Don't Buy $30,000 pigs in Ohio (or Mid-West)
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
Don't Buy $30,000 pigs in Ohio (or Mid-West)
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Some people call them dogs (aren't dogs man's best friend?), but I prefer Alligators, which I learn from Careleton Sheets (no flames please) because they can eat you alive.
When I started, I had more time than money, and these C/D properties were money makers, albeit more from a PM view. Since I was PM, I was making money hand over fist. Tenants were high maintenance and often late, and turnover was high. Some caused problems, and sometimes you need to call the sheriff. But at the end of the day, these properties made money because I stayed on top of it.
I've since pulled back on these (still have one 4-plex and 2 duplexes left I'm trying to exchange out) and "graduated" to SFR which I'm finding to be lower turnover, higher quality, thinner margin, but requires very little PM. This shift in strategy helps me scale up units faster without having to scale up PM capabilities.
In summary, if you have the time to be hands on, risky properties can make a lot of money if you put in the time. One common thread across the best investments I've made is that the stocks, homes, fill-in-the-blank investments that have done the best for me were the ones that nobody wanted to buy. Bank stocks I bought in 2008 are up 10x after 5-6 years. Homes are worth 1.5-2x what I paid, and I collected rent/dividends in the interim. This formula of buying what's out of fashion coupled with fundamental analysis and finally taking a leap of faith is what I follow.
189 Replies
@Ben Leybovich very interesting perspective from a property manager in the trenches. I've said it before and I'll say it again ... the only one making money on this asset class is the property manager. And believe me, those the hardest fees he will make. If your considering taking this plunge just ask yourself, why do more than half the PMs out there choose NOT to manage this asset class?
I must admit that the lure is so strong. The numbers look so good on paper. Wow $30k buy in and $700 rents! Over 10% cap rate! Better than anything I can find in my market. Buyer beware. Listen to Leybovich and the guys that have already played and lost that battle.
While that may be the rule there has to be exceptions.
Take the scenario that a house is 30-40K has brand new roof/windows/siding and furnace along with updated electric in a class b area for the city its in. This has to be looked at differently than a 30K junker that needs a ton of work and has deferred maintenance does it not?
In my market most duplexes are 30-60K and its in a lower income city with no 'ghetto' areas. Just low paying manufacturing and service jobs. Rents are in the low $500's pr door for a 2/2 duplex.
If you are buying and most of the work is already done for you I dont see where the huge loss comes into play.
Please educate me if I am wrong.
- 11yChris ClothierBusiness MemberRental Property Investor · memphis, TN · Member since 2009 · 2k+ posts · 3k+ votes
@Jeff G. who has been investing for a while and in many different asset classes, you understand that he is not just throwing darts to see which stick on the mark with his comments. I too have invested in that low price point and I like Ben am speaking form experience. We as investors have this incredible ability to convince ourselves that we can be different. That we are the one investor who can operate differently and make money. Ben is simply warning you from his experience to stick to better investments. What paper tells us about returns is usually vastly different than what the streets tells us about returns.
If you want to invest in these low price point, depressed areas with tired housing getting facelifts without the underlying community getting a facelift, then you will face stiff odds for finding success. It can be done. I think most hand-on active landlords will tell you that they are the ones who make these houses work and the activities they have to perform and the lengths they have to go to make these work is above and beyond what most want to do. But it can be done, just not the way most investors think.
Originally posted by @Jeff G.:
While that may be the rule there has to be exceptions.
Take the scenario that a house is 30-40K has brand new roof/windows/siding and furnace along with updated electric in a class b area for the city its in. This has to be looked at differently than a 30K junker that needs a ton of work and has deferred maintenance does it not?
In my market most duplexes are 30-60K and its in a lower income city with no 'ghetto' areas. Just low paying manufacturing and service jobs. Rents are in the low $500's pr door for a 2/2 duplex.
If you are buying and most of the work is already done for you I dont see where the huge loss comes into play.
Please educate me if I am wrong.
