I know this is one of those questions that is difficult to answer with out the specifics so I’ll narrow slightly down to the markets of Pittsburgh and Atlanta since those are my areas of interest. Through my research and driving around these cities I see a lot of abandoned homes many which are well below market (some 10x) in areas that otherwise look like great areas to invest in. Are these houses just too expensive to tear down and rebuild and too expensive to rehab? Not afraid of full gut rehabs but want to make sure I don’t blindly enter new markets and get my self in over my head. Any advice and things to look out for are appreciated.

I love me some tear downs. Best kind of house to flip, in my opinion. As with any other flip, "Numbers gotta work"

That said, not sure I'd try it in Pittsburgh. Area is still pretty rough for new construction.

Absolutely, the numbers have to work and also agree that Pittsburgh is not the best place for new construction based on the areas I visited and researched. I would primarily be doing BRRRR there. It's just really weird seeing houses falling apart right next to some good looking properties, especially coming from California where I'm located. I was hoping for any rules of thumb or tips before asking a bunch or contractors/water damage experts to look at a bunch of properties for bid.

I see you're from Atlanta where I'm also looking to invest. There seems to be many abandoned houses there as well. Do you have any experiences with gut remodels that you'd be able to share? Maybe where you wish you'd bulldozed and rebuilt or vice versa?

I'll PM for more info on your business and see if we might be able to work together. I'm new to OOS investing and am looking to expand my connections.

It depends on the ARV. If the property is in a cheap area, you'll probably rehab the equity out of it (and may have to deal with theft). I wouldn't consider such huge guts unless the ARV is at least $100,000.

Thanks Andrew! This is the type of general feedback I was hoping for. This can help me formulate a better idea of what I should even look into and hopefully save some time for myself and others.

For the $100,000 number I assume the gut doesn't include any foundational surprises or major framing work. What about plumbing, electrical, or water damage for houses that have been sitting with bad roofs for a few years?

Howdy @Ken D.

I stay away from any major foundation issues, extensive termite damage, and properties with heavy drainage problems. Neighborhood must support ARV's over $100K for gut jobs. Be careful of properties with significant fire damage. Lots of extra remediation expenses related to bring them up to code.

Always have properties inspected.  Mold can be a killer in the types of properties your talking about.

I can't speak to Atlanta, but in Pittsburgh you have to be very careful with the comps you are looking at in determining your ARV. Sometimes just crossing the street can make a difference. Neighborhood have these dividing lines that you won't find on any map. However having said that, if you find comps in all directions from your subject house, then I'm more comfortable

@Ken D.   Generally speaking abandoned boarded up wrecks will be difficult to turn around in a full gut rehab ... very often you can buy existing product for cheaper than you can rehab.

there are exceptions to this.. Like in Charleston SC.. were you can find houses that are falling down.. but have a value of 500 to 700k when done... that works.

if your in Atlanta that has board ups all over your probably in a war zone and caution is to be used. its not just the expense of doing the work but as @Andrew Syrios states theft will be real and especially out of state.. you could end up losing a ton of dough trying to turn those around.. this type of investing is best left to locals.

if your coming from Silicon valley and want to find something cheaper I would start with first and foremost seeing what the Median price point is in a given area.. check on schools and crime get in the better areas then go shopping.. also for remote rehab at least for starting out find minor rehab work not major.. Sub trades and labor are a real issue in todays construction world..

In my opinion, providing that they are in good areas. Meaning places where people want to leave and grow a family, abandoned and dilapidated houses are the ones which presents the most potential.
There is less competition for those houses.

As a result, they offer higher discounts at purchase and greater profits at resale.

On the flip side, they need more capital. A lot of capital to acquire them, hold on to them rehab or reconstruction and fund the work. It is harder to raise capital

They are also a lot of work and they require a lot of experience. It is very easy to get it wrong if you are a beginner.

So if you have the capital and know what you are doing and you are in a good and solid neighborhood, they are fantastic opportunities

In summary, you have higher risks, but also higher rewards compared to smaller, cosmetic or paper flips

Originally posted by @Jay Hinrichs :

@Ken D.   Generally speaking abandoned boarded up wrecks will be difficult to turn around in a full gut rehab ... very often you can buy existing product for cheaper than you can rehab.

there are exceptions to this.. Like in Charleston SC.. were you can find houses that are falling down.. but have a value of 500 to 700k when done... that works.

if your in Atlanta that has board ups all over your probably in a war zone and caution is to be used. its not just the expense of doing the work but as @Andrew Syrios states theft will be real and especially out of state.. you could end up losing a ton of dough trying to turn those around.. this type of investing is best left to locals.

if your coming from Silicon valley and want to find something cheaper I would start with first and foremost seeing what the Median price point is in a given area.. check on schools and crime get in the better areas then go shopping.. also for remote rehab at least for starting out find minor rehab work not major.. Sub trades and labor are a real issue in todays construction world..

