Small Town Duplex; Big Time Cash Flow

8 Replies

Investment Info:

Small multi-family (2-4 units) buy & hold investment in Karnes City.

Very affordable Duplex has been solid cash flow income for 7 yrs and counting.

What made you interested in investing in this type of deal?

After a recent sell, this was the only property I could afford to get into all cash. This was before I knew anything about creative financing.

How did you find this deal and how did you negotiate it?

This was a friend of the family deal that worked out for everyone. Since it needed repairs, the seller was happy to discount with an all cash offer.

How did you finance this deal?

This was an all cash deal.

How did you add value to the deal?

Immediately after purchase, rehab/repairs performed to convert this property into a 2-story duplex. Separating the units, adding plumbing, electric, bathroom, and kitchen would double the income potential of this good deal.

What was the outcome?

After repairs/rehab, this property has steadily leased for great ROI.

Lessons learned? Challenges?

The contractor cut some corners with the bottom unit that cost more to correct in the long run. The challenge was keeping an eye on progress as work was being performed. I was in Houston working full time, and property was 3.5 hrs away. This experience provided a fast learning curve. I now set deadlines with payment penalties, and I know more about the remodel process so as to not be taken too easily moving forward.

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

No agents were involved in this deal.

@Matt Smith This sounds great, congratulations!  Could you outline your process of determining whether the property was worth investing in as a small-town purchase?

I've looked at areas with lower population counts and have been concerned with overall lack of rentability and the lack of other similar rentals in the area.

Originally posted by @Adrian Chu :

Cool.  How's the market in Kansas City compare to Houston?

 Kansas City cash flows whereas Houston doesn't. The high property taxes and insurance in TX are cash flow killers.

Originally posted by @Mike D'Arrigo :
Originally posted by @Adrian Chu:

Cool.  How's the market in Kansas City compare to Houston?

 Kansas City cash flows whereas Houston doesn't. The high property taxes and insurance in TX are cash flow killers.

 Odd statement.  My cash flow from my Houston portfolio would beg to differ (of which, about 700 units were bought in the last 2-3 years so we're not talking about properties bought in the 80s that happen to be doing well today)

@David Hagen   Here's a general outline based on my experience as a response to a similar inquiry:

Thanks, but investing in rural has its drawbacks when trying to sell; hence, the great deals! But, for long term investments...I'm very happy.

I take time to try and find unlisted deals, or very long DOM. I'll try to acquire with seller financing. My experience with agents in the rural areas isn't too good. It seems to me that they're not as passionate about real estate. As for the seller financing, my experience has been that locals to rural areas undervalue their property.  When looked at from current income potential standpoint, the numbers start making a lot of sense.

NOTE: For rural, I would focus on your current living area's 1-3 hrs radius. If not practical, or if you prefer remote investing, then I'm not sure what a good recommendation would be. Maybe buying 1/2, or partial, but I don't know anyone doing that. In the 1980s equity sharing, or buying 1/2 a house seemed to be a solution for home ownership. I think it's great idea for any ownership, especially commercial (isn't that how the big boys acquire?). Not sure why it's not discussed more, especially since it can solve management concerns, and can be very close to true passive income...like a nnn lease with the right tenant. None the less, I travel to the areas 1-3 hrs from where I live and look around a lot.

Recommendations for Rural narrowed down to this:

1) Find a major metro area with strong jobs and increasing population, and search up to 60 miles out.

2) Find the most affordable region 60 miles out that has something special to offer in the path of progress. Maybe rivers, lakes, camping, general land layout, quality of the area as a whole--does it seem like a nice area when I drive through. New construction, but probably most importantly would be govt construction. Road widening, intersection improvements, etc. It lets me know that the government anticipates growth.

3) Find a vacant structure that can be leased "as-is" or very close to it, or an undervalued performing commercial asset. FSBO, Unlisted, Homemade Sign, or vacant and neglected structure. Or, a property listed by an agent with high DOM. Find the best deal on a single family that may be used commercially, or commercial property that can be leased as is. Consider the flow of traffic, egress, regress. Something on a large corner lot, if possible. I try to find value adds. Is the quality of the structure solid, and what would it cost to rebuild.

3a) Verify taxes. I've noticed some of these smaller towns have very low taxes. They'll likely go up, but to avoid mass financial shock to the older population, they'll go up slowly. This has been my experience so far.

4) Make sure purchase price can be justified based on worst case rental income. Commercial, as you can imagine, is always tougher in the smaller rural areas (commercial location not significant in my mind these days, I'll elaborate more another time). Find value that others have overlooked.

5) Prepare an offer for the seller to finance, and/or find some way to leverage having the property start paying for itself by leasing it asap. I look into tax records to see what can be determined. Questions I have are: Have the sellers owned it for a long time. Have they had trouble selling, was it inherited, does it include additional tracts of land, or solid construction traits not advertised.