Scenario 1:
So someone put 50K into the house to get it in decent condition? That doesn't mean it is worth more than 40K. What is the exit strategy? If you can't get creditworthy rental tenants, the possible cash flow doesn't matter. If you charge $500/month, but only collect $200/month other costs will eat up any profits. In a neighborhood like that you are unlikely to attract owner occupants. Also in those properties it is a matter of how long the property will stay in good condition.
Your Market:
At 50K/60K you may be looking at cheap, but legit investment property. 1000/rent on 60K property is about 1.6% ratio, which is good but reasonable. Also your acquisition cost isn't going to be your total cost. It could well be that the duplexes at the higher end of that range need some work and could be brought up to the level of a better neighborhood. However if it is on a block full of boarded up houses and foreclosures, it is best to pass on it, even if the property itself looks good.
Im closing on a deal:
Purchase Price 38K (30K mortgage)
Fully Rented with rents of 995/month (total) long term tenants one 6 years the other 2 both are staying. I think I can edge these up at lease renew in may by $25-35/unit
roof, separate electric, windows and furnace are new
taxes 1400
Location: Sheboygan WI (north side, which is most desirable)
I show a cap rate of 19.6%
CCR or 70%
Positive cash flow of $5600/year
I figured 10% maintenance, 5% vacancy and 5% reserve in my numbers.
I'm not trying to challenge a seasoned investor. I'm trying to learn as a newbie if I am grossly missing something here.
- Vendor · Cincinnati, OH · Member since 2014 · 144 posts · 58 votes11y
I can't get the @Ben Leybovich key to work.
What would your advise be to someone like me? I've been working in buy and hold properties for awhile as a contractor. I've seen how bad things can go and the stuff tenants in these areas pull. I know how to do pretty much anything to fix a house and have a bunch of connections to get stuff done cheap if I can't or don't want to do it.
Do you think I could make these class D properties work? My girlfriend has a duplex in elmwood. Its a nightmare she'll never be able to make any money from that house. I can't stand that neighborhood. I don't know if your familiar with Cincinnati neighborhoods but I'd be looking more in west wood and price hill. I'm guessing that it will be one and the same and I should just wait til I can afford to buy in a better neighborhood. I just started really advertising after working for myself for 5 years. So hopefully its not too far away. Like you said though these properties are just so tempting especially for someone like me that can fix anything that goes wrong myself. Although I realize its going to be a lot of work and I probably don't need that. Better off putting my efforts into my business. Some people call them dogs (aren't dogs man's best friend?), but I prefer Alligators, which I learn from Careleton Sheets (no flames please) because they can eat you alive.
When I started, I had more time than money, and these C/D properties were money makers, albeit more from a PM view. Since I was PM, I was making money hand over fist. Tenants were high maintenance and often late, and turnover was high. Some caused problems, and sometimes you need to call the sheriff. But at the end of the day, these properties made money because I stayed on top of it.
I've since pulled back on these (still have one 4-plex and 2 duplexes left I'm trying to exchange out) and "graduated" to SFR which I'm finding to be lower turnover, higher quality, thinner margin, but requires very little PM. This shift in strategy helps me scale up units faster without having to scale up PM capabilities.
In summary, if you have the time to be hands on, risky properties can make a lot of money if you put in the time. One common thread across the best investments I've made is that the stocks, homes, fill-in-the-blank investments that have done the best for me were the ones that nobody wanted to buy. Bank stocks I bought in 2008 are up 10x after 5-6 years. Homes are worth 1.5-2x what I paid, and I collected rent/dividends in the interim. This formula of buying what's out of fashion coupled with fundamental analysis and finally taking a leap of faith is what I follow.
Originally posted by @David H.:
One common thread across the best investments I've made is that the stocks, homes, fill-in-the-blank investments that have done the best for me were the ones that nobody wanted to buy.
+1 to this. Zig when others zag. It won't always work, but this is a principle that will absolutely serve investors well over the long term.
