New to REI. I want to purchase in a rural area for cash flow...

15 Replies

Hello, I'm new to BP and REI. I have been listening to podcasts and reading books and I believe I found a great investment opportunity. However, there are some things that I am concerned about and would appreciate some guidance.

Since the property is in a rural area, my plan is to buy the duplex with a cash offer with the 70% rule. I then plan to 'refinance' the property and take the equity and continue with the BRRRR plan. The property is selling for ~$50K and current renters are paying ~$500/month per unit.

I'm worried about several factors:

1. The population growth is on a negative trend. (Since this is a cash flow buy & hold property I'm worried that maintaining tenants in the long term could be an issue.) Should I stop here since the property is not at a growing market?

2. I'm not living there, I will have to use a property management company. I only see 2 property management companies in the area, but they don't have a website and 1 realtor site. Could someone help me with several guidelines on how to choose the proper PM?

Thank you in advance,

Steve K.

Steve. 

Is there a reason why you want to buy a property in a rural area? Is this because you can only afford to invest in this rural area?

@Steve Kim I would be careful buying in a rural area. Rents are likely to stay pretty low. If you buy at 70% of value and refinance at 80% of value your rent will have to cover the higher payment. In the rural towns I have looked at rents are pretty low and tend to stay that way. If the population is shrinking than vacancy rates can get pretty high. The one I have used to go vacant two and three months between tenants. I even would offer a free months rent at lease renewal time. Thankfully it turned around and doesn't do that anymore. It beat me to death for several years until the market bounced back. RR

@Antoine Martel You are correct. I was thinking rural because I can buy the property with full cash and am hoping to be able to get it at 70% because it's been on the market for a while and there's no contingencies.  The numbers made sense to me because, the property is rented for $1030 for both units and the expenses are basically non-existent. The mortgage and tax would be ~$125. I was thinking this property would be a great way to gain cash flow so that I can start to gather capital for the bigger purchases / quickly get another rural cash flowing property.

When I looked for quads in my area, they are going for around $400K - $600K and the cash flow were all showing negative numbers unless I would be able to get the property at ~%65 the list price. I don't have the capital to offer a full cash purchase so I can't leverage a no-contingent deal. The value adds are most of the properties that I was looking at didn't have individual unit water / electric meters, which I could install and save on expenses which would bring the NOI into the positives, but I don't know how much it would cost to get the properties sub-metered.

@Ralph R. Thanks for your insights. It does make me worried when thinking about long term vacancy, but since the property is such a low cost, the mortgage+tax would be ~$125-$135 I would be able to continue paying for it without any issues. You said that your property is now being rented long term. Knowing where you are now, would you stop yourself from purchasing that rural property?

@Steve Kim

I am not sure I understand the deal that you are looking at.

You plan to buy it for cash, and it is 100% occupied (both units) if you are assuming no expenses (a bad assumption) then it seems like it is in pretty good shape. Yet, the plan is to pull out an equity loan and fix it up? So kick the current tenants out and try to get two more paying a higher rate?

Again I know nothing about the market, but I just don't know that the fundamentals of what you are describing (or at least my interpretation) make sense.

I have property under contract in rural area. 3 lots and one 4 acre home "AS IS" with water well, electrical box and septic already on property.

@Jarrod Kohl

Sorry, I explained it poorly. I plan to purchase this property with cash at a lower cost due to no contingencies and the property being on the market for a while and then refinance it to pull the equity so can go after other properties. The property is in pretty good shape as you stated, so I won't need to renovate it and I won't have to kick out the current tenants and will keep the rent amount. I stated that the expenses is almost non-existent, which wasn't accurate. I was trying to convey that the expenses look to be very low, but I should get an accurate figure.

Let me know if what I wrote isn't a sound plan.

Thanks!

@Steve Kim  that property beat me too death for 7-8 years. Vacancy, repairs, low quality tenants that tore the place up and on and on. It was purchased as my primary and was my first rental. It had a 100% loan. I re-financed it 2 times in an effort to get it cash flowing. I would sell it today even though I finally got it turned around but now I've owned and depreciated it for 12 years.  I would need to 1031 exchange it and it would be difficult to find another to buy in this hot market.   I would NEVER buy it that way as an investment again.  If I could buy it for half its value and knew for a fact the market would go up then I might try it. Trouble is you never know what the market will do. I doubt I will ever reach a break even point with this property. The one good thing about it is that it has taught me every mistake a landlord can make.  That being said I am closing on a small mini storage facility in a very rural small town. The thing is full and has been quite a while. The town is not shrinking and real estate is starting to pick up there. It probably won't go as high as the rest of the state but the entire surrounding area is going up. Your post talks of a shrinking population. I would use extreme caution.  RR 

@Ralph R. Thanks for the heads up! This will definitely force me to consider this scenario in further depth.

