Briarwood, NY · Member since 2017 · 16 posts · 14 votes
I am completely new in real estate. I talked with an investment company and they said I can buy an old house or cheap house ( single family 3 bed, 1 bath or 2 bed, 1 bath ) for 20k- 30k and do a rehab( Jacksonville, FL or Indianapolis, IN).These homes will not have so much of an equity. May be 5% or less. So, the summary of our discussion: The total cost including acquisition and rehab will be around 40k to 50 K. After that, I can rent it out for $700 dollar. After all expenses including PM cost, TAX, Insurance, Vacancy, Repair I can have a take home cash flow of 60% of the rent which is around $400-$420 a month. Assuming there is no mortgage and buy all with cash.
So, here is my questions.
1. Is this a good way to approach for the first time investor?
2. Which state is better for getting this cheap rental property and less risky? Indianapolis or Jacksonville, FL?
3. How can I compare different states for investment, including vacancy rate, crime rate, and demographics data of a place?
4. How do I know the agents or realtor giving me all the authentic information?
Unfortunately, you are not going to make money passively investing in "Cheap" or "old" housing. Investors will tell you that actively investing in those two descriptions for properties can be very lucrative, but will also be very time consuming and you have to work hard to keep 60% of the rental revenue. You have to work VERY HARD!
Passively investing in low price, cheap, old houses in low-demand neighborhoods is a great way to lose money, but not make much money. Any one telling you that your expenses will be 40% is either lying to you on purpose to sell a property or they are simply too new or uninformed of the real numbers. You will be lucky to keep 50% of your rental revenue and, over time, will be lucky to collect 10 months of rental per year as an average.
So be prepared to only realize 84% of expected rental income and then will lose 50% of that to taxes, insurance, management, routine maintenance and playing catch up on deferred maintenance.
Run your numbers off of those calculations and if you like what you see, then you will at a minimum have a more realistic outlook and expectation going into your investment.
I'm not sure there is much difference between the two markets. Jacksonville will be more expensive and the houses are constructed differently because of proximity to the coast. I'm not sure what the term are, but the houses are block built houses and built for the area. In Indianapolis you are going to have houses with basements. I'm not sure that is a negative, its just something to be aware of in that they are built differently.
Beyond that, when talking about buying cheap houses with $700 rents, understand that these are not nice areas. These are not high demand areas, regardless of city. That is why you have to be careful as an out-of-state, passive investor. A person who wants to rent a property for $700 is earning somewhere between $22,000 and $30,000 a year. Maybe they are earning as much as $35,000 a year. They are one lost pay check away from having to make a decision about what to pay for. Do they pay for food, medicine, travel to work, etc.? Or do they pay rent. They are not as stable as a higher income earning household that may be looking for a rental payment between $1,000 and $1,500.
Will it costs you more to buy nicer properties in more stable areas and neighborhoods? Yes. There are absolutely home in Indianapolis and Jacksonville that are better long-term buy & hold properties at a price point that is more stable and a more reliable investment for you.
Whether or not you can trust someone and the information they are giving you comes down to your own intuition. Whether you travel there and meet someone face to face or simply have phone conversations with them, do your own research and ask questions of local investors. You will quickly learn who gives you good, unfiltered information and who is trying to steer you to doing business with them.
I definitely think you can find some really good individuals and companies located in Indianapolis and Jacksonville to do business with. That is something I would definitely look for in your situation. I would want to company I worked with to be located in those cities.
Best of luck as you get started! Reach out with questions as you start navigating the site.
Unfortunately, you are not going to make money passively investing in "Cheap" or "old" housing. Investors will tell you that actively investing in those two descriptions for properties can be very lucrative, but will also be very time consuming and you have to work hard to keep 60% of the rental revenue. You have to work VERY HARD!
Passively investing in low price, cheap, old houses in low-demand neighborhoods is a great way to lose money, but not make much money. Any one telling you that your expenses will be 40% is either lying to you on purpose to sell a property or they are simply too new or uninformed of the real numbers. You will be lucky to keep 50% of your rental revenue and, over time, will be lucky to collect 10 months of rental per year as an average.
So be prepared to only realize 84% of expected rental income and then will lose 50% of that to taxes, insurance, management, routine maintenance and playing catch up on deferred maintenance.
Run your numbers off of those calculations and if you like what you see, then you will at a minimum have a more realistic outlook and expectation going into your investment.
I'm not sure there is much difference between the two markets. Jacksonville will be more expensive and the houses are constructed differently because of proximity to the coast. I'm not sure what the term are, but the houses are block built houses and built for the area. In Indianapolis you are going to have houses with basements. I'm not sure that is a negative, its just something to be aware of in that they are built differently.
Beyond that, when talking about buying cheap houses with $700 rents, understand that these are not nice areas. These are not high demand areas, regardless of city. That is why you have to be careful as an out-of-state, passive investor. A person who wants to rent a property for $700 is earning somewhere between $22,000 and $30,000 a year. Maybe they are earning as much as $35,000 a year. They are one lost pay check away from having to make a decision about what to pay for. Do they pay for food, medicine, travel to work, etc.? Or do they pay rent. They are not as stable as a higher income earning household that may be looking for a rental payment between $1,000 and $1,500.
