So I've been researching and eyeing out of town properties for a while now. I have two properties lined up that I'd like to purchase as rental properties.  I've made some assumptions, but wanted to crowd source some opinions on the deal.

Properties are in well populated C+ class urban neighborhood (where I plan to focus my investing) and I plan to Buy and Hold both properties. Cash purchase and will Cash Out Refi after 6 months as they should appraise for +$25K each. Well trusted PM will take 8%. Take a look at the numbers below and let me know if you like the deal.

Property #1: Purchase price of $17,500, newly touched up, renter is moving in now and just signed a 12 month lease at $550 per month, tenant pays all utilities except for trash ($60 per quarter), city just completed and approved an Inspection Report.

Property #2: Purchase price of $17,500, needs to be refreshed (estimating ~$5,000), renter has been in for over 6 years, current lease at $650 per month, tenant pays all utilities except for trash ($60 per quarter)

@Martin N. , you have made a lot of assumptions that are simply not true.  Let’s start with the easy ones:

• You will never get a mortgage for $17500. They will charge you loan fees that will make this too expensive. These will be cash only deals.
• 
  
•     $91 a month positive cash flow is horrific.  You will go broke in less than a year.  Your minimal callout for any work is $75.  The other deal isn’t that much better, imho.  
• 
  
•    17500 is NOT C+.  Not anywhere in the United States.  You won’t get rent paid & your place will turn into a crack house.
• 
  
• I hope your well trusted PM is a great person.  There are no horror stories about ‘bad PM’s’.
  
• 
  Otherwise it looks like a great deal.  Sarcasm intended.  ;-)
  

Oh, forgot the main part, WWYD:  I’d laugh at whoever bought either of those crack dens to be.  ;-)

I know there are areas where you can pull these numbers so I wouldn't dismiss the opportunity just based on the home value. However, I agree that it is likely to be difficult to find a re-fi option for such low values. Have you called your local banks and credit unions to run this by them? My strongest recommendation is to confirm that you will have the ability to re-finance. You may have to combine the two under one blanket loan but even that could be close to the minimum that the banks will lend. Also, for the expenses I think that "replacement reserve" is your capex budget. This is only $600 per year or $6000 over the next ten years. Do you really believe that you will only need to put another $6,000 into each property over the coming ten years? Have you gotten an evaluation of the big ticket items and how much life is left? HVAC, Roof, etc? It can easily cost $2,000 in paint, flooring, etc just for one turnover when a tenant moves out.

Assuming that you have looked at demographic trends to select a good location for your out-of-town investing and if you want to "get in the game" these could be reasonable options. Just realize that you may lose money in the long run if the expenses are higher than expected.

@Alan Grobmeier I appreciate the call outs and the humor, seriously. Lol

A couple of points to add:-I'm buying these off-market in an all cash deal. I'm hoping to accumulate a couple more properties and then find an investor friendly bank that will mortgage my properties (individually or as a bundle). This will be after I've captured +6 months of rent and made some minor updates. Basically a BRRR.

I know the cash flow is relatively low, but I've also included replacement savings, repair and maintenance cost. Trying to be very conservative. Wondering if this is worth getting me started in the RE Investment game.

The vast majority of repairs will be handled by my PM/handy man. His cost for a callout will be included in the monthly PM cost. And yes I know there are a million PM horrors, but mine is trusted (he's essentially my brother).

@Shera Gregory Thank you so much for the additional perspective. I'm going to make some calls to banks and get a sense for the minimums. I don't want to over pay for a good learning experience, but I do want to avoid paralysis by analysis.

Originally posted by @Alan Grobmeier :

@Martin N. , you have made a lot of assumptions that are simply not true.  Let’s start with the easy ones:

• You will never get a mortgage for $17500.  They will charge you loan fees that will make this too expensive.  These will be cash only deals.
• 
  
•     $91 a month positive cash flow is horrific.  You will go broke in less than a year.  Your minimal callout for any work is $75.  The other deal isn’t that much better, imho.  
• 
  
•    17500 is NOT C+.  Not anywhere in the United States.  You won’t get rent paid & your place will turn into a crack house.
• 
  
• I hope your well trusted PM is a great person.  There are no horror stories about ‘bad PM’s’.
  
• 
  Otherwise it looks like a great deal.  Sarcasm intended.  ;-)
  

Oh, forgot the main part, WWYD:  I’d laugh at whoever bought either of those crack dens to be.  ;-)

• 
  

LOL. Funny but true. This is a good post, I don't think there's anything in there I disagree with. You have to have a certain mettle to invest in 17k houses. I recommend you visit @James Wise 's website and see what the "other half" deal with in this bracket. 

Originally posted by @JD Martin :

Originally posted by @Alan Grobmeier:

@Martin N. , you have made a lot of assumptions that are simply not true.  Let’s start with the easy ones:

• You will never get a mortgage for $17500.  They will charge you loan fees that will make this too expensive.  These will be cash only deals.
• 
  
•     $91 a month positive cash flow is horrific.  You will go broke in less than a year.  Your minimal callout for any work is $75.  The other deal isn’t that much better, imho.  
• 
  
•    17500 is NOT C+.  Not anywhere in the United States.  You won’t get rent paid & your place will turn into a crack house.
• 
  
• I hope your well trusted PM is a great person.  There are no horror stories about ‘bad PM’s’.
  