- Real Estate Investor · Niles, OH · Member since 2010 · 26 posts · 7 votes11y
Originally posted by @David H.:
When I started, I had more time than money, and these C/D properties were money makers, albeit more from a PM view. Since I was PM, I was making money hand over fist. Tenants were high maintenance and often late, and turnover was high. Some caused problems, and sometimes you need to call the sheriff. But at the end of the day, these properties made money because I stayed on top of it.
I agree with David and Ben. This is exactly what I do. I work a full time job and have kids. I do not want to put my families way of living in jeopardy. I can not afford to be in A/B neighbor hoods. I invest where others wont. I break even now! But in a few years, mortgages and loans will be paid off and I can then sell my C/D properties and finally get into the A/B. Right now I have time and youth on my side. When I am ready to slow down, I will have equity to get those higher end low maintenance properties. Then I will agree with Ben's outlook.
"I would rather start somewhere, than nowhere!"
- Investor/Accountant/Builder · Meno, OK · Member since 2014 · 1k+ posts · 918 votes11y
Cheap rentals rule.
- Investor/Realtor · Hoover, AL · Member since 2010 · 1k+ posts · 459 votes11y
Affordable homes needed in every market! For Rent...Find what works for you and work it!!..Keep it moving!!
- Bentonville, AR · Member since 2015 · 1 post · 0 votes11y
Originally posted by @Arlan Potter:
Cheap rentals rule.
Do you mind elaborating? Are properties in more rural areas and/or Oklahoma different? I'm a newbie and these are the properties I'm interested in( in OK, AR, or MO), but this post is alarming.
Originally posted by @Allan Landfried
"I would rather start somewhere, than nowhere!"
That's pretty much the idea. I think I just had to start somewhere, and it had to be somewhere "small" and profitable. I'd love to buy that pretty granite skyscraper at 6% cap rate in downtown, but I don't think anyone would finance that for me.
Starting out, you generally have more time than money and will find yourself doing the ***** work. I don't think it's different in any business or industry. You gotta pay your dues, reinvest in yourself, grow, and graduate. Get promoted at your job, or, in this context, reposition your assets for higher quality and scalability.
There's no way I could manage my old portfolio today without outsourcing, if it's even possible) if I still had all of the subprime tenants. But I wouldn't be where I am without cutting my teeth on something.
One last thought on subprime tenants - they're always in a recession. Whether times are good or bad, they will be living paycheck to paycheck, so there's a component of stability and predictability in your cash flow. Assets are priced lower in the recessions (tail end right now), so take this opportunity while you still have it to get started building your retirement package one crappy house at a time.
Originally posted by @Jeff G.:
Im closing on a deal:
Purchase Price 38K (30K mortgage)
Fully Rented with rents of 995/month (total) long term tenants one 6 years the other 2 both are staying. I think I can edge these up at lease renew in may by $25-35/unit
roof, separate electric, windows and furnace are new
taxes 1400
Location: Sheboygan WI (north side, which is most desirable)
I show a cap rate of 19.6%
CCR or 70%
Positive cash flow of $5600/year
I figured 10% maintenance, 5% vacancy and 5% reserve in my numbers.
I'm not trying to challenge a seasoned investor. I'm trying to learn as a newbie if I am grossly missing something here.
How did you find this deal? It does look very promising. What do the comps look like? What is the typical DOM of houses in that area? What does the neighborhood look like in general?
- Investor/Accountant/Builder · Meno, OK · Member since 2014 · 1k+ posts · 918 votes11y
Buy cheap houses in Bentonville, or Garfield, or Springdale. Close to you. Cheaper the better.
You live in a great area.
How did you find this deal? It does look very promising. What do the comps look like? What is the typical DOM of houses in that area? What does the neighborhood look like in general?
I was networking with a realtor hoping to start investing in June of this year when she said she had a widower who's husband owns 20 properties and is dumping them after his recent death 2 months ago. Assessed value is 54k, neighbor hood is B for the town, three blocks down the road are 500K houses. The neighborhood is one that you have very nice homes mixed with duplexes and rentals.The city is starting to run a tight ship with making land owners keep their properties looking nice.
House was built in 1884. The owner took very good care of his properties, this was his nest egg. I looked at several of his single family houses that all looked good but I am only in the position to purchase one right now.
