San Antonio, TX · Member since 2019 · 40 posts · 14 votes
So, I went to see a local multifamily property yesterday. The numbers looked great, affordable enough for me to get into the game, everything seemed perfect...turns out it is run by a slumlord and needs way too much work. The tenants were actually super nice, humble people but you can tell the owner is taking advantage of them.
Anyways, I've turned my sights to out of state. For the same price range of the local duplex I visited yesterday, I've seen much nicer properties in the Midwest. The things is, I feel like I'm missing something because in 45-60 mins of quick research after work and just looking through Zillow and Realtor...I found a property in the Indianapolis area that is within my price range, tenanted on yearly leases, exceeds the 2% rule, and looks to be in good shape. The neighborhood is C class comprised of solid, blue collar people according to the BP community.
Am I missing something? Are deals really this good and easy to come across in the Midwest or is it almost certain that an inspection will reveal major problems? All I hear is "there are still good deals out there in this market, you just have to put in the work to find them" but this literally took almost no effort.
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
7y
Lots of things look good on paper, which is often misleading. You're definitely missing information.
What's more likely, that you do a 1 hour search of a property on Zillow in an area you know nothing about and find a killer deal while ALL the other investors in the area are sleeping.
or
you found a deal that no other investors want at that price because they know something about that property or neighborhood that you don't.
The internet has made deal analysis priority number 1 in property purchasing but that does them a disservice when they forget the first and most important part of real estate: LOCATION.
I guarantee there are a ton of investors looking at deals no matter where you go. All the low hanging fruit in real estate is gone so if you're finding low hanging fruit, it's probably poisoned ;) ;)
Also, finding the deal is just one small step of OOS investing. Who is going to manage the asset? do the rehab? who are your backups when you find the first people unreliable?
Buying profitable OOS rentals is easy, yes, but no where near as easy as you're thinking and if you're not regularly driven to drink by the frustration of competition then you're not trying to buy anything worth competing over.
Guy with Great Hair · Austin, TX · Member since 2013 · 2k+ posts · 4k+ votes
7y
Lots of things look good on paper, which is often misleading. You're definitely missing information.
What's more likely, that you do a 1 hour search of a property on Zillow in an area you know nothing about and find a killer deal while ALL the other investors in the area are sleeping.
or
you found a deal that no other investors want at that price because they know something about that property or neighborhood that you don't.
The internet has made deal analysis priority number 1 in property purchasing but that does them a disservice when they forget the first and most important part of real estate: LOCATION.
I guarantee there are a ton of investors looking at deals no matter where you go. All the low hanging fruit in real estate is gone so if you're finding low hanging fruit, it's probably poisoned ;) ;)
Also, finding the deal is just one small step of OOS investing. Who is going to manage the asset? do the rehab? who are your backups when you find the first people unreliable?
Buying profitable OOS rentals is easy, yes, but no where near as easy as you're thinking and if you're not regularly driven to drink by the frustration of competition then you're not trying to buy anything worth competing over.
San Antonio, TX · Member since 2019 · 40 posts · 14 votes
7y
@Alexander Felice As far as location goes, I did do some quick research on it. The BP community considers it a C Class neighborhood, ~$36k median income.
Agree with your general point though. Definitely came away feeling that if it was as good of a deal as it seems at first glance someone would've snatched it up by now. It's been on the market for over a month.
What would be the best way to dig deeper on the property? I was thinking of contacting a local property management company to see if they're willing to share information about the area.
Raleigh, NC · Member since 2017 · 347 posts · 94 votes
7y
things can be different just a block away. have you contacted a local pm company to see what they're take on it is? the should be more familiar with the area than you would be, and would know local rents. (it could be rented for over market, and the previous landlord just lucked out)
Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
7y
What’s the address? I’ll tell you if C class or F class. I will say multi family cash flows well here so could be true. I personally own several duplexes and more dense in some of the nicer areas and am a happy investor. However, F class cash flows on paper only typically. Unless you can scale.
Rental Property Investor · TN · Member since 2018 · 2k+ posts · 2k+ votes
7y
You might want to check the water, sewer, etc. costs. Sometimes its hard to keep people in units when the utility rates are high. Or maybe the building has issues? Or that particular building has bad ties to something, like a gang, or past happening?
Property Manager · Indianapolis, IN · Member since 2010 · 1k+ posts · 1k+ votes
7y
@Jose D.
I know that city is close to Indianapolis, but it’s not connected to or even a suburb of Indy. It is it’s own small town. So unlikely to be high crime and most people that live there also work there. Probably right on the C class. But pull local rent comps and not Indy rent comps. That’s apples and oranges.