Originally posted by @Steve Kim :

@Jarrod Kohl

Sorry, I explained it poorly. I plan to purchase this property with cash at a lower cost due to no contingencies and the property being on the market for a while and then refinance it to pull the equity so can go after other properties. The property is in pretty good shape as you stated, so I won't need to renovate it and I won't have to kick out the current tenants and will keep the rent amount. I stated that the expenses is almost non-existent, which wasn't accurate. I was trying to convey that the expenses look to be very low, but I should get an accurate figure.

Let me know if what I wrote isn't a sound plan.

Thanks!

That makes more sense. The BRRR was referring to a second undecided property and not the current target. In that case, it is possible that this deal is just fine. I really don't know any of the details or anything about that market. As others have said, make sure you do your research and build in some vacancy expense. I would first make sure it is a solid investment before thinking of it as a vehicle to invest more cash into something else, otherwise you might as well get a loan and get a more valuable property.

@Steve Kim

If you can find the right areas, with boots on the ground and a trusted competent management company, I say go for it. 

It's the same concept with investing in sub $50K houses in Class C / D areas in Chicago or the rust belt. This has been discussed a lot on the forums.

Sometimes even with the right deal, and you don't have a supporting cast, you would more than likely fail. And exit strategy would be extremely difficult. 

@Steve Kim after reading the rest of the posts on this thread I would like to recommend some things. You say there doesn't "appear" to be many expense with this property. Only a fool buys a property if he can't put a finger on the exact numbers to use in his analysis. I would recommend using the BP rental calculator and get on the phone and use real hard numbers to see exactly what you are buying. Look up the taxes. Get the due dilligence from the current owner, call and find out what all the bills are, get an insurance quote, don't take the owners word for anything. Trust but verify everything he says. Your playing hardball here not horseshoes. Close is not good enough. You need exact numbers and when you get them plugged into the BP calculator look and see what your ROI is. It won't be much if you pay all cash. Also you need to remember your only going to be able to get around 80% financing. Maybe 75 and maybe 85%. But figure 80 until you know different. The property will need to season and no bank is likley going to loan you more than what you paid for the property until it's seasoned a while. Also they may not count rental income for a year or 2 until you get established as a landlord. You need to research your exit strategy ( the re-finance). Don't go off half cocked!! RR

Originally posted by @Steve Kim :

@Antoine Martel You are correct. I was thinking rural because I can buy the property with full cash and am hoping to be able to get it at 70% because it's been on the market for a while and there's no contingencies.  The numbers made sense to me because, the property is rented for $1030 for both units and the expenses are basically non-existent. The mortgage and tax would be ~$125. I was thinking this property would be a great way to gain cash flow so that I can start to gather capital for the bigger purchases / quickly get another rural cash flowing property.

When I looked for quads in my area, they are going for around $400K - $600K and the cash flow were all showing negative numbers unless I would be able to get the property at ~%65 the list price. I don't have the capital to offer a full cash purchase so I can't leverage a no-contingent deal. The value adds are most of the properties that I was looking at didn't have individual unit water / electric meters, which I could install and save on expenses which would bring the NOI into the positives, but I don't know how much it would cost to get the properties sub-metered.

 Steve.

I understand this but still I would stay out of rural areas. Personally I'd rather invest out of state than invest in a rural area. With the way the market cycle is, rural areas will be hit pretty hard if something were to happen to the market. 

Thanks everyone for your input. I believe I am going to avoid the rural properties at this time. I'm continuing to search for a property that makes sense and meets my credentials. Thanks again for your comments as they have been very helpful! I'll post back when I find another property that looks like a good opportunity.

@Jarrod Kohl & @Ralph R. & @Antoine Martel

@Steve Kim  good deals and workable properties are where you find them. I wasn't trying to scare you away from rural properties all together. Ones in shrinking towns maybe. what I wanted you to understand was the risk in a small town can be a lot higher. Opportunity is where you find it   I look at everything I can anyplace I can find it. you cannot place rules like I will only look here or I will only look there. You severely limit your chance for sucess by doing this. It's like saying I will only buy red houses or I will only buy 3 bed 2 bath houses. You limit your pool of available properties. This in turn reduces your opportunity   While it's safer to stick to what you know you should never close your mind to learning new ways to succeed. All things in life have pitfalls. For me it's better to live a full life and fall into some of those pitfalls than to try to live in a bubble.   I encourage you to keep looking in rural areas look out of state. Look in your home town look Everywhere! Buy when you find the right deal  when you have a bunch of producing properties and can afford to play a bit try one that's a bit riskier. Don't put all your eggs in one basket until the basket has enough eggs you can afford to lose a couple if you drop it.   RR

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