Will it costs you more to buy nicer properties in more stable areas and neighborhoods? Yes. There are absolutely home in Indianapolis and Jacksonville that are better long-term buy & hold properties at a price point that is more stable and a more reliable investment for you.
Whether or not you can trust someone and the information they are giving you comes down to your own intuition. Whether you travel there and meet someone face to face or simply have phone conversations with them, do your own research and ask questions of local investors. You will quickly learn who gives you good, unfiltered information and who is trying to steer you to doing business with them.
I definitely think you can find some really good individuals and companies located in Indianapolis and Jacksonville to do business with. That is something I would definitely look for in your situation. I would want to company I worked with to be located in those cities.
Best of luck as you get started! Reach out with questions as you start navigating the site.
Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
9y
@Chris Clothier is spot on! You have to stay away from this type of model. You will lose. It's only a matter of time! There are no shortcuts! Get more education and keep stacking your chips for now! :)
Briarwood, NY · Member since 2017 · 16 posts · 14 votes
9y
@Chris Clothier Thank you so much for your detailed information. You made a valid point. They did mention about those areas as C class neighborhood. I don't care if it's in Indianapolis or Jacksonville but I want to invest where it is less risky and headache. I am in junior year of my college and I really don't have time to look over my property all the time.
From my some online research I see Texas is better to place to invest rather that area. But after the unfortunate disaster there, I don't know how it will affect their market. You mentioned contacting the local agent but how do I pick a state to invest or what area should I look at before picking a state to invest in? I forgot to mention I am an immigrant and came to the USA 5 years ago. so, I don't have too much information about other states.
@Ivan Barratt thank you for your reply. Since you are from Indiana what area in Indianapolis you will feel safe to invest? and what is the price range in those neighborhoods? Thank you again for your kind response.
Investor · Indianapolis, IN · Member since 2015 · 764 posts · 953 votes
9y
@Tanveer Ahmed that's a great question but actually tricky to answer. Indy, like many markets can be "block to block." If you're thinking of investing here my advice is to come hear and evaluate the neighborhoods where the investment offerings are located. My last three deals have been 200, 237 and 250 units. My perspective is likely different than yours. Make sense?
@Chris Clothier Thank you so much for your detailed information. You made a valid point. They did mention about those areas as C class neighborhood. I don't care if it's in Indianapolis or Jacksonville but I want to invest where it is less risky and headache. I am in junior year of my college and I really don't have time to look over my property all the time.
From my some online research I see Texas is better to place to invest rather that area. But after the unfortunate disaster there, I don't know how it will affect their market. You mentioned contacting the local agent but how do I pick a state to invest or what area should I look at before picking a state to invest in? I forgot to mention I am an immigrant and came to the USA 5 years ago. so, I don't have too much information about other states.
@Ivan Barratt thank you for your reply. Since you are from Indiana what area in Indianapolis you will feel safe to invest? and what is the price range in those neighborhoods? Thank you again for your kind response.
See if you can find a local mentor to have coffee with. Find a real estate investor there - you can run an ad right here on Bigger Pockets. Offer to buy them a cup of coffee or breakfast, lunch or dinner. Make it worth their time to spend a few minutes with you so you can ask their advice. Make sure it is someone who is investing out of state.
Listen. Be patient. Spend time with investors who have done exactly what you want to do. Be open with them and ask honest, but not mundane questions. In other words, listen to what's being shared and learn. Ask good questions about your process and what you think is most important and then adjust based on the answers you hear.
Then, try to find a mentor or group of other, experienced investors here on BP that you can lean on with your plans as well. Plenty of investors, who have nothing to sell to you, will be happy to share with you how they have built successful, passive and out-of-state investment portfolios.
What you've done so far is excellent, BUT DO NOT BE IN A HURRY! Be patient and precise with your reasoning and actions and you will be fine.
Rental Property Investor · Hummelstown, PA · Member since 2015 · 638 posts · 653 votes
9y
Tanveer Ahmed I would definitely not do a long distance rehab. Especially since you are not starting with much equity. Where's the reward for the extra risk?
For out of state, I would look for true turnkey rentals that are fully rehabbed with a tenant and management in place. And where you can do a full inspection, buy with conventional financing which will require an appraisal to make sure you are buying at or below retail value.
This is a vanilla approach with vanilla returns (compared to more active REI), but I believe it helps to protect your downside risk compared to what you described.
Tanveer Ahmed I would definitely not do a long distance rehab. Especially since you are not starting with much equity. Where's the reward for the extra risk?
For out of state, I would look for true turnkey rentals that are fully rehabbed with a tenant and management in place. And where you can do a full inspection, buy with conventional financing which will require an appraisal to make sure you are buying at or below retail value.
This is a vanilla approach with vanilla returns (compared to more active REI), but I believe it helps to protect your downside risk compared to what you described.
You make a great point Kyle. Unfortunately, the word Turnkey is often used to attract investors because it sounds easy and implies that everything is done for you. But, a major flaw in the original question was that the buyer was going to have to buy the property and then supply the money for the renovation and then wait for a resident to be placed. This is not a turnkey investment. That is simply investing out of state and placing an unhealthy amount of faith and trust - especially at these price points.