Originally posted by @Jeff G.:
How did you find this deal? It does look very promising. What do the comps look like? What is the typical DOM of houses in that area? What does the neighborhood look like in general?
I was networking with a realtor hoping to start investing in June of this year when she said she had a widower who's husband owns 20 properties and is dumping them after his recent death 2 months ago. Assessed value is 54k, neighbor hood is B for the town, three blocks down the road are 500K houses. The neighborhood is one that you have very nice homes mixed with duplexes and rentals.The city is starting to run a tight ship with making land owners keep their properties looking nice.
House was built in 1884. The owner took very good care of his properties, this was his nest egg. I looked at several of his single family houses that all looked good but I am only in the position to purchase one right now.
I think buying a "50K house" for 38K is different than buying a "38K house" for 26K even if the ratio is similar. Also you bought from an old house from a motivated seller, so there are good reasons that you got a good price - not it was sold cheap because no one wants to buy it.
Is your analysis factoring in property management? Given the age I would factor in more for maintenance/repairs. It still looks like it could be a great deal.
Is your analysis factoring in property management? Given the age I would factor in more for maintenance/repairs. It still looks like it could be a great deal.
I factor 10% repair 5% vacancy and 5% reserve. It would still cash flow with a property manager however my business plan does not incorporate property management until I have a bunch more units. I do however factor it into my calculations as I always want to be conservative in cash flow projections.
- Attorney · Shawnee, OK · Member since 2013 · 350 posts · 230 votes11y
Don't be scared by this post. Read everything @David H. wrote. He nailed it perfectly. All of my properties would be considered D or C by many here. They are cash cows. I work my tail off and took it one house at a time but I have built up to 14 houses in 8 years and have invested about $60,000 of my own money. The rest of the gain was paid by my tenants. There will be days you want to quit. You will make huge mistakes. It takes sacrifice. It is work. Blah blah blah... I think you get the idea.
There are many of us out here who have done it and are doing it. I would never have been able to start with Class A properties. If I had, one mistake could have bankrupted me. My last house was bought at an estate auction for $3500 and I put $5000 into it. (all new interior, windows, doors, updated plumbing and electrical.) It is rented for $400 per month. I can screw up a lot and still come out ahead. Plus I am local. I know these houses and these people. The underlying message is you have to have time, money or both. There is no short cut. I make great returns but do more work than someone with a better house. That is a trade-off I am willing to make for now. I tell my son- when I hit 100 houses, I am turning it over to him and my wife and I will be on the beach. It will be his job to get us to 1000. He's 11 now. I am right on track.
- Investor · Boyd, TX · Member since 2014 · 688 posts · 467 votes11y
Originally posted by @Heather M.:
Originally posted by @Arlan Potter:
Cheap rentals rule.
Do you mind elaborating? Are properties in more rural areas and/or Oklahoma different? I'm a newbie and these are the properties I'm interested in( in OK, AR, or MO), but this post is alarming.
In rural areas, price of property isn't tied as much to the neighborhood as it is to the particular property. This means if you get a good deal and can improve the property you can improve the rents without running into the issues people talk about war zone neighborhoods in cities. It is not uncommon for a $30k-$40k property right next to a $300k property with several others in the $80k-$200k range just down the road.
- 11yRhett TullisBusiness MemberProperty Manager · Oklahoma City, OK · Member since 2013 · 1k+ posts · 617 votes
@Paul Choate has it right on the low end properties here on oklahoma. I buy those all day long. I understand some folks dont like them but i personally love to work with them and enjoy giving lower income families a quality home to live in and still turn a profit.
- Investor · Baltimore, MD · Member since 2014 · 1k+ posts · 688 votes11yI do very well with low end properties in baltimore
- Flipper/Rehabber · Greeley, CO · Member since 2013 · 2k+ posts · 1k+ votes11y
Some people make a lot of money on $30,000 houses and some people lose a lot of money on them. I wish I would have bought about 20 $30,000 houses in my area three years ago because they would be worth $100,000 now!
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