I'm just getting started in investing and have been reading several financial blogs lately... They all seem to be jumping for joy on their cashflow property that is bringing in $300/m net that cost them around $50,000 to purchase. These are out of state turnkey investments that they say are in a "C class neighborhoods," however I'd disagree. More like war zones if you'd ask me.
I haven't been able to find any of these bloggers/investors who have held their turnkey investment in so called "C class neighborhoods," for more than a year... Does anyone have a similar investment that has stood the test of time? Owned it for more than 5 years roughly? I'd be really interested to see how these investments last once you factor in a longer time horizon, allowing for theft and bad tenets to do damage...
A house that cost only $50,000 that brings in $300/m sounds great, but... In those kinds of neighborhoods...? Not sure if that's profitable long term. Thoughts?
I would have to agree with you. There are several factors to take into account.
If you are referring to an investor buying from a TK company, for $50k it would be hard to achieve $300 in even gross cash flow assuming conventional financing. The ROI is much higher but the cash flow is only decent. In my market, if you took a $50k home and say it rents for $650, assuming 30yr loan with 20% down plus $4k closing cost at 9% property management, $500 in yearly insurance and $1,000 yearly taxes your gonna get around $250 in gross monthly cash flow. When you start to factor in vacancy, repairs and even potential capex you will only look at about $125 in net cash flow.
Even for example sake you purchase the home for $10k lower your cash flow only gues up by about $40 per month. So you if you are hearing $300 in has to be gross cash flow before any expense factors. Also for the most part $50k neighborhoods are not the greatest, calling them C neighborhoods is a big stretch and that is why the grading system is subjective to personal opinion. Long term they will fail more then offer success. Local investors will have the best chance to make them work along with some deep pockets to cover the repairs and mortgage during vacancy.
Where are those properties located? I've always bought turnkeys, and back in about 2011 you could find a decent property with that kind of return....but certainly not today. Curious as to more details on them.
I've seen a few investors speaking specifically about Kansas City. I'm from there, and the areas they're investing, I wouldnt touch (east near Troost/Paseo). I'm all about finding good cash flow one day, but with a long term mindset.
We manage several properties in the so-called war zones and these are my take-away's if you're looking at those areas:
- almost all buyers (investors) are cash buyers
- very few would pay $50k for the area, most would be lower
- Yes there is theft and some bad tenants that we have to evict, but you can prevent a lot of that with a good management company. Kansas City Management Inc does extensive background checks, we get deposits that are the same amount as rent, and most of the rents in those areas run anywhere from $650 to $850. That requirement alone keeps out the really bad ones.
- More and more of the "bad" areas are getting rehabbed, so over time, they could see some improvements. As Kansas City grows in population, the neglected parts of the city will eventually show signs of rehabilitation as we make room for new residents.
That is just my two cents, but if you don't want to worry about those things, there are still other areas in KC that have that same money-making potential. I come across several each week. Feel free to contact me for more information.
@William S. , I have been a licensed agent and investor since 2004. I have sold hundreds of these types of properties over the past decade. I have also rehabbed and managed hundreds of them for my clients (and continue to do so). I have even owned a few myself. Here is what I can tell you from my experience:
- The returns in these areas are NEVER as high as advertised! Let me say that again. The returns in these areas are NEVER as high as advertised! When a seller or listing agent calculates the ROI, they always leave some key expense out of the equation. It is usually the vacancy rates or the maintenance rates or the leasing fees. Never trust the seller's ROI. Always do your own calculations.
- In the past 12 years, I have yet to see any investor hold one of these properties for 5+ years. I have seen several 3 and 4 year holds, but never 5 or more. By the 3rd or 4th year, most investors are either sick and tired of dumping money into the property, or they are tired of trying to find a good property management company.
- These properties require way more effort to manage than a property in a good area which means it costs more money to manage these properties. Trying to cut costs by finding a cheap PM is the fastest way to fail.
- These types of properties are great for tax right-offs. If you are looking to lower your taxable income, this could be a good option for you.
- The few investors that I have seen be successful with these types of properties were highly involved with their investments. They either managed their properties themselves or they micromanaged their PM.
Despite all of these negatives, if you factor in ALL of the expenses and buy right, you can make good cash flow. However, if you pay more than $25-$30k for these properties in KC, then you are over paying.
I bought a class-c in '97 in a great neighborhood near to schools. We inherited the existing tenants, and thereby created our own TK at zero cost. Now in '15, it's a class-b with great cash flow. Yes, over time there was good upgrades ( ~7k per kitchen) but it's paid off in both c/c and FMV.
I refused to purchase a non-cash flowing property in speculation of appreciated FMV, so at 2/3 occupancy we were in the black day one.