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Marcus Auerbach
  • Investor and Real Estate Agent
  • Milwaukee - Mequon, WI
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What they don't tell you about cheap rental properties

Marcus Auerbach
  • Investor and Real Estate Agent
  • Milwaukee - Mequon, WI
Posted Jun 8 2021, 06:14

It all sounds so perfect: you can buy a house for cheap, have someone else fix it up for you and then rent it out for great cash flow. You run the numbers (on a BP calculator, they are really good BTW), you read the forums on BP and after moneth of research you are convinced this will work!You can make it work!

So you narrow it down to a city (maybe Milwaukee) and you call an "investor friendly agent" to help you find a great inexpensive property. There are some on Zillow for 5k, so spending 50k or 100k will surely get you a good deal. And you won't have to deal with the tenants, because you will have a PM to do that for you, so problem solved (in theory at least). Some agents tell you that's a bad idea, they probably were not the investor friendly kind, plus most agents don't understand investing (which is true), so you just keep looking until you find one who is happy to write a few low ball offers on cheap properties - and you buy your first one!

Surprise number one is finding contractors is a lotharder than they made it sound in the book! Let alone getting three bids! Contractors are either booked out for the year, or they are expensive, or the worst, not trust worthy. Finally you found one, but when you tell him where the property is, he does not want the job anymore. He is worried about his truck and his tools, not worth it he says.

I have seen a lot of houses over the years that have been "remodeled" remotely and I have seen the "quality" of work that can come without the owner checking in person. Like upper cabinets "secured" by finish nailes, makshift plumbing and electrical, trim and woodwork that looks like a kindergardener has installed it, drywall that shows every single seam, roofs that leak from day one. The best part, it is almost impossible to sell a house like this, even a low income buyer will get scared by the home inspector.

The remodel went over budget, but after 7 months of remodel agony now its time for cash flow and to hire a PM to get the place rented. Turns out not every PM wants to take on your property when you tell them the address. But you finally find one who will do it and has a low enough fee. So you hire them and they place a tenant. Rent starts comming in - finally success!!

So you go ahead and buy a few more of these properties. It is hard work, but you have mastered the first one, you have learned a few things, the next one will go better.

A few years into this and with a hand full of cashflowing properties you start to notice that repairs request start increasing. A new furnace, a ton of plumbing repairs on the 60 year old galvanzed pipes, the PM says they need to fix the ceiling, because the roof (that had a few years left when you bought it) is leaking. You realize that capex is exceeding cash flow.

Meanwhile there are some problems with the tenants. You receive fines from the city (DNS) for littering and trash, the police gets called to deal with issues, one tenant moves out, and the PM can't seem to get a grip on this. No rent for 3 months. You had enough and fire your PM, find a new one. The new guys come with a hole list of expensive repair requests, 15k in total, but they also recommend a few extra things on top of that like a new garage. You decide to make a trip and find the place is trashed. You have never seen anyone living in such a flith. The weeds grow tall, fast food wrappers everywhere. The aluminum siding has dents everyhwere!? Walls are damaged and dirty, someone punched a hole in a beedroom door. There are drawers missing from the kitchen cabinets....!? 

Now you have to deal with an eviction, you try to get money from the tenant for damages. Attorney, small claims court, daily emails and phone calls. Tenant has no money, just fieled for bankrupsy. Meanwhile you are trying to find a contractor, who can get the place ready and an agent to sell it. An investor offers you half of what you paid. You finally get it listed, an offer accepted, home inspection comes back and reviels a whole list of expensive repairs. The elctric panel is not safe and needs to be replaced, a basement wall has a crack and needs to be beamed, probably cause by water from the missing  downspout extensions. Reluctantly you agree to get all these repairs done, more working with contractors, more expenses. But it will soon be over!

A week before closing you get a phone call from your agent. Financing fell apart, because the buyer has lost their job. So back on the market, you just paid the foundation contractor and the electrician an amount that equals about 20% of the list price.

You can see where this is going. I am currently working with a friend of a friend helping him liquidate his small portfolio. I have done this before, it's often more work and frustration to sell a cheap house than one for 200k or 300k (or 600k). He basically went through the experience above, he said he never should have, it was a bad idea. I am not excided about the listings, I can barly cover team expenses, I do it just to help him out.

Last night someone called me, saw me on BP,  is looking to buy investment properties, no experience and never been to Milwaukee, but he heard it's great. Wants to buy two houses every year until he has enough cash flow to retire, hates his job. Tells me the hole plan. Budget is 80k per house. I explain that I have been a buy and hold investor for over a decade, done a lot of BRRRs, worked with a lot of investors. Median home price in Milwaukee is now over 200k, he'll be in a rough neighborhood. That I am personally buying only properties that are at least twice that amount, that's before rehab. It's 2021, prices are up, market is hyper competitive. I am telling him why this is a bad idea. 

He thanks me for my time and asks me if I knew of any more investor friendly agents.... 

True story, food for though.

Milwaukee, Wisconsin

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