Knowing When to Walk Away or Take a Chance

Knowing When to Walk Away or Take a Chance

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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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)

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.
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.
If you have time get a contractor to bid on the issues the inspector found.
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.
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
Now close on it.

You got this... I believe in you.

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Nik Moushon
Architect · Wenatchee, WA · Member since 2018 · 843 posts · 907 votes
8y
I'm still pretty new to this as well so if my number are off I'm sorry. But...
If it cash flows 18k/yr that mean the current owner was only leaving $2,400 a year for expenses? Just your estimated water bill a year would wipe that out. Not including any taxes and everything else.

Either I still dont understand how to calculate things correctly or theres something wrong with those numbers you have (or have been given). I don't see how the owner is getting that cash flow.

Not saying this is a good or bad deal. Just you need to do some more digging on your numbers and dont rely on just what the owner has said. My hunch is I think you could make this work if you do your numbers and purchase price correctly.

You could work backwards and see what you need to offer to make it work. Thats another option.
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Bart H.
Dallas, TX · Member since 2016 · 1k+ posts · 745 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.
I am late to the party but I would recommend you look more closely to your numbers.
1) When you say the property is worth X, why do you think that is the value? did you get a real estate agent who said as much? Are there comps that lead you to that conclusion? Did you look around Zillow or some other third party source to get a decent idea of what a buyer might be looking for? Ie if I am a buyer what are my other choices in that market.
Once you have done that, ask yourself, is the neighborhood improving? getting worse? or staying about the same? My most profitable deal of all time was a property where we had trouble finding comps, I think I even had to bring extra money to the table because the appraiser couldn't find a decent comp. Net net, we bought it for 180K, we are sitting on a value of about 450K+/- 4 years later.
2) I would highly recommend as the only information you take from the current owner is what is the on signed leases actually says. Get a few comps from your real estate agent. See the property I talked about before. When we bought it the seller had most recently rented it out for $1,300. 3 years later we just leased it out for $2,800/month. We did so by turning a loft into a 4th bedroom, expanding out a master bathroom and marketing a large house near downtown at a cheap rent per room, ie each bedroom @$700/month (times 4), vs a SFH for $1,400.
Sometimes sellers will tell you a property will rent for $1,500/M, but your realtor will tell you that you will be lucky to get $1,000/m
3) If you are new to investing, and have no construction experience, I would look for houses with minimal repairs. Especially if you are not sitting on a ton of cash. Because rehab is super expensive, and will cost you twice as much and take twice as long as you expect to complete.
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Tiffany U.
OP
Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
8y
@Bart H. Great advice. I guess I'm so used to hearing stories here on BP with great ROI and cash flow but I'm not finding those deals in my area. I'm going to take the leap though and dive in. I've heard that your first deal is not the best as far as cash flow. We're looking at a few homes now in hope's of making an offer tomorrow.
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Allison Stewart
Rental Property Investor · Austin, TX · Member since 2018 · 76 posts · 46 votes
8y
Originally posted by @Tiffany U.:
@Bart H. Great advice. I guess I'm so used to hearing stories here on BP with great ROI and cash flow but I'm not finding those deals in my area. I'm going to take the leap though and dive in. I've heard that your first deal is not the best as far as cash flow. We're looking at a few homes now in hope's of making an offer tomorrow.
I don't necessarily agree that your first deal shouldn't cash flow the best. All your deals should cash flow how you want them to cash flow - for our first (and only, so far) deal, we wanted to maximize cash flow, so we did (by adding value to the property). If you are looking for cash flow, don't settle for a deal that has minimal (or worse, none). You don't want to sit on the sidelines forever, but you also don't want to just buy any property. Know what you want/need the numbers to say and then don't be afraid to buy when they say that.
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Tiffany U.
OP
Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
8y
@Allison Stewart Thanks Allison. I guess it's true what they say. You will look at hundreds of deals before finding one that works.
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Bart H.
Dallas, TX · Member since 2016 · 1k+ posts · 745 votes
8y
Originally posted by @Tiffany U.:
@Allison Stewart Thanks Allison. I guess it's true what they say. You will look at hundreds of deals before finding one that works.
Yes Tiffany, its getting really tough to find deals in DFW. We look at hundreds of properties before even considering an offer, and then probably one in ten we actually get under contract and close. 2=3 years ago we could find properties on a regular basis. Its just getting tough now, and I don't think ROI's will be as high as they have been over the least few years.
I would say in baseball terms, look for a single. Low maintenance, rent ready, decent return with a little bit of cash flow. Something to get you in the game, then look for greater returns in future years.

IMO its a needle in a haystack finding a decent return property, and its been 4 or 5 years since we found a big ROI property that didn't require a ton of work, and/or a little help with the neighborhood going up in value.
My biggest recommendation is find an up and coming neighborhood, picking a place where developers are just beginning to build. We like rowing neighborhoods close to downtown/or in Oak Cliff.
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Tiffany U.
OP
Rental Property Investor · Mc Kinney, TX · Member since 2016 · 45 posts · 22 votes
8y
@Bart H. The prices in our market currently, are outrageous. We have expanded our search area in hopes of increasing our chances but we don't want it to be too far away. Years ago I inherited a property 6 hours away and it was a nightmare managing the rehab. What's a typical ROI in this market that you accept?
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