Buying my first rental property.

11 Replies

Hello All: I have been working successfully in residential real estate and am ready to buy my first rental property. I am definitely starting small so I am looking in to out of state markets. My question is about foreclosures. I must say, there are so few of them in my market that I am ignorant when it comes to the pros and cons. I was thinking I should start by buying something turn key for my first, but wondered if anyone thought there was an advantage to buying a foreclosure. Are most in pretty bad shape? Does it have to be an all cash purchase? Thanks in advance for your insight.  So far I am considering the Pittsburgh, PA and Cleveland, OH markets.

Foreclosures are not a beginner's game. You typically don't have the opportunity to inspect them prior to purchase, the occupants may not leave, the occupants may trash the place and steal doors, appliances, and cabinets on their way out, or you may discover it's so damaged it needs to be torn down. You also can't finance them. When you win the bid, you have to pay them in full. The the owner has a redemption period and may still get it back. 

I can't speak for foreclosures as I've always gone the turnkey route for out-of-state properties. Mostly for the risk mitigation, and I've never wanted to do that much work on my properties. With the turnkeys too comes a lot of built-in expertise--neighborhood selection, property selection, rehab, etc. 

The foreclosures can come with a lot of risk, mostly because there's no standardization with them so you' have to investigate every single property very thoroughly to know exactly what you're getting. 

How much work are you wanting or willing to put into a property? I think that's the first question regarding turnkey vs. foreclosure.

@Susan Little its tough to find 1% Rent-to-Value Ratio turnkeys that are not garbage. You may have to find a little distressed properties and bRRRR

@susan 

@Susan Little I agree about staying away from foreclosures as they can hide some nasty surprises from costly unexpected repairs to undisclosed liens.  Better get a property that you can get inspected and have time to do proper title search.  Also foreclosures offer less desirable title (some must be seasoned to resell).  Remember foreclosures are not always the cheapest option

@Susan Little I’ve bought pretty much all foreclosures in the Cleveland market and the comments above are all spot on.  There can be a lot of locked up value in them, but very difficult for a new out of state investor to manage.....even for an experienced out of state investor for that matter.   One thing I’d add to the list is that utilities typically aren’t on which is risky + a major pain when you transfer title.  On one house, the water dept wouldnt turn the water back on because the previous owner had messed with the meter multiple times and was on their blacklist.  They acknowledged that I had a perfect pymt record on other properties but it still had to be cleared by their “investigations unit”.  2 weeks later they finally turned it on.

You might consider looking for properties that are just cosmetically inferior......e g lots of big flowery wallpaper, pink tiles in the bathroom, etc.  things that turn off the retail buyer and in turn get the price down but that either are easy to correct or can wait.  

Originally posted by @Susan Little :

Hello All: I have been working successfully in residential real estate and am ready to buy my first rental property. I am definitely starting small so I am looking in to out of state markets. My question is about foreclosures. I must say, there are so few of them in my market that I am ignorant when it comes to the pros and cons. I was thinking I should start by buying something turn key for my first, but wondered if anyone thought there was an advantage to buying a foreclosure. Are most in pretty bad shape? Does it have to be an all cash purchase? Thanks in advance for your insight.  So far I am considering the Pittsburgh, PA and Cleveland, OH markets.

 Foreclosures are going to be in far worse condition than turnkey products. The pro to this is this is where you typically create value. The con is renovating properties is a very tough business. There are many unknowns, its timely, expensive and things don't always go as planned. The construction industry is a very tough industry. It's also a pretty tough industry to break into. Contractors on sites like craigslist are a dime a dozen but good contractors are scarce and very hard to hire if your just getting into the business. 

Most important thing you need to know about contractors is the following. Everyone wants their contractors to provide them with 3 things. Fast Work, Cheap Work & High Quality Work.

  • Good contractors will give you 1 of the 3.
  • Great contractors will give you 2 of the 3.
  • No contractor will give you all 3.