6) Try to acquire with $5k or less down, and payments low enough to sustain long term in case of long vacancies. If the seller will only sell with a balloon, then demand a clause with the option to extend with no, or low consideration.

I see great architecture, especially commercial, in some of the small towns in Texas. Such a waste to see many of them vacant. I'm all for recycling these classics, generating cash flow to the local communities. Something that I find very valuable is the access to the locals, other businesses, and city leaders in these areas when investing in commercial. Everyone wants success, even the City Mayors, and having access to them is very encouraging.

I could go on and on. There's more to it, but hope this helps a little if/when you decide to invest in the outskirts.

Most of my acquisitions came between 2014-2015. Timing and luck.

Hope this helps and encourages others to consider the rural areas that make sense.


Good Luck and Happy Investing

Originally posted by @Matt Smith :

@David Hagen  Here's a general outline based on my experience as a response to a similar inquiry:

Thanks, but investing in rural has its drawbacks when trying to sell; hence, the great deals! But, for long term investments...I'm very happy.

I take time to try and find unlisted deals, or very long DOM. I'll try to acquire with seller financing. My experience with agents in the rural areas isn't too good. It seems to me that they're not as passionate about real estate. As for the seller financing, my experience has been that locals to rural areas undervalue their property.  When looked at from current income potential standpoint, the numbers start making a lot of sense.

NOTE: For rural, I would focus on your current living area's 1-3 hrs radius. If not practical, or if you prefer remote investing, then I'm not sure what a good recommendation would be. Maybe buying 1/2, or partial, but I don't know anyone doing that. In the 1980s equity sharing, or buying 1/2 a house seemed to be a solution for home ownership. I think it's great idea for any ownership, especially commercial (isn't that how the big boys acquire?). Not sure why it's not discussed more, especially since it can solve management concerns, and can be very close to true passive income...like a nnn lease with the right tenant. None the less, I travel to the areas 1-3 hrs from where I live and look around a lot.

Recommendations for Rural narrowed down to this:

1) Find a major metro area with strong jobs and increasing population, and search up to 60 miles out.

2) Find the most affordable region 60 miles out that has something special to offer in the path of progress. Maybe rivers, lakes, camping, general land layout, quality of the area as a whole--does it seem like a nice area when I drive through. New construction, but probably most importantly would be govt construction. Road widening, intersection improvements, etc. It lets me know that the government anticipates growth.

3) Find a vacant structure that can be leased "as-is" or very close to it, or an undervalued performing commercial asset. FSBO, Unlisted, Homemade Sign, or vacant and neglected structure. Or, a property listed by an agent with high DOM. Find the best deal on a single family that may be used commercially, or commercial property that can be leased as is. Consider the flow of traffic, egress, regress. Something on a large corner lot, if possible. I try to find value adds. Is the quality of the structure solid, and what would it cost to rebuild.

3a) Verify taxes. I've noticed some of these smaller towns have very low taxes. They'll likely go up, but to avoid mass financial shock to the older population, they'll go up slowly. This has been my experience so far.

4) Make sure purchase price can be justified based on worst case rental income. Commercial, as you can imagine, is always tougher in the smaller rural areas (commercial location not significant in my mind these days, I'll elaborate more another time). Find value that others have overlooked.

5) Prepare an offer for the seller to finance, and/or find some way to leverage having the property start paying for itself by leasing it asap. I look into tax records to see what can be determined. Questions I have are: Have the sellers owned it for a long time. Have they had trouble selling, was it inherited, does it include additional tracts of land, or solid construction traits not advertised.

6) Try to acquire with $5k or less down, and payments low enough to sustain long term in case of long vacancies. If the seller will only sell with a balloon, then demand a clause with the option to extend with no, or low consideration.

I see great architecture, especially commercial, in some of the small towns in Texas. Such a waste to see many of them vacant. I'm all for recycling these classics, generating cash flow to the local communities. Something that I find very valuable is the access to the locals, other businesses, and city leaders in these areas when investing in commercial. Everyone wants success, even the City Mayors, and having access to them is very encouraging.

I could go on and on. There's more to it, but hope this helps a little if/when you decide to invest in the outskirts.

Most of my acquisitions came between 2014-2015. Timing and luck.

Hope this helps and encourages others to consider the rural areas that make sense.

Good Luck and Happy Investing

Thanks for the thorough reply, Matt -- great insight here.  I admit that I don't know all too much about seller financing, so I'll be looking into how this works for future opportunities.

I also definitely see the value looking 50-60 miles out from major areas!  Where I'm at we have suburbs of suburbs, all pretty valid for a commute to a major area or commerce or employment.

I'm curious of your overall thoughts on commercial property, however; this is the first time that I've seen commercial real estate listed on the BP forums in my short couple of months here so far. What have you used to analyze opportunities for these properties, if different from the standard tools for SFH and the like?

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

We hate spam just as much as you