San Mateo, CA · Member since 2015 · 55 posts · 19 votes
7y
I have already had the too good to be true issue occur in Indy. I bought a duplex that was already leased and cash flowing from a gentleman that claims to have 40 properties under his belt. "Why are you getting rid of this one?" I asked. He replied "I am aging, tired of fixing little things, and just need to have fewer in my portfolio to manage." So, I figured immediately that there's something wrong and I need to be very careful and wait for the inspection report. The inspection report came out fine. No mention of the feces in the basement, no mention of the nearly brown ceiling that the smoking heroin addict had in their unit, none of the roach infestation, nothing like that. Which is fine. Inspectors are looking for functionality not details that you will probably need for later. $5000 worth of little things to repair (turned out to be $3800). Anyhow, a month after the transfer, one tenant, let's call them "Smoky the bandit", refused to pay rent while the other tenant cannot pay on time. Supposedly, both tenants paid on time all of the time according the owner, but it couldn't be proven because the leasing and accounting documents had recently been destroyed in a pipe burst flood. I know. I know. Red Flags.... I'm learning. Anyhow Smoky has been evicted, leaving their bedbugs and other issues behind. After all is said and done, this property will still cashflow, but dealing with the minutia and the aftermath of this seller has been more of a pain than I would have liked.
TAKEAWAYS
- Never trust the too good to be true property. Assume it is getting offloaded due to some unforeseen issue. Mitigate that issue with due diligence. - NEVER NEVER NEVER SKIP A DUE DILIGENCE STEP! Assume any seller is not completely forthcoming and mitigate that with research. In my case it was verification that rent has always been paid and on time. - Assume that the contractors, sellers, etc. will try to take advantage of out of state investor money. Vet and plan accordingly.
THE BRIGHT SIDE
A silver lining could be that this tenant could have been a functional addict and continued to pay on time and the issues that were hidden could have stayed hidden and gotten worse over time.
Real Estate Consultant · Whitestown, IN · Member since 2014 · 547 posts · 933 votes
7y
@Jose D. Martinsville is a small City about halfway between Indianapolis and Bloomington. We are selective about managing properties that far out as a tough property would put a strain on our efficiency if we had to visit the property very often for maintenance, high vacancy, or other types of drama. The crime in Martinsville isn't terribly high in most areas as it is a more rural lifestyle than Indianapolis. The housing market is similar to the median in Indianapolis as far as rents and sales prices go.
I can provide some insight on OOS investing and purchasing tenanted units.
Several things to consider. You mentioned properties being run by slum lords... Understand that until the last 10-20 years, the majority of the prospective tenant demographic was pretty poor and had little means. Most people preferred purchasing homes and the banks were very easy to work with. This means that properties that have been rental properties for a while have not usually been kept up. Deferred maintenance and neglect are very common in a lot of markets when sourcing investment properties. This is actually a benefit to investors looking to BRRRR properties as the best deals need a moderate to major rehab anyway and can update the property in to the modern rental market. You do have to understand the risks to taking on large rehabs though. There's almost always something that doesn't go according to plan. Problems may include weather delays, vandalism, problems with contractors, unforeseen issues, and more. Always run the most conservative numbers that you can find reasonable to ensure that you have a cushion included in the project.
The majority of people do not sell their "cash cows," they unload their headaches. Often times a lot of these headaches can be remedied with renovations and good management, but it takes time and money to turn-around and stabilize a property. In dealing with multi's sometimes you are also dealing with an ongoing reputation problem from poor management and even a good renovation will not likely turn things around immediately. Always go in looking for the untold part of the story.
When deal with tenanted units... I recommend "not" paying a premium for tenanted units unless buying from a trusted turn-key provider. When I am working with clients looking at purchasing tenanted units, we always run the scenario of having to evict the tenants within the first few month's and renovate the unit. If option kills the deal, you need to reevaluate. Be sure to obtain the following information before closing.
Get copies of the leases for the tenants. This will ensure that you understand the actual rent rates, lease end dates, security deposits held, and terms and obligations for the tenants. The deal may not look the same if you find out that part of the lease commits you to pay utilities, responsible for lawn care, landscaping, and lawn maintenance, etc. I've seen situations where the marketing description claims that a tenant is paying $850/mo to find out they are only paying $750/mo.
Ask for copies of the rental ledger. This will show you the tenants payment history and also let you know if the tenant is current... while you can't go after back rents to a previous owner, purchasing a home with a resident who hasn't paid in several months is probably a bad sign. Why aren't they paying? Will they start paying again? Will you have to evict the tenants? Do you want to pay a premium for a tenant who always pays 3-4 weeks late and never catches their account up?
