Pinch Me - Numbers Always Seem Too Good

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Pinch Me - Numbers Always Seem Too Good

Andrew White
Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes

Howdy folks,

My wife and I are looking to invest a significant amount of cash in to out of state rental properties with a target of $115k/year in passive income. I got Mashvisor and love the analytics that it offers, as we're trying to hone in on an area to invest in. That being said, I'm looking alot at the St. Louis area, Texas in general(lots of family there), Memphis and Chattanooga and I feel like I'm missing something when I'm doing the analysis. I feel like I'm quite regularly finding on-market deals that look like they'd provide 15-25% CoC, especially in MO and TN.

Outside of hard numbers, what are the other key parts to deal analysis? I'm out of state, so I know that I need to build a team once I've landed on a region and am assuming a good realtor would help steer me away from issues with homes, so maybe that's the part I've yet to experience, ie; 10 homes have great numbers but 8 of them turn out to be duds or disasters once a realtor does a walk through?

Should I plan to make a trip to each of these cities to get a feel for the layouts and neighborhoods?

I guess I'm looking for some advice on pitfalls, because right now it looks, on paper, like I could be printing money in the near future (just kidding...kind of!)  Am I likely doing something wrong, or do I just need to take the next step and start engaging some boots on the ground?

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Lindsay Lekkalapudi
Chattanooga, TN · Member since 2020 · 4 posts · 8 votes
5y

Hey Andrew, 

I can’t speak to the other markets but I live and invest in and around Chattanooga, TN. You’re not talking specifics In the post above but one thing I would point out with Chattanooga is that many homes inside the city limits are beginning to sell at or above listed price within 1-14 days. Several of the homes we have bid on in the last 30 days have had all cash offers in 12 hours or less. This is likely the case with many markets right now, given the strange economic circumstances we all find ourselves in, but I find this detail is worth mentioning because when you’re running your numbers I would be sure to start at or above list price. Hope this helps a little and if you do choose Chattanooga I would love to be a part of your boots on the ground team. I know the area well as I’ve grown up here and it’s an exciting place to invest! 

Best, 

Lindsay 

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  • Lindsay Lekkalapudi
    Chattanooga, TN · Member since 2020 · 4 posts · 8 votes
    5y

    Hey Andrew, 

    I can’t speak to the other markets but I live and invest in and around Chattanooga, TN. You’re not talking specifics In the post above but one thing I would point out with Chattanooga is that many homes inside the city limits are beginning to sell at or above listed price within 1-14 days. Several of the homes we have bid on in the last 30 days have had all cash offers in 12 hours or less. This is likely the case with many markets right now, given the strange economic circumstances we all find ourselves in, but I find this detail is worth mentioning because when you’re running your numbers I would be sure to start at or above list price. Hope this helps a little and if you do choose Chattanooga I would love to be a part of your boots on the ground team. I know the area well as I’ve grown up here and it’s an exciting place to invest! 

    Best, 

    Lindsay 

    4Reply
  • Bruce Lynn
    Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes
    5y

    I was so sad the last time I went to STL....much of the city seemed to be dying to me.  Lots of vacant homes and lots and seemed like 1/2 of downtown was empty.  Lots of cool buildings, and some people trying to revitalize, but I think it is hard with so much vacant space.   If there is limited commercial tax base that also makes it hard for the city leaders to do all the needed things.  Now that is all based on 1 visit for 3-4 days.  It's a big city and I just saw a portion.

    I hear Chattanooga on the other hand is on fire...in a good way.  Last time I was there was way too long ago....but I hear good things about TN....Nashville and Chattanooga and other cities.

    DFW area is on fire too.....crazy how many companies are coming here...and many builders are so backlogged it's a year or more before you can get a house if you contract today...some aren't even contracting now...because they are so backlogged.  That's national builders.

    If you can get a grip on the future of the area I think that is helpful.  Also age of home, type of home, quality of schools, where companies are moving....local Dallas billionaire Ross Perot said if you want to make a billion in real estate, buy in the path of progress.  It has worked for their family.

    0Reply
  • Andrew Kougl
    Chula Vista, CA · Member since 2017 · 195 posts · 104 votes
    5y

    Check the crime map for the area. You might be looking at really bad parts of town if you are seeing those types of deals all over the place. A lot of things have been picked clean and stuff coming on the market, if a semi-deal, goes so fast. If something is sitting for any length of time there is usually something going on you can't see in the public listing.

