Knowing When to Walk Away or Take a Chance

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Knowing When to Walk Away or Take a Chance

Tiffany U.
Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes

Newbie question.

I am looking at deals trying to break into the market.  My question is how do you know when to leave a property alone and when to go ahead and invest.  I've run the numbers they work.  The property has tenants.  But the property is not in the best neighborhood.  I'm not really sure what that means because I live about an hour away.  

Part of me says go for it as an investor who is looking to buy and hold properties my lens that I view properties is different then how I view a property that I want to personally reside in.  The other part of me says the school district is not good and I'm not sure about how well the property will appreciate in the future.  I have looked that the county and see the numbers as they are okay. 

Looking at the numbers and taking the leap are two different things. I know that REI is filled with on the job training opportunities. Am I better off investing in my first property that's not in the best neighborhood than not investing at all and continue searching? At what point do you just dive in and start learning?

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Most Popular Reply

Edwin K.
Tuscaloosa, AL · Member since 2016 · 17 posts · 12 votes
8y

Hey, the best way to learn is to jump in. Just like riding a bike for the first time you will get some scrapes and bruises. I got mines on my first deal but best part about it is I started and learned. You ran the numbers and they work(check)

  1. Now go view it. You decide what "a good neighborhood is". Don't let anyone else decide that for you. I look in areas where some people on BiggerPockets will say it's not "good" but to me there's nothing wrong with the area. I grew up in areas that was deemed bad by certain people but in reality it's not. Heck I'm currently house hacking in a C area and I'm enjoying it. 
  2. After you view it get a good and I mean good inspector. The one thing I learned from my first deal is picking a good inspector. Make sure the inspector have good reviews online and ask him/her to send a sample of how their inspection sheet look like. No sense in paying an inspector and you can't read their inspection sheet. 
  3. If you have time get a contractor to bid on the issues the inspector found. 
  4. After step 1 and 2 and 3 run the numbers again with the new information you have gained. Renegotiate the price if you need too. If the numbers still work move forward. 
  5. Ask the owner for copies of the lease and all other paperwork on the tenants. Read the leases carefully find all the clauses for ending the lease, find the lease terms, rules, and so on
  6. Now close on it.  

You got this... I believe in you. 

7Reply
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32 Replies

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  • Account Closed
    Youngsville, LA · Member since 2017 · 74 posts · 10 votes
    8y

    I'm still waiting/researching for my 1st property. I've walked away from two deals. The 1st wasn't a bad deal, the HOA fees, and new development cost brought the COC return less than what I could receive elsewhere. The 2nd was an older home which had some electrical issues.

    In your numbers have you included the vacancy rates, maintenance reserves etc? If so, are the numbers still good?

    0Reply
  • David Zheng
    Investor · Saint Louis, MO · Member since 2016 · 970 posts · 1k+ votes
    8y

    If it's your first property, I would avoid the headaches and just keep searching for something in a better neighborhood with less maintenance. usually properties in C places or worse are reserved for those that know how to handle those markets well, not for a first timer.

    3Reply
  • Tiffany U.
    OP
    Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
    8y
    @Rema W. Yes the numbers still work. One side has a section 8 tenant that's been there 15 years. The other side not section 8 tenants there 8 years. C property in C area.
    0Reply
  • Tiffany U.
    OP
    Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
    8y
    @David Zheng I'm still looking but this deal is available and I'm seriously considering.
    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    8y

    As soon as you say, "take a chance", it means you're not ready. The property could be great, but if you run the numbers and they look fine, but you're doubting your numbers... you're not ready to invest. Walk away

    2Reply
  • Tiffany U.
    OP
    Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
    8y
    @Joe Villeneuve Please give me your reasons why walking away is best.
    0Reply
  • Edwin K.
    Tuscaloosa, AL · Member since 2016 · 17 posts · 12 votes
    8y

    Hey, the best way to learn is to jump in. Just like riding a bike for the first time you will get some scrapes and bruises. I got mines on my first deal but best part about it is I started and learned. You ran the numbers and they work(check)

    1. Now go view it. You decide what "a good neighborhood is". Don't let anyone else decide that for you. I look in areas where some people on BiggerPockets will say it's not "good" but to me there's nothing wrong with the area. I grew up in areas that was deemed bad by certain people but in reality it's not. Heck I'm currently house hacking in a C area and I'm enjoying it. 
    2. After you view it get a good and I mean good inspector. The one thing I learned from my first deal is picking a good inspector. Make sure the inspector have good reviews online and ask him/her to send a sample of how their inspection sheet look like. No sense in paying an inspector and you can't read their inspection sheet. 
    3. If you have time get a contractor to bid on the issues the inspector found. 
    4. After step 1 and 2 and 3 run the numbers again with the new information you have gained. Renegotiate the price if you need too. If the numbers still work move forward. 
    5. Ask the owner for copies of the lease and all other paperwork on the tenants. Read the leases carefully find all the clauses for ending the lease, find the lease terms, rules, and so on
    6. Now close on it.  