 Jay makes another good point, I don't really like out-of-state investing in general, but I really don't like it if it involves a large rehab. There are just too many things that could go wrong and being so far away really exacerbates that problem.

@Ken D. Full-gut, across the country, boarded up, dilapidated, low(er) value area...as Clubber Lang would predict: PAIN. I think people sometimes try to juxtapose full-gut vs. new construction to rationalize doing it. The reality is that mid-level housing products probably still exist that are better values. Another group of fun realities are:

1.) Good contractors typically are able to start tomorrow. The last time I looked at a rehab I got 3 contractor names, called them all, and the soonest one of them would be able to start was 9 months. Too many other projects were lined up.

2.) You’ll want to check in and those flights across the country won’t be convenient or cheap. It’s an added cost that local flippers won’t have when/if you’re making an offer.

3.) A good first step is figuring out what a licensed GC would charge per sq ft for the basics of flooring, trim, paint, sheetrock, etc. I’ll guess that even if there isn’t water damaged this stuff is in pretty rough shape. Is that (completely rough) estimate $20/sq ft or $50/sq ft.

4.) 99% of the time pictures are better than it will look in person, after you’ve bought a plane ticket.

So I’d start with figure out what a ballpark cosmetic rehab $/sq ft costs for you in Pittsburgh and ATL. Then you can throw in HVAC, foundation allowances, roof issues, etc. on a property by property basis.

The other problem you may run into is ownership. Many times the buildings fall into abandoned and falling over status because the previous owner died without a will or next of kin. So nobody knows who actually owns the building to be able to sell it. Ran into one recently where the tax records listed the owner as a 160 year old. Since no death certificate was ever done, he technically still owns the house.

@Jay Belcher I can fully appreciate your comment. I flew out to Pittsburgh in December to check out neighborhoods. Loved it while I was there but very strange driving through very nice houses to literally the next block drive through rows of abandoned buildings and homes.

@John Leavelle Mold and water damage are areas that I am most uncomfortable with a the moment. In SD and even Bay area there isn't much flooding or serious water damage to the extent of some of the houses I looked at. But to @Patrice Penda point I see the potential in some of these homes. I realize I'm looking through the goggles of inexperience, but it's hard for me not to get excited about a property that is under $10K who's ARV is $100K with rents around $1K or more if it's multifamily.

@Patrice Penda @Andrew Syrios @Jay Hinrichs I would prefer to invest in my own backyard as well. It just posses larger hurdles than OOS investing based on my current knowledge of RE rehabbing and raising capital (which is why I'm here to hear other's opinions as well!). However, I plan to heed your caution and start smaller so that I can recover more quickly from my mistakes.

@Andrew Johnson Very good points. But even with these disadvantages with OOS investing there are many successful investors that do this. I'm hoping to figure out how they do it, hopefully with some help along the way...Maybe I'll have my own secret sauce some day.

The main reason I'm interested in OOS investing is that although I'll never be as good as the local guys, it will allow me to be flexible with where I choose to invest if I figure out how to do it. 

Originally posted by @Ken D. :

@Patrice Penda @Andrew Syrios @Jay Hinrichs I would prefer to invest in my own backyard as well. It just posses larger hurdles than OOS investing based on my current knowledge of RE rehabbing and raising capital (which is why I'm here to hear other's opinions as well!). However, I plan to heed your caution and start smaller so that I can recover more quickly from my mistakes.

That is a sound decision and it makes a lot of sense

@Patrick Orefice I'm actually ran across this when doing some reading on Pittsburgh before I flew out there. There's a lot of effort on revitalization goin on out there and one of the things the city is trying to do to help is educate families on how to pass their assets on to their next of kin.

I can't find the article at the moment, but I believe I found it on the next pittsburgh website. Sharing the general link because it has interesting info on activity in Pittsburgh for those interested.

https://www.nextpittsburgh.com/about/

@Ken D. if you're willing to invest in Pittsburgh, why not invest in East Oakland? Instead of paying $100K cash for a SFR in Pittsburgh, how about putting $100K down on a 4plex and using your rehab skills to fix it up? It's close to home and you can drive by any time you want.