    1Reply
  • Jeffrey Holst
    Investor · Chattanooga, TN · Member since 2016 · 676 posts · 543 votes
    5y

    @Andrew White Chattanooga is a great market that being said regardless if where you end up you should spend some time getting to know other investors. I suspect it would be hard to get those kinds of cash on cash returns in reality.

    Without seeing your numbers it's impossible to know what might be missing from your calculations. I think possibly turn costs, vacancy, capex etc But the great part about getting to know some local investors is that when you have a deal you can talk to them about it and see what kind of returns you might actually expect.

    In my opinion if you're really looking to spend some serious money building a real estate business you should travel to the area that you're looking in and pick the one you're most comfortable with. You should also start by buying one property and see what the number is really look like once you have it for a short period of time.

    And I agree with the other people it'll be difficult to buy anything in Chattanooga or probably in most of the hotter markets at or below ask.

    If you do get to Chattanooga feel free to look me up

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  • Andrew White
    OP
    Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes
    5y

    @Lindsay Lekkalapudi, thanks for the input.  I kind of figured that's something that doesn't necessarily come through on a computer screen when just looking at listing data! I'll definitely reach out if I land on Chattanooga as my market!

    Thanks,

    Andrew White

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  • Andrew White
    OP
    Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes
    5y

    @Bruce Lynn, To clarify, I've been looking at Madison County, IL, particularly near Wood River, just across the river from STL. Two friends of mine have a few houses there and have had very good experiences, particularly once they got the right property management team together. That being said, they're primarily solid cash flowing houses and don't really seem to be seeing any sort of appreciation, but cost of entry is pretty low so it's working for them. They've bought a number of $30-50k homes there that have required less than $5k of initial Capex and are renting for $7-900 / month.

    I've included a link to an analysis that I did on one of the homes in the area.  I think I've made some reasonable allowances for expenses, including $5k for initial repairs (NOT looking to rehab/flip).

    https://www.biggerpockets.com/...

    I'll reach out to you once I spend some more time deep diving on the DFW area. Thanks again for the input.

    0Reply
  • Andrew White
    OP
    Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes
    5y

    @Andrew Kougl, Good points.  I'm definitely seeing the crime maps go red hot on most good deals IN St Louis, although outside of the city looks much better.

    0Reply
  • Andrew White
    OP
    Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes
    5y

    @Account Closed, Here is one that I looked at.  You can see my reply to Bruce Lynn above with a report showing the numbers I ran for it.

    308 E Acton Ave, Wood River, IL, 62095

    0Reply
  • Andrew White
    OP
    Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes
    5y

    @Jasmine H., Good to know.  Although we may have cash available to make those kinds of offers, our primary focus is cash flow and growth, so I'd rather use leverage and work up to 15-20 homes instead of going all in on 5!  I'll keep in touch if I land on Chattanooga.  Looks like there are alot of active BP folks there as the post turnout has been pretty strong!

    1Reply
  • Kelly RastatterPro Member
    Investor · Chattanooga, TN · Member since 2015 · 149 posts · 135 votes
    5y

    @Andrew White In Chattanooga, if you are in that price range of $30-50k for single-family with only $5k in repairs, you are in the roughest areas we have with high crime. Yes, you can get close to 2% rents but you are going to be dealing with a rough tenant pool. You need to determine if that's the playground you want to play in and make sure you have a good property management company willing to manage those areas for you since you are out of state.

    3Reply
  • Andrew White
    OP
    Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes
    5y

    @Kelly Rastatter Fair enough.  I was looking at somewhat more expensive homes in the Chattanooga area ($70-100k), but I have been assuming that the lower price tags come with tenant headaches.  The long-distance strategy definitely doesn't make sense if I can't get a rock-solid property management team.  It's tough to really understand how much trouble that is when I've yet to purchase any rentals.  Based on everybody's feedback, I am definitely trying to put more weight on that "burden" so I don't get blinded by the numbers and miss something more qualitative.