    You got this... I believe in you. 

    7Reply
  • Tiffany U.
    OP
    Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
    8y
    @Edwin K. Thanks for the encouragement.
    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    8y
    @Tiffany U. You said “ I ran the numbers” Real estate is all about numbers What are your numbers so we can have a better idea of the risk vs reward on this so called deal
    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
    8y
    Originally posted by @Tiffany U.:
    @Joe Villeneuve Please give me your reasons why walking away is best.

     You're not ready yet.  If you do an analysis, and the numbers coming back tell you it's a good deal, but you question  your own numbers, what does that tell you?

    1Reply
  • Diana Duncan
    Real Estate Investor · Miami / Fort Lauderdale, FL · Member since 2013 · 63 posts · 12 votes
    8y
    Originally posted by @Edwin K.:

    Hey, the best way to learn is to jump in. Just like riding a bike for the first time you will get some scrapes and bruises. I got mines on my first deal but best part about it is I started and learned. You ran the numbers and they work(check)

    1. Now go view it. You decide what "a good neighborhood is". Don't let anyone else decide that for you. I look in areas where some people on BiggerPockets will say it's not "good" but to me there's nothing wrong with the area. I grew up in areas that was deemed bad by certain people but in reality it's not. Heck I'm currently house hacking in a C area and I'm enjoying it. 
    2. After you view it get a good and I mean good inspector. The one thing I learned from my first deal is picking a good inspector. Make sure the inspector have good reviews online and ask him/her to send a sample of how their inspection sheet look like. No sense in paying an inspector and you can't read their inspection sheet. 
    3. If you have time get a contractor to bid on the issues the inspector found. 
    4. After step 1 and 2 and 3 run the numbers again with the new information you have gained. Renegotiate the price if you need too. If the numbers still work move forward. 
    5. Ask the owner for copies of the lease and all other paperwork on the tenants. Read the leases carefully find all the clauses for ending the lease, find the lease terms, rules, and so on
    6. Now close on it.  

    You got this... I believe in you. 

    Great advice Edwin K. I would also do a background check on the tenants.

    0Reply
  • Tiffany U.
    OP
    Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
    8y
    Originally posted by @Dennis M.:
    @Tiffany U.

    You said “ I ran the numbers”

    Real estate is all about numbers

    What are your numbers so we can have a better idea of the risk vs reward on this so called deal

    Here are the numbers.  I may be forgetting  something but here they are.

    Property value $92,487

    Asking Price $155,000

    Offer cash $89,360 this is modified originally we were thinking of offering 76,900 I believe.  

    This is a duplex.  The owner states its cash flow is $18,000 before tax

    Property taxes $2129

    Insurance $2500 guessing my mentor told me this is a good guess

    Owner pays water on the property only one water meter but tenants pay all other utilities.   So I am putting in $2400 a year for water.  

    One of my concerns is how this owner just picked a number for the listing price.  I have not gone into the property yet.  So I am hesitant, I don't want to offend with my offer but I have to make the numbers work for me.  

    0Reply
  • Jeremy England
    Contractor · Pensacola, FL · Member since 2017 · 317 posts · 156 votes
    8y

    What's your worst case? can you afford it?  If so, jump in and see what happens.  

    I never invest in anything that I can't just pay for with my own money (be it payments or cash).  That way if it blows up in my face, I'm good

    0Reply
  • Tiffany U.
    OP
    Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
    8y
    @Jeremy England Well that's kind of complicated. My husband and I make decisions together so ultimately he makes the final decision because he's the numbers guy. I say let's do it. One of my concerns is the area home is in does not appreciate well. It cash flows but we've calculated the numbers with appreciation at 1% instead of 3%.
    0Reply
  • Jeremy England
    Contractor · Pensacola, FL · Member since 2017 · 317 posts · 156 votes
    8y

    Based off your numbers, I wouldn't do it.  

    ARV: 92k

    Offer: 89K, that's near 100pct.  

    Your down payment will remain in the property .

    Then let's take into account your cash flows.

    IF he is being honest 

    Revenues: 18000

    -2129

    -2500

    -2400

    -1800 (maintenance) (assuming you don't do a complete rehab after purchase)

    -540 (capex)

    -1620 (management)

    NOI: 7011, using the cap rate this property should be valued at like 70-75k

    Debt service?  How much will your mortgage be?  Take that away now.  

    Whatever you are left with is true cash flow.  Now how long will it take you in those cash flows to make up for that down payment?  

    2Reply
  • Account Closed
    Specialist · Paradise Valley, AZ · Member since 2018 · 3k+ posts · 2k+ votes
    8y
    Originally posted by @Tiffany U.:
    Originally posted by @Dennis M.:
    @Tiffany U.

    You said “ I ran the numbers”

    Real estate is all about numbers

    What are your numbers so we can have a better idea of the risk vs reward on this so called deal

    Here are the numbers.  I may be forgetting  something but here they are.

    Property value $92,487

    Asking Price $155,000

    Offer cash $89,360 this is modified originally we were thinking of offering 76,900 I believe.  