• 
  Otherwise it looks like a great deal.  Sarcasm intended.  ;-)
  

Oh, forgot the main part, WWYD:  I’d laugh at whoever bought either of those crack dens to be.  ;-)

• 
  

LOL. Funny but true. This is a good post, I don't think there's anything in there I disagree with. You have to have a certain mettle to invest in 17k houses. I recommend you visit @James Wise's website and see what the "other half" deal with in this bracket. 

 

You look at any major metro market in the USA if the tenant is paying $550/mo for the home and the cost is $17,500 understand that that's going to be an F-Class neighborhood in that metro. I understand you were told that it's a C+ Class asset but that's impossible. This is the basement, think about it there isn't anywhere down one can go then $17,500 and $550/mo. 

As for whether or not you should invest in F-Class properties that's a risk vs reward conversation that you need to have with yourself. If you've never been in the rental business I'd say that F-Class certainly isn't where you want to start. Folks I know that make a ton of money in F-Class are hands on rough riders. One example is a local guy who handle's the move out's when we do evictions in Cleveland. That dude is a straight savage. Carries a gun wherever he goes, is a felon, hires felons and there are rumors of him releasing rats inside of homes when the tenants don't pay him. He does very well but one needs to be comfortable with that type of lifestyle to do so.

@James Wise I appreciate the heads up. You're right, C+ would suggest that the neighborhood can get worse. Frankly, it can. While this is a tough part of town (in StL), there are much worse areas and the crime in the neighborhood is not bad. People on this street generally take care of their homes. That being said, I could downgrade it to a D after your callout.

Your example of the local guy in Cleveland is helpful context. While I'm no felon and don't plan to release any rats, I know my way around and can general fix problems when they pop (if that makes sense). Definitely won't have issues collecting when things are due. I have a good team.

@Martin N. , glad you appreciate my humor.  I have friend/former partner of mine that deals in something just above this class you are describing.  He has a CONCEALED CARRY (we are in AZ).  He does his own evictions, has 32 doors & has done over 100 evictions in 5 years.  The judge & him are on first name basis.  ;-)

Yes, he makes money.  But it's very tuff money.  Stories, not getting paid on time, etc., is the norm.  Not the rule.

I like 'push button money'.  This is way too much like work to me.  

You can make money doing this and buy decent cheap homes In not too bad of areas too ( I own several in that price range some are places I’d be willing to live In Too) however you will need to actually live in the area and self manage and do your own work . I personally know several millionaires with rentals at those rates and those price points . There’s so much more than your spread sheet is showing though . I would never consider doing it remotely or basing my numbers off algorithms or calculations like this . In general I’d follow the others advise here on investing in good areas with higher price point homes with higher rental rates 

Originally posted by @James Wise :

Originally posted by @JD Martin:

Originally posted by @Alan Grobmeier:

@Martin N. , you have made a lot of assumptions that are simply not true.  Let’s start with the easy ones:

• You will never get a mortgage for $17500.  They will charge you loan fees that will make this too expensive.  These will be cash only deals.
• 
  
•     $91 a month positive cash flow is horrific.  You will go broke in less than a year.  Your minimal callout for any work is $75.  The other deal isn’t that much better, imho.  
• 
  
•    17500 is NOT C+.  Not anywhere in the United States.  You won’t get rent paid & your place will turn into a crack house.
• 
  
• I hope your well trusted PM is a great person.  There are no horror stories about ‘bad PM’s’.
  
• 
  Otherwise it looks like a great deal.  Sarcasm intended.  ;-)
  

Oh, forgot the main part, WWYD:  I’d laugh at whoever bought either of those crack dens to be.  ;-)

• 
  

LOL. Funny but true. This is a good post, I don't think there's anything in there I disagree with. You have to have a certain mettle to invest in 17k houses. I recommend you visit @James Wise's website and see what the "other half" deal with in this bracket. 

 

You look at any major metro market in the USA if the tenant is paying $550/mo for the home and the cost is $17,500 understand that that's going to be an F-Class neighborhood in that metro. I understand you were told that it's a C+ Class asset but that's impossible. This is the basement, think about it there isn't anywhere down one can go then $17,500 and $550/mo. 

As for whether or not you should invest in F-Class properties that's a risk vs reward conversation that you need to have with yourself. If you've never been in the rental business I'd say that F-Class certainly isn't where you want to start. Folks I know that make a ton of money in F-Class are hands on rough riders. One example is a local guy who handle's the move out's when we do evictions in Cleveland. That dude is a straight savage. Carries a gun wherever he goes, is a felon, hires felons and there are rumors of him releasing rats inside of homes when the tenants don't pay him. He does very well but one needs to be comfortable with that type of lifestyle to do so.

 

OMG, James, I didn't realize you knew my uncle! 

@Martin N.

There's an app called DealCheck and you can run better numbers within 2 minutes. The excel stuff is time consuming especially if you do that to analyze every single property out there.

@Patrick J.

Thanks a lot. I’ll grab it and check it out.