    0Reply
  • Joe Edwards
    Investor · Northern New Jersey · Member since 2020 · 94 posts · 96 votes
    5y

    @Andrew White

    Is this area in a flood zone? I see the river is not that far away

    0Reply
  • Andrew White
    OP
    Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes
    5y

    @Account Closed These are all great insights.  I can't say that I want to have a portfolio that is nothing but these homes, but the input from my friends did make it sound like they've had a rather good experience in this particular area.  I'm obviously trying to do my own research to make up my own mind.  They've got alot of eggs in this particular basket and I don't feel like that's my long term goal, but also don't want to discount the area; 75% of the population there is renters so SOMEBODY has to own them, right?  I am certainly after a pretty good level of passivity to the income, so I'll be wary of the strings that come attached to these sorts of things.

    @Joe Edwards, It is not in a flood zone.

    0Reply
  • Alexandre Marques dos Santos
    Rental Property Investor · Member since 2020 · 215 posts · 137 votes
    5y

    @Andrew White

    Things to considere:

    1). I know you are looking to leverage. Fair. You can grab a great return. But in houses of 50k, the cost of a loan ( closing cost) would kill you. So might be better to go to a commercial loan, doing it in a portfolio level.

    2) A 50 k house will bring you tons of headache. An air conditioner will eat 3 months of your rent. Roof maybe 1 year... and dont expect a class c/d to take good care of your house. But expect a fair amount of complains if something breaks...

    3). Rotation of families could be another factor. Class c/d will have some kind of bad credit history. Having said that, you will have delinquency and higher than usual rotation. Just think about it

    4) to avoid interaction, you will have to hire a PM. Reserve 10% of the rental for it.

    5) insurance might cost more than usual, as the property value is very low. Also someone mentioned flood zone. If thats the case, flood insurance might be a must, and its expensive. Not mentioning if flood comes, you might get in trouble with tenants...

    Good luck

    1Reply
  • Andrew White
    OP
    Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes
    5y

    @Alexandre Marques dos Santos, Thanks.  My plan was to utilize local banks, although I hadn't considered commercial loans.  I guess I thought I'd need to have first gotten a few homes under my belt.  I'll keep this in mind.

    I also get the multiple comments about low cost = high headaches from both the tenant and the quality of the home.  I do have 10% baked in to my numbers to cover PM.  Also, the particular home that came up is NOT in a flood zone, but I have been remembering to check for that.

    0Reply
  • Jessica Lombardo
    Property Manager · Chattanooga, TN · Member since 2019 · 23 posts · 12 votes
    5y

    @Andrew White I have some interesting market data on a few different popular investment areas. This information helped me choose Chattanooga as an area to start investing in. I put it together about a year ago so some of it may have changed by now but if you are interested I can send it to you. 

    0Reply
  • Richard Worcester
    Investor · Tucson, AZ · Member since 2015 · 5 posts · 0 votes
    5y

    I HIGHLY recommend David Greene's book on Investing in Out of State Properties. It is the best book on the subject out there. He breaks down all the needed actions into easy to follow steps. Every investor should read this book! 

    0Reply
  • Andrew White
    OP
    Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes
    5y

    @Jessica Lombardo I’d love to get a look at that data. I perform big data analysis for a living right now and have been working on building myself a nice powerbi dashboard fed by the Bigger Pockets dataset downloads to try and hone in on a market. I’ll take all of the info I can get!

    0Reply
  • Andrew White
    OP
    Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes
    5y

    @Richard Worcester, I just ordered it, thanks!

    0Reply
  • Jessica Lombardo
    Property Manager · Chattanooga, TN · Member since 2019 · 23 posts · 12 votes
    5y

    @Andrew White then your information is probably way more detailed than mine lol. I basically just created a spreadsheet with some growth data from some of the more popular investment cities and a few smaller ones that I had contacts in. So it looked at job, income, and population growth. And then basically ranked them and came up with which markets looked best according to each of those and the ratio of average rental price to average sales price. To come up with a basic way to focus on markets. Chattanooga wasn't at the top of the list I think it was like 4th or 5th out of the ones I looked at but when I looked at each market more in depth (analyzing actual properties) I felt like Chattanooga was a really good option because like you mentioned the numbers really make a lot of sense. 

    I purchased a house out here for 90k and am working on some renovations for it right now to hopefully turn it into a BRRR deal. I think I should be able to get an ARV of about 140-150 depending on what the market keeps doing and then rent it for 1100-1200.

