our projections for the next quarter. Our projections will put us on pace for 300 units a year. We wanted to make sure that there was consistency from the introduction to the sales process, through renovation, inspections and all of that stuff.
You survey every portion of that transaction from the lender to the provider, to how your team did. There was what we felt a potential disconnect beyond the sale. To us, it’s the most critical part. We could have a great renovated property, you’ve got a good deal, a solid loan and it can all fall apart in management. We weren’t willing to take these relationships and not be 100% confident that we had a seat at the table. I’m so fortunate that we had the ability to navigate through what we’re going through now with the collection of rents and communications to residents. We had one person that had not paid out of close to 200 doors. That’s phenomenal. We started taking action weeks before in anticipation of that day. It had a lot to do with our success. We wanted to make sure that there was consistency throughout the experience for the customer.
Describe the property management service. I’m sure it’s similar with every other management company that we work with. It’s across the board full-service management. If you want to touch on that, feel free to do so. Give us a rough idea of what the terms under that management is.
The monthly management fee is 6% for all of our turnkey investors. Typically, in our market for property management, it’s between 8% and 10%. The 6% is part of the package deal for the turnkey investments. The first tenant we place, that’s included with the purchase of the property. You’re not paying a separate fee after you close to lease it. Following the first year, lease-tenant placement is a half month’s rent. The lease renewal is $100. They’ll do either semiannual or annual inspections, $35. Those are optional but I would definitely always suggest them, especially for that first year that attendance is in place. They do have in-house maintenance. There’s no markup on that, which is nice. A lot of companies will either sub it out or mark it up on their own. That’s passed along directly to the owners, which is nice.
Those are incredible terms. You probably realize you’re underselling yourself.
As funny as it may sound, it’s intentional. We appreciate and treat it as it’s our own business. For us, it’s an extension of our turnkey business. We want to make our properties in our area as appealing as possible with the things that we can control. Some people want to invest in primary markets and have the shiny, appealing possibility of big upside numbers with appreciation and stuff. That’s not us. What we have to offer is that blue-chip stock that delivers consistent and reliable returns.
When you’re talking about our property values, and the coinciding cap rates, a little bit of markup and maintenance and charging 8% management fees, you start to add those things up. It starts to make that investment potentially not as appealing as what it may be otherwise. We have control over that stuff. Another big contributing factor for us is we do it to extend that service as a bonus for our clients. Anybody in the property management business, I haven’t heard of many people getting wealthy off of that. It’s an extremely demanding business with extremely small margins. When we attach that to our core business, and you treat it as an extension of that business, it makes a lot more sense for us. It never puts us in a position where we have to choose between what’s right and wrong because we’re operating on such a small margin. It’s not even a part of the conversation. That’s truly at the core of why we made the decision to do it and the reason that we run our business that way. It’s an extension of our turnkey provider business. It makes things a lot easier.
I jokingly say you live and die by your property manager or your management company. There’s some truth in that. It’s important to have good quality management. What you are doing is great. I hate to use the word, cheap, but you are cheap in terms of the spectrum of property management fees and services that are out there. We’ve gotten great feedback from our clients about it. They’re happy. I haven’t heard one negative thing. Keep up the good work. Are there any parting comments about your market or the investment opportunities that you have there?
You already touched on it. The appreciation, that’s one thing that I always do to be upfront with people about. If they’re looking for a market that’s going to have a huge appreciation, if they want to sell a property in two years and make $50,000, this isn’t the market for them. It is the most consistent, steady market that I’ve seen as far as my research nationally.
It’s exciting. We’re getting a lot of attention on it. It’s a positive thing, especially now. The stock market has been incredibly erratic going up and down, 1,000, 1,300 points. It’s driving some people a little bit batty. They’re saying, “I need something a little more predictable and consistent that generates cashflow,” not purely a capital gains type of play. Real estate is an obvious choice and a great inflation hedge. I want to thank you guys for taking the time to come on. You are rockstars. We get compliments about you all the time. Keep up the great work. Thank you for working with us and thank you for taking the time.
We appreciate the opportunity, Marco.
We appreciate you. Thanks so much.
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That wraps up another Market Spotlight. If you have an interest in the Pennsylvania market where we’ve been for a number of months, feel free to contact your investment counselor here and we will get you additional information. We’ll answer your questions and show you some of the properties that are in the pipeline. If you don’t have an investment counselor with us, at least not yet, fill out the form on our website. We will assign an investment counselor to you within 24 hours.
You can start off with a free strategy session. I always refer to these strategy sessions as being free. The thing is we don’t charge for anything at all. Everything is essentially free as far as what we do. We provide you a ton of value, education, resources and knowledge and put you in touch with the right people in the right markets that make sense for you and your investment goals. You can call all that free. It’s a whole bunch of value that we provide for you and help you on your real estate investing journey and work towards your financial freedom goals.
Contact us if you have any questions at all, not just about the particular Harrisburg market that we talked about. Download the free report on our website, The Ultimate Guide to Passive Real Estate Investing. We’ve got some other freebies coming up here in the near future. If you haven’t already subscribed to this channel, click that subscribe button to help us spread the word. Leave us a rating and review. Thanks for reading. We will see you in our next episode.
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