I am fairly sure that the whomever is offering this investment opportunity does not own the properties, nor the renovation company nor the management company. They are simply marketing for investors and then selling the opportunity. Splitting profit with the actual providers of each service.
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Chris Clothier sounds like Morris invest model... cheapest property possible prey on newbies and give glowing account of how these homes perform when nothing could be farther from the truth..
this person if interested should check in with JWB in Jacksonville and see what they have to compare.
In Indy if you stick to that 80 to 125k range 900 to 1200 rent you will have a pretty solid investment over time , at least that has been our experience.. the hood is the hood is the hood .. no matter what city you invest in..
And those type of rentals in my humble opinion are the province of local investors who own a lot of them and run them as their business model.. for out of area investors the cost of owning will strip most cash flow over time.. to down right losing capital.. and capital preservation is a must in this business.
Investor · Indianapolis, IN · Member since 2014 · 208 posts · 137 votes
9y
Hmm, I'm in Indy and have a different perspective. Renting out a house valued around $60-$70k and renting it out for $700 sounds reasonable. The part that I'd exercise great caution about and would not recommend for a first-time investor is an out-of-town rehab. Too many things are out of your control and there's too much potential for you to get ripped off. If I were you, I'd get a good real estate agent, have them help you assemble a list of investment properties that you can immediately rent out without repairs (doable in this price range), fly out and take a look. Neighborhoods vary from block to block here. If you want to know if it's trash or treasure, you have to see it for yourself. A $700 rental house is not necessarily in a slum.
Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
9y
@Mike D. I hear you but a 40k so called full turn key certainly is.. LOL... locals like you can do it.. out of state or country get killed over time .. that is a fact.
Real Estate Agent · Jacksonville, FL · Member since 2016 · 406 posts · 163 votes
9y
Hi @Tanveer Ahmed I agree with @Jay Hinrichs that this sounds an awful lot like the Morris Invest approach. I also tend to agree with @Chris Clothier that this model does not really provide the kinds of returns that a lot of providers are presenting.
That being said I don't think the approach is faulty as long as you know what you're getting yourself into and you have the right team in place. Here in Jacksonville the majority of the investors I work with both local and abroad tend to avoid these areas but we do have some investors who specifically want these High Risk, High Return areas.
Having spoken to several property managers to find someone who could control assets we would purchase in those areas we found that while there is a much higher risk, you can mitigate that risk with a couple things.
1. Do quality repairs. Don't just put lipstick and bandaids on the problems. Many investors do this in these neighborhoods and the result is that a few months into the lease these same problems come back up and the tenants stop paying rent ultimately resulting in an eviction, headaches and lost rent. If you do quality repairs however I am told you will actually get decent tenants who won't give you problems.
2. Pay the price for a quality property manager. A lot of these same "investors" will place a tenant that was not screened properly just to show a "turn-key" property. This results in a poor tenant and again may result in an eviction or many headaches.
3. Know the actual numbers. Many of these investors present you GROSS returns and even if they show you NET returns the often don't take into account costs like property management, capital expenditures/maintenance, utility startup fees, carry costs, etc.
If however, you know the real numbers, you do quality repairs and get a quality property manager I see no reason why you shouldn't invest there. The only reason that I could see would be to save the money for investing in a larger property that costs a bit more. In my mind I see it as being a good starting point for a year or two and then 1031 into the larger property.
I would be happy to connect and let you know more about what is going on here in the Jacksonville market.
Rental Property Investor · Mansfield, OH · Member since 2017 · 151 posts · 117 votes
9y
@Tanveer Ahmed I"ve been using an Indy TK company for the past four years all of them purchased from out of state. Purchased 7 houses from $46k (2013) to $68k (2017) with rents from $550 - $750 and get consistent returns ranging from 7-13%. Look for companies that have implemented systems!
@Jay Hinrichs - I agree it can be done when you complete your due diligence and find the right company... in many different markets.
Developer · Nashville, TN · Member since 2016 · 484 posts · 406 votes
9y
We operate a successful TK company here in Indy, and don't have any trouble in the C-class neighborhoods...probably for a few reasons... 1. We do a proper rehab. 2. We have amazing management. 3. We know the town, and yes...one street can be different from the next. We invest in our own product, and do quite well. To @Jay Hinrichs point, there are plenty of players in the Indy market that don't do it correctly, so you do have to know who you're dealing with.
@Chris Clothier Thank you so much for your detailed information. You made a valid point. They did mention about those areas as C class neighborhood. I don't care if it's in Indianapolis or Jacksonville but I want to invest where it is less risky and headache. I am in junior year of my college and I really don't have time to look over my property all the time.
We've sold turn key properties in Indianapolis for 7 years so I know the market well. I can assure you that $50K properties renting for $700 are not C class neighborhoods. Unfortunately some people overstate the class of neighborhood and out of state investors get a big surprise when they can't get decent tenants and lose money, Listen to what Chris Clothier is saying and it will save you a lot of headaches and money.