Last thing to leave you with is a surprise situation I had back in December with a client. He was purchasing a tenanted duplex. One side was going to move out and he owner was aware. While he was planning an extensive remodel, we made sure that the alternate scenario of a full vacancy and remodeling both units at the same time was still a viable option. Within an hour after closing... he received a call from the previous property manager as the police had kicked in the door, arrested the tenant, and seized a large amount of drugs from the home. The unfortunate part was that the family was still left to reside in the home during this legal situation. The remainder of the family had to be evicted because they no longer had the ability to pay the rent. It was a really sad situation for everybody. The point is, verify anything and plan for the worst as if you do this long enough, you will likely see it.
I speak with clients all the time about being risk aware and planning to mitigate various types of liability that come along with investment properties. I always recommend building a solid team in your target market. There are several quality providers and professionals in this market and probably almost any viable market that you may research. Having a good team will help you navigate a variety of potential complications and have systems and processes in place to avoid or mitigate them as much as possible. OOS investing is not only possible but also profitable. There are a lot of people who do it successfully, but they have built a network and relationships with a variety of local professionals to assist them.
Chicago, IL · Member since 2018 · 546 posts · 227 votes
7y
Definitely important to make sure you have a dedicated team in place if you decide to invest in the out of state du[plex that you've set your sights on. Additionally, there are some tools available to you where you can bring a certain level of automation to that rental management process (ie. automatically syndicating a single listing to 10+ major listing sites, thorough tenant screening with full background checks, digital lease creation, automated online rent collection, and maintenance tracking). If you're looking for a recommendation I'd be happy to share more information. @Jose D.
Hopefully this doesn't come off as politically incorrect but is there a zip code/neighborhood in Indy that is known for being Mexican? I know in general the Hispanic population is pretty low but I'm guessing most of them are concentrated in one area.
I'm Mexican myself, bilingual, my parents don't speak English and having been around this population my whole life...I've noticed that they may not reside in the nicest areas but non-English speaking Mexicans are super reliable tenants that don't want to stir things up. I recall Felipe Mejia on the BP Podcast #329 basically saying the same thing. Who knows maybe that opens up another neighborhood for me that most others steer clear from.
If you find that neighborhood, I would love to know as well. I hail from Miami and the Bay Area California and I have nothing but praise for our friends from the south.
Real Estate Consultant · Whitestown, IN · Member since 2014 · 547 posts · 933 votes
7y
@Jose D. and @Aladdin M. we see larger concentrations of Hispanic populations in the Eagledale/Lafayette Square areas (38th St and Moller area,) Hawthorne area (just South of Haughville on the West side,) and between Fountain Square and Christian park. If you google something like Mexican Grocery Stores, usually they are in areas with higher concentrations of Hispanic people.
One caveat... under the current Fair Housing and Discriminations laws, we have to screen everyone the same way. Because ITIN numbers are not to be used for credit or criminal history, we cannot place households where all residents are on ITIN numbers as we cannot get the data that we need. We also have issues with residents who have invalid ID's that come back as flagged when the SSN's are run. I've seen SSN's to babies, dead people, military people, etc. It can be a tough space to navigate around. I believe that this is a common issue for many property managers. I've actually sent letters to the President and our US Senators about the complications that "legal" immigrants and workers face under the current system and would love to see a system that allows more opportunities, but obviously, it's a hot button topic for anyone to have a real conversation instead of political grandstanding.
Hispanic tenants are usually good tenants for us and they usually reside in a home for a while because of some of the complications they face in finding housing. They can be "harder" on homes though as many will have more residents coming and going, work dirty jobs, and just have busy lifestyles.
Every different type of lifestyle and resident demographic presents its own idiosyncrasies, but we like the Hispanic residents that we have been able to place and would love to see immigration reform that would allow us to work with them even more.
I know what you mean with the documentation issues. I've known friends and acquaintances with "fake" SSNs and green cards. They have to live somewhere though, so it makes me wonder if the landlords that are providing housing for them are (illegally) turning a blind eye?
Anyways, that was a lot of great info. Thanks for taking the time.
Turn key provider · San Jose, CA · Member since 2010 · 4k+ posts · 3k+ votes
7y
@Jose D. there isn't a lot of low hanging fruit. Yes, there are good opportunities in part of the Midwest, however, it is highly unlikey to find anything with a 2% ratio that doesn't need a significant amount of work. I would be very cautious.