@Ken D. For what it's worth I exclusively invest out of state. I have a PM that I trust and she has contractors that she trusts as well as a couple of people on her staff that she could trust with the "easy" stuff (paint, hang doors, etc.) And while I've looked at some deals that need mild or heavy rehab I've never pulled the trigger. Okay, I've pulled the trigger with offers but I've never had one be accepted. The cost structure (for me) is just different than someone local. Someone local doesn't have to fly there, can choose to put in sweat equity, can be there weekly to monitor progress and "nag", can catch little issues before they become big issues, etc. So what do I do? I "risk adjust" my offer based on some of those things. Frankly, with many of my offers I know I'm not going to be competitive. Every single market of a reasonable size is going to have people that flip for a living. They cost estimate better than me (or you), they have contractor relationships better than me (or you, or even my PM), and they know the ARV better than me (or you...maybe not my PM).

You also mentioned (quite astutely) that you're seeing things through the goggles of inexperience. So here's my advice, if you see 50 homes that are all $10K that all look attractive to you...something is wrong...something is VERY VERY wrong. To be blunt, $10K is nothing. For a lot of us, $10K purchase and paying a contractor $50K to rehab and planning on an $100K ARV would be something we could do tomorrow, multiple times over, easily, with no financial hiccup. Heck, do 5 at a time so we could buy material in bulk and have even more savings that translate into better margin! So if all 50 look like "deals you would get excited" about you're missing something huge, something monumental, something obvious that more experienced investors know. On the other hand, if you look at 50 of these deal and 1 looks interesting. One looks viable. One looks like it's in a particularly nice area. One looks like it might have been glossed over while all other deal pro-formas have failed. Then you might be onto something.

Account Closed I would love to do that, but I haven't come across anything to where the numbers compare. For example, using some Zillow numbers, I could find a 4plex for around $600K in Oakland and rent each 1 bd unit out for $1600 with makes it about a 5cap. In Pittsburgh it isn't too tough to find closer to 10cap properties from what I've seen so far. They just take a little more work and I don't think the rental demand is near the same level, which needs to be taken into account as well. I also haven't actually renovated one yet so actual costs might also be higher than my estimates...

I also think I'll need more than $100K down on an investment property with Oakland prices unless I use unconventional lending.

If my numbers are way off on Oakland I'd be happy to chat more about investment strategies in the Bay area. I'll PM you.

@Andrew Johnson Your comments are worth quite a bit more to me now knowing you also invest exclusively out of state. I'm aligned with your thought process. There are many neighborhoods that I looked at where there were too many run down properties to be worth looking at. It's the 1 or 2 that I found in much better locations that peaked my interest. About missing something huge...hence the title of the thread :)

I want to thank all on this thread for your comments. As a new poster (not so new podcast listener) it is refreshing to be able to have a sounding board to keep myself in check.

Being from Pittsburgh, I'd be careful trying to rent out 1 BR apartments in Oakland for 1600 a month.  It is almost exclusively a college kid area and Pitt is a state school with lower tuition requirements.  The issue is that those 600k 4plexs were only 200k 10 years ago, yet probably bring in similar rent so it's mainly being sold at such a high price to make some fast money.  Maybe others have success at those price points but I just don't many non-college people living in oakland who can afford those prices.  Personally I'd then focus on supplying temporary housing to Doctors if thats the price I was going for. After all, Pittsburgh is a UPMC and PITT economy. 

Vast majority of salaries in Pittsburgh are low with a few stories of robotics engineers earning 250k a year.

The expensive properties are going to be in Shady Side/Squirrel Hill where you find CMU grads staying or a few blocks off bakery square in the nice parts of East Liberty (but you are assuming Amazon, Google, Uber, etc are going to invest a lot more which isn't a guarantee).

The older areas have very sturdy brick houses which can be gutted successfully without having to rebuild the whole thing, and in MANY areas you are not allowed to rebuild as you have to maintain the brick exterior look for cultural reasons. 

Anyway just my 2c from a Pittsburgh native

@Dominic Metzger I think you're getting Oakland, CA and the neighborhood of Oakland in Pittsburgh mixed up. Account Closed and I were referring to Oakland, CA.

That being said, I appreciate the feedback from a Pittsburgh native. Good to know that tear down will be more difficult for the brick buildings in certain areas.