    There are definitely a lot of reasons to invest in Chattanooga, although I am sure that is true for a lot of markets. Having moved here recently, and starting to work as a home inspector, I have seen how many people are moving to this area from all over and while that makes the market competitive to purchase in it also provides a great opportunity to get involved in a growing and improving community before everyone else does. 

    0Reply
  • Jennifer Donley
    Rental Property Investor · Saint Louis, MO · Member since 2018 · 229 posts · 279 votes
    5y

    @Andrew White, I'm a St. Louis investor and have a portfolio of SFH in B and C neighborhoods in north St. Louis County. All of my tenants are on Section 8, a program I love. I get higher rents, I am owed $0 in rent and my tenants stay longer. You can get great tenants in this segment but you have to screen meticulously. Section 8 can be more management intensive if you don't know what you're doing.

    I don't know much about the Illinois side but in general, what everyone has said here is correct.  You can buy $30K to $50K properties throughout the St. Louis area in C- and D neighborhoods all day long though.  I find that it's harder to keep tenants in lower rated school districts so I have transitioned to better districts.

    From what I hear about Illinois, a couple things to be aware of - higher property taxes than Missouri and more intensive rental occupancy inspections.

    Good luck!

    0Reply
  • Andrew White
    OP
    Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes
    5y

    @Jennifer Donley, thanks for the great perspective.  The cheap entry price and high-percentage of population renting make it attractive, especially for starting out, although the lack of growth in the region makes me worry from a long-term perspective.  Good to know about the property tax differences as I hadn't drilled in to that yet.

    0Reply
  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Andrew White

    Your biggest mistake would be investing a large amount of money with little to no experience and the worst thing you can do with $X is slowly (or quickly) turn it into less than $X. Buying rental property out of state is not a passive endeavor, especially if buying in volume.

    First, make sure you are taking a strategic approach to your finances. I've met people who had set aside their inheritance for investing (because it was the "smart" thing to do) but weren't maximizing company match opportunities on 401k's because they needed their paycheck for essential spending. That's an instant 100% ROI they were leaving on the table for no reason other than ignorance.

    Second, diversify. The key to wealth building is diversification and time in the market.

    What you do put into real estate, I would place by exploring deals in all of the market areas you are interested in and eventually you will find yourself drawn to one area over the others. From there, I would invest slowly. You want to find out you aren't good at investing yet on your first house, not your fifth.

    Buy a deal you like and sit on it for a year or so. If it all turns out like you thought it would, then you can start to make more and more frequent/aggressive purchases. This will allow you to test your team in the most controlled manner possible. You want to find out your property manager can't return a call because you haven't heard back on a cost for HVAC service not when you need confirmation a gut renovation is progressing as claimed by the contractor.

    10-25% Cash on Cash is probably fine for most long term rentals, but you mentioned mashvisor which I though was geared towards STR's? If you are looking at STR's I would think 10-25% is too low for the extra work. Additionally, all the successful STR investor's I'm aware of self manage.

    I think visiting is a must. We made personal inspections the first couple properties we bought and then that has grown to a few trips a year usually because there's something we want to see for ourselves.

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  • Andrew White
    OP
    Rental Property Investor · San Antonio, TX · Member since 2020 · 26 posts · 11 votes
    5y

    @Todd Rasmussen, thanks for all of the advice. Our personal finances are in fantastic form as we are debt free except for our home, are putting away 15% for retirement between our 401k, IRA's and other investment accounts, and are still putting a good chunk in to savings every month. Although I'm excited and WANT to move quickly, I do still need to learn the ropes here, so I don't foresee throwing all of our money at real estate right away. My wife is also a more conservative person than me in these situations, so there is a strong balancing force within the relationship! Good advice on getting #1 under our belts and just sitting tight for a bit.

    As far as Mashvisor goes, the tool provides analysis of both STR and LTR, although you definitely have to check their numbers on estimated LTR rent rates. But, most of the properties I've drilled in to, once rent-corrected, calculate returns in-line with what I get from the BP calculators. It's been quite convenient.

    Good note on the trips.  The internet only provides so much!

    1Reply
  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Andrew White

    You can disregard 80% of my cautionary statements previously, lol. Just treat REI like everything else you've done and you'll be okay. Trust but verify everything. Glad to hear you have an accelerator and brakes. That situation has worked out well for my wife and I as well.

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