    This is a duplex.  The owner states its cash flow is $18,000 before tax

    Property taxes $2129

    Insurance $2500 guessing my mentor told me this is a good guess

    Owner pays water on the property only one water meter but tenants pay all other utilities.   So I am putting in $2400 a year for water.  

    One of my concerns is how this owner just picked a number for the listing price.  I have not gone into the property yet.  So I am hesitant, I don't want to offend with my offer but I have to make the numbers work for me.  

    HI Tiffany, I invest from Dallas TX to San Antonio Texas and I would suggest you compare your numbers to other opportunities. If you still like your numbers, go for it. Here is a spreadsheet that outlines a lot of variables. I'm a "numbers" kind of guy. I also like the idea of not buying in C or D neighborhoods. There are long term expenses everybody glosses over like vacancy rates, tenants trashing the property, deteriorating neighborhoods, lesser appreciation in lower cost neighborhoods, etc.

    I wrote this to compare cash flow on a deal I did for an investor. The same type of properties are available all along the towns and cities in the I-35 corridor

    https://www.biggerpockets.com/forums/600/topics/58...

    0Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    8y

    Your deal isn’t very good if your numbers are accurate .id find a new mentor because he’s clueless 

    2500 for insurance that is astronomical !

    0Reply
  • Tiffany U.
    OP
    Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
    8y
    @Mike M. I will take a look. Thanks.
    0Reply
  • Tiffany U.
    OP
    Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
    8y
    @Jeremy England The current appraisal is what you are listing as ARV. There are two tenants currently there one has been there for 15 years the other for 8 years. They are in leases until Aug 2019. One side is listed through section 8. The good thing with that is properties have to meet certain criteria and pass inspection yearly to continuously be listed for section 8. I believe that's a plus for me.
    1Reply
  • Marshall Fairley
    Real Estate Agent · Dallas, TX · Member since 2016 · 255 posts · 14 votes
    8y
    @Tiffany U. I can help you find deals in this market
    1Reply
  • Tiffany U.
    OP
    Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
    8y
    @Jeremy England Forgot to add rent is 850 unit.
    0Reply
  • Joe SplitrockPro Member
    Moderator
    Rental Property Investor · Sioux Falls, SD · Member since 2015 · 9k+ posts · 18k+ votes
    8y

    @Tiffany U. the only thing you can't change is location. As the old saying goes, the three rules of real estate investing are location, location, location.

    That being said, for many investors starting out, you can't afford an A+ location. Most working class neighborhoods are C class. You can't judge the property based on whether you would live there or whether you would let your kids go to those schools. You have to look at it from a tenant demand standpoint. Jobs is the number one thing to look at. There has to be employers in the area that support your tenant base. Sometimes in lower end properties proximity to public transportation is important. Working class neighborhoods are fine, but you want to avoid crime zones or neighborhoods with vacant houses or lots of boarded up windows. Ideally the neighborhood is seeing some revitalization. You may see 1 in 5 houses has been renovated. That shows that is the start of a turning point for a neighborhood. 

    Probably the biggest thing for a newbie is closing your first deal. Most people get scared and never pull the trigger. My first deal was in a C neighborhood and I had similar concerns/situation as you. The best advice I can give is to jump in and learn as you go. Every property you purchase becomes a learning experience. Each one becomes easier as you become smarter and more experienced. 

    It sounds like you need to pull the trigger, because finding the perfect deal in the perfect neighborhood is like chasing unicorns.

    Good luck!!

    2Reply
  • Tiffany U.
    OP
    Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
    8y
    @Joe Splitrock Thanks, I'm going to drive the neighborhood and view property tomorrow. I used the bigger pockets 4 square worksheet to analyze the property for myself last night (not my husband's excel sheet). From that I can see that the CoC ROI is slightly over 6% not great but the average of the stockmarket. I may not purchase this property but I will know for sure after I drive the neighborhood and view property tomorrow. Thanks everyone for your insight and help.
    0Reply
  • Jack B.
    Rental Property Investor · Seattle, WA · Member since 2014 · 1k+ posts · 1k+ votes
    8y

    As a newbie I think it's a questionable time for you to get into the market, especially with a questionable rental. Don't buy questionable houses especially with no experience.

    0Reply
  • Account Closed
    Rental Property Investor · Belgium, WI · Member since 2015 · 53 posts · 54 votes
    8y

    take this with a grain of salt because I have one property

    First are you comfortable with the risk? Are you willing to be more hands on with managing your investment or do you have a Rockstar management company lined up? 

    Real estate itself can be good investment, the numbers have to work, but the other half of what drives returns I think is in how you manage. If there is demand for rentals in the area, can you place in good tenants? Can you cut expenses? 

    There are people who own in lower class neighboorhoods that do well but they're very hands on and I assume budget for extra repairs and lost rent. 

    You really have to know what you want, and can afford to risk. The rest you learn as it comes, No matter how much you read, this I know from experience haha

    1Reply
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